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IR35 and the Public Sector - Finance (No2) Bill

Accounting treatment and VAT consequences anyone?

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Under the new IR35 and the Public Sector rules enshrined in today's publication of the the Finance (No 2) Bill 2107. itself the longest Finance Act we have ever had (!!!) the rules set out for tax purposes the consequences of the obligation to account for tax moving from a deemed obligation within the service company to an actual obligation on the entity paying the service company.  HMRC in their guidance notes explain in an example that a service company invoices the payer £6,000 plus VAT of £1,200, a total of £7,200.  The Payer deducts PAYE (Tax plus NIC) of £1,871 and pays this to HMRC under RTI.  The company then receives a payment of £5,329 - £1,200 for the VAT and £4,129 being the payment for the services net of PAYE.

First question - how should this be accounted for under FRS102/105 etc? - I know the act provides that for CT purposes and IR35 purposes the amount taxable for the service company is reduced by the amount on which PAYE is applied by this regulation but I want to know what the accounting treatment should be - the difference has to be written off somewhere doesn't it?  The company has turnover of £6,000 by reference to the invoice issued even though this new rule means it won't receive the whole sum.  Could the company sue for the balance as it has, in commercial law, been underpaid?  These rules strike me as having been devised by HMRC for the convenience of HMRC without considering the commercial legal consequences that flow from following the rules laid down in the Bill.

Second question - we invoice £6,000 and only receive £4,129 so under the VAT bad debt regulations, which are, of course, mandatory, after 6 months should we then operate VAT Bad Debt relief and get a repayment of £374 (1,871/6,000 x £1,200)  There doesn't seem to be anything in the act about the act of deducting and diverting £1,871 which legally belongs to the company so does the payer then have to adjust the amount of VAT they recover?  I suppose it could be considered that the payment under RTI is part payment of the invoice but again, in commercial law, surely it isn't?  The legislation deems the income to be that of the service provider anyway, and any repayment of this tax goes then to the service provider.

Third question - the legislation deems the income to be that of the service provider anyway, and any repayment of this tax goes then to the service provider.  So again, if some tax is repaid because of a claim in respect of expenses, capital allowances or pension contribution, it will be paid to the service provider, how should that be accounted for inside the company, if at all?  The capital allowances that can be deducted could only arise inside the company and yet if the company has no other source of income other than these contracts is it even entitled to capital allowances?

Am I seeing problems that don't exist?  I hope so but wonder...

 

Replies (19)

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By Wanderer
21st Mar 2017 01:37

Paulsoper wrote:

..... but I want to know what the accounting treatment should be - the difference has to be written off somewhere doesn't it?  The company has turnover of £6,000 by reference to the invoice issued even though this new rule means it won't receive the whole sum. 

Doesn't paragraph 13 of the guidance note suggest that the Turnover to reflect is £4,129?
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Replying to Wanderer:
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By Paul Soper
21st Mar 2017 08:59

How can the company's legal turnover reflect £4,129 without amending company law? When the invoice is issued the turnover is clearly £6,000 - so how do you legally adjust it?

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By Wanderer
21st Mar 2017 01:52

Paulsoper wrote:
...... and any repayment of this tax goes then to the service provider. 


Will it though?

I'm interpreting it that as the tax goes on the individual SA return that any refund will be paid to the individual.

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Replying to Wanderer:
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By Paul Soper
21st Mar 2017 08:57

The service provider is the individual working through the service company. The legislation also makes provision for more than one service provider working through a single company. PAYE is operated by the person paying the service company but treated for all tax purposes s the income of the person providing the services who would have been an employee. Therein lies the problem. It ignores the legal reality that the income still belongs legally to the company.

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By EstherG
22nd Mar 2017 11:18

And what about the fact that the company will be paying accountancy fees and PI insurance, does this mean that there will be losses to carry forward to a time when contracts are outside of IR35?

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By pauljohnston
22nd Mar 2017 11:40

EstherG raises a very valid point and could mean that the company contracts different ways to get loss relief. This is not my specialised subject.

I did note that in a recent survey 80% of contractors to Govt departments would not be prepared to work for a lower net income. I guess therefore that our public services are going to suffer even more and that this IR35 implementation could cost the taxpayer more than it raises. Well done again to the Treasury!!

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By DM1
22nd Mar 2017 12:33

This may not be correct, and I welcome useful comments if I am not correct or someone has a better solution. We have been advised to record the transaction as follows:

The sales invoice is for £6000 plus £1200 vat
The amount received is £4129 plus £1200 vat

At this point the VAT is sorted out.

The deductions of £1871 are an adjustment to credit trade debtors and debit directors remuneration.

At this point the net pay of £4129 is not at this point recorded in the accounts as wages. This should be included on the payroll as a 'non taxable payment' and an EPS submitted to HMRC under RTI.

Then an amount of £4129 is either paid to the director or credited to the directors loan account, and debited to directors remuneration.

The end result is sales of £6,000 and directors remuneration of £6,000, with a directors loan balance of £4129

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Replying to DM1:
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By Wanderer
22nd Mar 2017 12:43

DM1 wrote:

The deductions of £1871 are an adjustment to credit trade debtors and debit directors remuneration.

The guidance notes effectively say that the debit is to Sales.
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Replying to DM1:
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By Paul Soper
22nd Mar 2017 13:09

That seems to make some sense at last, is this the answer? Better certainly than the suggested debit to Sales which then understates turnover.

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Replying to Paulsoper:
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By Wanderer
22nd Mar 2017 13:34

Agree.

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By DM1
22nd Mar 2017 13:06

To avoid any misunderstanding, do you have a link to the guidance notes you are looking at?

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Replying to Wanderer:
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By Paul Soper
22nd Mar 2017 14:42

Quote from guidance - "The accounts of the PSC should reflect the amount that the company receives. That is the net amount after the tax and NICs have been deducted.
From the example above we established that from an invoiced amount of £7200 the fee payer would physically pay an amount of £5329 to the PSC. This included an amount of VAT (£1200) therefore the corporate accounts would reflect the VAT exclusive amount of £4129 in the calculation of turnover for Corporation Tax purposes." So our solution seems to differ from this statement, and to avoid a liability arising on the £4,129 would need to pay remuneration to the director, simply crediting that amount would not seem to avoid the CT liability although the next paragraph then goes on to say - "Chapter 10 Part 2 allows the business to set an amount equivalent to the amount on which tax and NICs were paid at source, against the income drawn from the company by the worker. The PSC pays the worker a salary that would otherwise have attracted tax and NICs. However, the PSC is able to set against that the amount which has already been subjected to PAYE / NICs, £4129 in our example. The PSC will incur no further PAYE / NICs liability unless the payment to the worker exceeds the level of the net fee received."
Hmmmmm....

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By DM1
22nd Mar 2017 14:53

Thank you Wanderer,

You are correct that HMRc are expecting the debtors adjustment to be allocated against sales.

However I would be tempted to ignore this and show it on the p&L as remuneration. -obviously after checking if this would result in a penalty. Maybe this is a good reason to prepare abridged accounts that only show gross profit?

Referring to Paulsopers query, reporting the £4129 on the PSC's RTI report as a 'non taxable payment' should I believe resolve the problem of creditng the amount to the directors loan?

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Replying to DM1:
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By Paul Soper
22nd Mar 2017 15:49

Strikes me that HMRC are considering everything from a tax perspective - so adjusting sales takes that amount oout of a potential charge to CT but it seems from the extract above in my last post that unless the sum after PAYE is paid or credited as remuneration there would be CT payable on it, and of course PAYE, as they suggest, if the amount paid exceeds the amount charged. Still looks like like a muddle to me from a legal perspective...

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Replying to Paulsoper:
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By Wanderer
22nd Mar 2017 16:22

& bear in mind if a company has no 'Non IR35 income' if it has other expenses there will be no residual cash from sales to actually pay the whole of the net income to the employee.

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Replying to Wanderer:
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By EstherG
22nd Mar 2017 16:45

Wanderer wrote:

& bear in mind if a company has no 'Non IR35 income' if it has other expenses there will be no residual cash from sales to actually pay the whole of the net income to the employee.

I totally agree with this point, hence making a loss to carry forward?

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By rboggon.yahoo.co.uk
22nd Mar 2017 16:57

Rob - a - Job

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By akr129
23rd Mar 2017 17:16

Wanderer's link on the gov website says that the primary employment of the director is with the PSC and secondary employment with the public sector fee payer who will operate a BR tax code. What is my client to live on if her income suddenly drops by having 20% tax deducted from the full payment?

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