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...