ir35 deemed payment

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Hello,

Anyone assist with scenario where client (ltd) is inside IR35 in previous years.

Struggling with understanding how to calculate the deemed payment when turnover is low ie less than £10k and with a small salary for example £5k

They have other employed income. For some years they were not be due to pay tax on total earnings, others they were within basic rate.  

I cannot find guidance on how to allow for the employees NI threshold (or personal allowance) which surely there must be an allowance for this. For the above example if the whole turnover was put through the payroll the liability would only be very small but calculating it as a deemed payment is significantly more. (where the salary is below the NI threshold)

Can anyone point me in the right direction? 

Thank you

Replies (32)

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Replying to David Ex:
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By Claire M123
26th May 2024 14:54

Thank you, those were the steps I was using. However they do not allow for any reduction where there is an unused part of the national insurance threshold from the processed salary.
Thank you

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Replying to Claire M123:
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By FactChecker
26th May 2024 15:12

Having just seen this after posting my lengthy comment below .. I now wonder if you are labouring under a simple misunderstanding.

NICs (and the threshold used in calculating them) are unlike Tax in that they are 'per employment, per pay period' (not consolidated 'per taxpayer, per annum').
[A slight generalisation - e.g. two employments with connected companies are usually treated as a single employment, and there are other exceptions, but a broadly true overview in a sentence.]

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Replying to FactChecker:
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By Claire M123
26th May 2024 16:43

Thank you for taking the time to respond.
Hes subcontracting for a small company who have just paid the invoices raised.

Maybe i am misunderstanding!
Just if a salary of £10k for the director was actually put through this year there would be no Ees NI due.
However following the steps (with a salary of 5k) deemed payment is £3,950 ? And then employees ni due on that?

Thanks

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Replying to Claire M123:
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By FactChecker
26th May 2024 17:13

Sorry, I'm still confused ... can we break this down into discrete facts/transactions?

* Your client is a limited company?
* That company has a sole director/employee?
* That company (not the individual) was paid by a 3rd party for work performed?
* The 3rd party determined that although their contract for the work was with your client (the company), it was actually performed under IR35 and therefore treated the work as delivered by the individual as 'deemed employment'?
* The 3rd party therefore processed the gross amount due for the work via their own PAYE (including deduction of EE NICs)?
* Your client (the company) should have invoiced the 3rd party (with whom they had the contract) for the Net Pay amount - and been paid that amount?
* The sole director/employee (who may also be your client for all I know but as a separate entity) then wanted to extract money from your client ('his' company)?
* For whatever reason it was decided to do this by your client paying its sole director/employee via PAYE (which allows any NIC already deducted by the 3rd party to be 'offset' within your client's RTI but only up to a max of the liabilities that would otherwise have been incurred by your client)?

If any of that is incorrect then we're following different stories.
But if it's all correct, then I'm still bemused by your final and core 2 questions:

1. "Just if a salary of £10k for the director was actually put through this year there would be no Ees NI due."

* When you say "a salary of £10k for director was actually put through this year", I hope you mean that it was actually paid and Payroll processed and RTI reported?
Not only is that the correct way to 'put through a salary', but it is also the only way in which to use the 'offset' generated from the net IR35 receipted money.

2. "However following the steps (with a salary of 5k) deemed payment is £3,950 ? And then employees ni due on that?"

* From where do these new figures (£5k and £3,950) suddenly appear - and how did they fit in (i.e. at which step) in the storyline I set out above?
Specifically:
... 'salary of £5k' = paid by which entity to which entity?
... 'deemed payment of £3,950' = paid by whom to who, and do you mean net pay?
... 'employees ni due on that' = which of the two employments? + due on what?

If this is still not making sense to you then there are only two possibilities (either I'm not explaining it clearly enough - which is always possible - or the topic falls outside of your sphere of knowledge/comfort).
Either way, you should seek professional guidance - it's not massively complex, but nor is it a topic for those new to it to attempt on a wing and a prayer.

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By FactChecker
26th May 2024 15:07

I'm struggling to understand the cast of characters in this muddled story ...

1. You have a client (limited company) ... who has been providing services to ANO business (where ANO determined that service to be 'deemed employment')?
OR your client has paid some other party and determined that the other party had to be paid (by your client) as 'deemed employment'?

2. Can't see the relevance of "turnover is low ie less than £10k" or "a small salary for example £5k" or "They have other employed income" ... but you seem to be focussed on NICS - so moving on ...

3. "I cannot find guidance on how to allow for the employees NI threshold (or personal allowance) which surely there must be an allowance for this. etc etc"
And we're back to my confused point 1:
- If your client (or to be precise the presumed sole director/employee of your client) did work for a 3rd party who has treated that as 'deemed employment' ... then that 3rd party will have operated PAYE on those payments.
Which means they, not your client, will have deducted EE NICs before remitting net pay to your client (which your client CANNOT reclaim but can 'offset' against EE NICs that would become payable if your client decides to pay its own director/employee).

Does that answer whatever question you were trying to raise (as I don't intend to hypothesise ad infinitum)?

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By Matrix
26th May 2024 17:43

Why wouldn’t you just put the £10k through as salary and then the deemed payment would be nil? You can deduct 5% but this seems an awful lot of work for the amounts involved for a basic rate taxpayer.

It doesn’t sound like the kind of contract which is usually within IR35 given the amounts involved and other employment but your client must have run the tests.

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Replying to Matrix:
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By Claire M123
26th May 2024 17:51

That would be the ideal solution, i agree.
However when it is for prior year disclosures?
Thank you

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Replying to Claire M123:
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By Matrix
26th May 2024 18:07

They took £5k through RTI but should have put through £10k? Is this for the accounts or are you refiling RTI, SA100s, CT600s and how would you do that?

What is the loss of tax to HMRC, if any, if you don’t and who has determined the contract is within IR35?

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By Paul Crowley
26th May 2024 17:47

Why is he inside IR35 for this year?
Who made the decision?
At 10K turnover, it cannot be his sole or main income, so the how could it be equivalent to continuous employment?
BTW, HMRC do not have the time to waste on small stuff like this.

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Replying to Paul Crowley:
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By Claire M123
26th May 2024 19:36

Thank you

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By Sandnickel
26th May 2024 19:21

IR35 is supposed to give a higher tax/NI position as it takes away the choice to be tax efficient (i.e. in the same position as an employee). If the contract has been determined to be within IR35 then you have no choice.

Having said that, it's not 100% clear to me who has made the determination? It would seem to be the contractor if the fee payer is a small company?

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Replying to Sandnickel:
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By Claire M123
26th May 2024 19:35

Thank you.
My clients customer feels that the relationship is outside of IR35 and always has advised this (they are a small company). My client has made the determination himself. But will be getting advice. He is very worried.

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Replying to Claire M123:
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By Sandnickel
26th May 2024 20:41

So, he's taken a contract which was advertised / agreed as outside but he now believes it should be inside? What has caused him to doubt the situation?

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Replying to Sandnickel:
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By Claire M123
26th May 2024 21:06

Thank you.
He will look into it with advice but from his own research he is concerned enough and wanted to know what the deemed payments would look like.
The guidance states that the Tax and NI on the deemed payment calculate an amount similar to the amounts processed through RTI payroll. However unless there is a step missing. on the example of:
Turnover £10k
Salary £5k
There is a deemed payment of around £3900 creating a Tax and NI cost.
Whereas a £10k processed salary produces no tax and NI cost (depending on the year)
Thanks

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Replying to Sandnickel:
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By FactChecker
26th May 2024 21:11

Must be me ... but I STILL can't work out WHO is doing work for WHOM?

For most of the thread it has sounded (to me anyway) as if OP is asking about OP's client (company) providing a service to a 3rd party - who then determined this to be within IR35.

But now OP says "My clients customer feels that the relationship is outside of IR35 and always has advised this (they are a small company). My client has made the determination himself" ... which suggests (to me) that it is the other way round (as in OP's client, the company, is purchasing a service from a 3rd party)?

Hope someone else can work out what's actually going on - because none of my explicit earlier questions have been confirmed or corrected by OP, so I'm out.

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Replying to FactChecker:
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By Claire M123
26th May 2024 21:29

Apologies. I do appreciate your responses.
My client is a ltd being paid for services which have been treated as outside IR35 for a number of years.
My client has realised it is his responsibility not his customers and so the reassurances that the treatment was correct from his customer are irrelevant.
He wants to make things right.
I am shocked to find following the steps to calculate deemed payments there is a tax and NI calculation even on very small turnovers.

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Replying to Claire M123:
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By Sandnickel
26th May 2024 21:48

The "turnover" is effectively salary, that's the objective of IR35. It won't be treated the same as turnover. Based on what you've said, you would have to unwind the salary that was taken and then rework the deemed payment to avoid double taxation. Don't forget if it is a deemed payment then there will be no CT on it either so there may not be as much of a difference as you think.

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Replying to Claire M123:
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By FactChecker
26th May 2024 22:47

Right ... so your client (still not clear if that is the limited company or its presumed sole director/employee - but ignoring that distinction for a minute) is:
* a worker (W) who provides their services through their own intermediary (PSC) to their client (CL).

In most cases, CL is responsible for determining employment status of W.
However, if CL is outside the public sector and a small company - see below - the PSC is responsible for deciding W’s employment status and so whether the IR35 rules apply (i.e. the PSC must issue a Status Determination Statement).
[So if CL meets 2 of the 3 stipulated conditions necessary to make them a 'small company' for these purposes, then the SDS must be issued by the worker's PSC, aka OP's client.]

The SDS must also provide reasons for the determination - if not, the worker’s Income Tax and National Insurance contributions become the responsibility of the 'deemed employer' (i.e. CL).

All these rules are intended to penalise the end client, CL, if they try to avoid their responsibilities ... but TBH it's less clear where the penalties land when it is the PSC who has failed to issue a SDS (or issues one but with ineffective reasoning).

So back to OP ... are you saying that :
- Your client has failed to issue a valid SDS prior to doing work for CL?
- Or are you saying that he issued one, but has now changed his mind?
- Or are you saying that CL is not a small company or is in the public sector?
Without getting to the bottom of which process has not historically been done correctly (and by whom), your client should be *very* careful as to what it submits to the clear light of day (particularly in front of HMRC).

Finally, back to your core concern ... "I am shocked to find the steps to calculate deemed payments there is a tax and NI calculation even on very small turnovers" makes no sense as it stands.
The 'price' quoted for the job (if this is now within IR35) is no longer 'turnover', it (the labour component) is 'gross pay' (to which the rules of PAYE are applied).

EDIT: I see Sandnickel has already made this latter point (as well as some other excellent ones).
Unless there are some very substantial amounts in play (which it doesn't sound like), then personally in OP's client's shoes I'd be putting my efforts into getting it right (watertight right) going forward - rather than pulling at loose strands from the past.

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Replying to FactChecker:
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By Matrix
27th May 2024 09:41

I doubt CL would be at all interested in the IR35 status since the risk is not theirs but the assessment should be done to determine the PSC contract terms/working practices and rate. All too late in this instance.

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Replying to Matrix:
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By Sandnickel
27th May 2024 13:00

Based on the information given, I would say it has been done from the client side. The worker in this instance (like many in this situation) didn't understand their own responsibilities and is now panicking.

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Replying to Matrix:
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By FactChecker
27th May 2024 14:13

Understood and agreed. But I've never encountered this situation ...
... where SDS *should have* been issued by PSC but wasn't (and CL chose to treat as outside IR35 and so paid PSC's invoice), but PSC *after the event* potentially decides to issue the SDS (showing work as within IR35).

The SDS (if issued at correct time) would have required CL to reject any invoice and treat the work as 'deemed employment' (and so operate PAYE and RTI) ... so who would pick up the liability/tab for that not having happened?
I understand that 'the risk' (of not following the rules and generating an SDS etc) fall on PSC (assuming the non public sector/small company criteria of CL) - but IF the PSC belatedly issues the SDS (as within IR35), then who has to do what to get things back to what they should have been in the first place?
It would be mighty unfair to require CL to revisit all the affected payroll pay periods ... but how does PSC process 'deemed employment' by another employer on its own Payroll?

Thank goodness it's a Bank Hol and I'm retired!

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Replying to FactChecker:
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By Matrix
27th May 2024 14:22

These are the original IR35 rules not the off payroll rules so the PSC puts any deemed employment through their payroll (I assume, I don’t take on such work, no idea about the SDS, sounds like some off payroll thing). I don’t see what this has to with the client, apart from setting the commercial terms. Why would they need to know? It was never their risk, they just pay the invoice as they have done.

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Replying to Matrix:
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By FactChecker
27th May 2024 14:32

That would be my logic ... indeed the only sane way logically - thereby leaving CL free of PSC's 'misbehaviour' (although they may be less keen to use PSC's services in future).

My entirely pragmatic concern therefore is how PSC is supposed to correct the past?
Is it possible for the PSC payroll to hold two distinct sets of records for the same individual (one as the actual employment of the sole director/employee, and one as a 'deemed employment' of that same person)? [Answer: I doubt it.]
And, even if somehow possible, how does PSC manage to retain those earnings (as it should if they are 'deemed earnings') instead of paying them out direct to the actual employee?

Probably time to give up and do something more interesting in the garden!

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Replying to FactChecker:
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By Matrix
27th May 2024 14:42

Yes get outside while it is sunny.

CL has never and would never need to know? Why do you think they would care - as soon as it was their risk, larger engagers and public bodies issued blanket assessments or stopped using contractors. Small companies can still engage contractors with no risk to them.

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Replying to Claire M123:
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By More unearned luck
27th May 2024 15:26

So one party to the hypothetical contract thinks it is and always has been a contract for services but the other party has had no opinion until now but now thinks that the contract is one of service?

Why has he formed the opposite view of the other party?
Why does he prefer his view to that of the party?

Before he goes down the road of back taxes, interest and penalties, it might be prudent to obtain an opinion from an employment lawyer . It might prove to be the cheaper option.

"My client has realised it is his responsibility not his customer's and so the reassurances that the treatment was correct from his customer are irrelevant."

As cases like that of the Kaye Adams demonstrate this is a complex area of the law even some learned judges have had the greatest of difficulty in determining the nature of hypothetical contracts; it is not easy at least in the fuzzy centre. So it is reasonable for your client to seek advice ('reassurances'), if that advice was wrong, the only question is how reasonable is it for your client to have taken advice from the quarter he did and should he have sought corroboration from, say, you.

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Replying to FactChecker:
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By Sandnickel
26th May 2024 21:38

If the customer is small then the original IR35 rules still apply. This means it is the intermediary (i.e. the PSC) who determines whether the contract falls within IR35 and who is responsible should HMRC come knocking.

It is unlikely, as has already been noted, that this will catch the attention of HMRC for such small fry. If your client wishes to pay the additional amount to ease his worry then that is his choice. It would come down to interpretation if it ever came to it and HMRC are making a hash of every IR35 case I've read so far.

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By Cylhia66
27th May 2024 07:04

So many helpful answers. Yet the OP is missing the magic word "please", which personally makes me cringe.

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By Claire M123
27th May 2024 08:33

I do want to thank everyone for their assistance and time. Really appreciated.

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By kim.shaw-and-co.com
27th May 2024 15:20

Setting aside the question of whether the status determined by the PSC is correct or not, and given the modest amount of turnover associated with the contract, there are three underlying questions pertinent to the risks IR35 is designed to address :

1) Are the company expenses claimed by the PSC as deductions against turnover reasonable trading expenses ?

2) Has the company ever paid a dividend instead of salary to the director whose 'personal services' might be regarded as having been provided to the end client ?

3) Are 'pre-salary' profits retained in the PSC ? (alternatively are they all paid out as salary through RTI by the PSC ..)

If the answer to all three is "no", then the structure is very unlikely to be targeted as 'abusive'. There is no attempt to have earnings paid out as dividends, which is the main thrust of the legislation.

Since status determination can be subjective, there may not be a definitive answer as to whether IR35 applies or not without the matter being subject to review at the Tribunal. It is unlikely in these circumstances that is something HMRC would be seeking to prioritize or 'trigger' with so little tax and NIC in point if the IR35 position were to end up falling on one side or another of a judgement.

If the company pays out all of its surplus income as taxable salary to the director, it is very unlikely to become a target, for the simple reason that it isn't a target of the policy. The 'panicking' director might benefit from understanding that the thrust of IR35 is prevention of the avoidance of tax and NIC associated with the conversion of salary to dividends or distributions, or the deferral of same.

If, as it seems may be the case, there is no significant instance of this for any significant period, the avoidance of employment tax and NIC is unlikely to be the reason for use of the company in relation to the commercial arrangement with the client.

Technically, depending on the status determination outcome in relation to the underlying contract, there may be a risk of the PSC being strictly required to operate within IR35, but if it is being used in the manner above HMRC are unlikely to want to waste their time (and that of the company, employee and relevant advisors) enforcing its strict application.

Historic operation of the company in relation to its income in the manner above would likely be sufficiently consistent with the underlying aims of IR35 to render its strict application to the income in point to be without 'reasonable merit'.

If the director is particularly concerned, and the company is only used for this contract, he might consider ending the contract, paying out the remainder of income after costs as salary through RTI, closing the company and commencing afresh through a new company/contract within the scope of IR35 from the outset. That is only suggested as an option for his future peace of mind, because obviously there are costs associated with such a change.

Alternatively, continuing to operate the company in a way whereby all of its income is paid out as salary is unlikely to be a particularly 'high risk' strategy to adopt.

In short, IR35 is a huge 'mess' riddled with shades of grey and aimed at abusive arrangements. Intermediary PSCs set up to manage commercial risk who RTI everything left over after necessary trading expenses associated with their operation as salary are not the target of the legislation.

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Replying to kim.shaw-and-co.com:
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By FactChecker
27th May 2024 15:48

"If the answer to all three is "no", then .."
I presume that should read 'If the answers to all three are "yes", "no" and "no", then ..'?

But a pragmatic deconstruction ... leaving the way forward (whether or not that includes re-visiting the past) entirely in the hands of OP's client.

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Replying to FactChecker:
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By kim.shaw-and-co.com
27th May 2024 16:27

FactChecker wrote:

"If the answer to all three is "no", then .."
I presume that should read 'If the answers to all three are "yes", "no" and "no", then ..'?

But a pragmatic deconstruction ... leaving the way forward (whether or not that includes re-visiting the past) entirely in the hands of OP's client.

"yes", "no" and "no" indeed .... thank you for the timely correction !

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