Share this content

IR35 income through LTD company

IR 35 Treatment under a LTD company/PAYE

Didn't find your answer?

I have a client who is a LTD company PSC. The LTD Co has received income net of VAT and PAYE under the IR35 rules (his client is a govt office).

The P60 he has been given is in his personal name. 

Am I right that the P60 being in his name is ok, the fact that VAT has been deducted and PAYE has been deducted before payment is made is ok, but ultimately there is no further tax to be paid on this income.

Therefore on the LTD co accounts I need to show the profit, then dedcut the income under IR35 as it is non taxable somewhere on the tax comp. Then the Net IR35 income can be taken out tax free and doesn't need to go on client's SAR? The P60 PAYE income goes on SAR but should be no further tax payable. 

Does this sound correct?

Replies (21)

Please login or register to join the discussion.

avatar
By Hugo Fair
04th Jan 2022 17:13

First things first ... with whom did the 'govt office' have a contract for the work performed by your client?
Clue it was either with the individual OR with his company (not both).

Second ... if the PSC (Ltd company) is your client, then is the individual a separate client of yours?

Thanks (1)
avatar
By Ben10Rose
04th Jan 2022 18:41

Yes, good point. The government office have a contract with the LTD Co. (There is Vat involved too)

Then yes both the LTD Co and the individual are separate clients of mine

Thanks (0)
Replying to Ben10Rose:
avatar
By Hugo Fair
04th Jan 2022 20:55

So if, as I suspected, the government office contract is with the LTD Co ... then presumably they (govt office) paid the Company (not the individual)? In which case why was the individual given a P60 (by the govt office)?

IR35 means that the payer deducts PAYE (as the individual is treated as a 'deemed employee') - but it doesn't change who is actually being employed (the company).
So the receipts belong to the company (not the individual).

However the individual may extract this money from his company without paying double-PAYE ... IF he is paid as an employee (of his company), via PAYE, but with the IT already deducted by the govt office being used as 'an offset' against the amount that would otherwise be due on being paid by his own company.

Note: the individual doesn't have to extract money from their company this way - but it is the only way to do so that won't incur the normal tax due (for dividends or whatever) - from which the govt office deductions cannot be 'offset'.

[On a separate note ... I don't understand why VAT was deducted before payment was made to the Ltd company. Are you saying that the Ltd company raised an invoice with VAT but that that VAT has not been paid?]

The majority of your assumptions in your ultimate paragraph therefore appear to me not to be correct.
IR35 is a complicated area and you have two choices ahead of you ... do a lot of reading (of the legislation & guidance) or get professional advice from an expert.

Thanks (1)
Replying to Hugo Fair:
avatar
By adf2410
04th Jan 2022 23:06

It's the way it works Hugo. The deemed employer's payroll system reports against the individual's details and so the individual gets payslips and a P60 which they have to report on their self-assessment return. Each payment shows up on the individual's personal tax account online, and the individual's personal tax situation drives the PAYE tax coding in the same way as any normal employment.

Deemed employer pays the net pay (plus the total VAT) to the intermediary (the individual's company), and the individual can extract the net pay from their company.

Regarding deducting VAT, the OP may mean that the VAT was disregarded when working out the tax and NI to be assessed on the individual.

Thanks (1)
Replying to adf2410:
avatar
By Hugo Fair
05th Jan 2022 00:28

Well it's news to me.
I know how the payroll processing (and RTI reporting) work ... but was under the impression that Payslips (and any P45 or P60) were meant to be suppressed for a 'deemed' (aka not real) employee - although there is an option to provide the IR35 company with a pseudo-payslip (an 'alternative remittance notice').

This would seem logical to me, since the individual is not an employee of the govt company and therefore will not end up with a true employment record on HMRC's database (because "Off-Payroll Worker" flag in the FPS should've been ticked).
[Note: amongst other things this status means that SL deduction instructions from HMRC should be disregarded - and the worker has no entitlement to any form of Statutory pay or to AE enrolment].

The payments (by the govt company to the IR35 company) do NOT go on the individual's SATR - for the simple reason that they have not (at least at this point) been paid to the employee.

If the individual wants to extract the equivalent to those payments from the IR35 company then that company can run their own payroll - and pay the individual via PAYE (using the "Value of payments not subject to tax or NICs in pay period" box in the FPS because the tax/NIC amounts have already been taken into account under the off-payroll working rules in the govt company's reports).
Or they can extract the money through other channels, but those won't provide the 'offsetting' capability to which I've just referred.

Of course I could be wrong ... but if so some rather large govt depts are operating IR35 and deemed employments incorrectly, so do you have any references for the M.O. that you've outlined?

Thanks (1)
Replying to Hugo Fair:
avatar
By adf2410
05th Jan 2022 12:09

Hi Hugo,

Most of my knowledge comes from having been on the wrong end of one of these contracts for a while, so I know how I was treated and what showed up on my personal tax account. I've just been back into my personal tax account to see what's there for that year, and there's definitely an IR35 employment sitting alongside some other real employments I also had during the year, and there's nothing to show that the IR35 employment was any different from the real employments.

A quick google gives an ACCA technical factsheet from April 2021, (sorry can't work out how to link to it) which says :

3. If the outcome of the tool is that IR35 does apply:
a. If you disagree with its decision, contact HMRC immediately and
HMRC will arrange for an independent review of the circumstances. It
may be possible to argue that the online tool is wrong.
b. If you agree with its decision, issue an SDS to the worker and, unless
you are paying the worker’s company, to the fee-payer (whoever will
actually pay the worker’s company) – see point 4 below.
c. If you will be paying the worker’s company, apply PAYE/NICs to all
future payments under the contract:
i. Enter the worker onto your payroll and deduct PAYE/NICs from
the invoiced amount (exclusive of materials and VAT) as if the
worker was your direct employee.
ii. Pay over the net pay (plus materials and VAT) to the worker’s
company.
iii. At the end of the tax year, if the contract is still continuing, issue
a P60 to the worker.
iv. At the end of the contract, issue a P45 to the worker.

Hope that helps,
adf2410

Thanks (0)
Replying to adf2410:
avatar
By Hugo Fair
05th Jan 2022 14:28

Thanks for that ... but I wouldn't usually rely on ACCA (or any another PB for that matter) rather than legislation (or at a pinch HMRC's internal manuals).

FWIW, 3 a) & b) are unarguably correct - but are a different topic (the process of determination rather than subsequent payment), and only a slightly strange subset of the rules.

Turning to 3 c), parts i and ii are again unarguably correct - albeit again a gross simplification that omits some of the rules I mentioned previously (regarding an FPS submission and what NOT to process for such a deemed employee).
Perhaps more surprisingly it suggests receipt of an invoice from the intermediary company (the one with which they have a contract) is a necessary pre-cursor to payroll processing ... which conflicts with the RTI rules for submission dates.

But I'm still stuck (logically) at points iii and iv ... given that the deemed employer has no idea whether the intermediary company has paid all (other than materials or VAT) sums to the individual via their own PAYE processing!

A P60 is an EoY statement of earnings & statutory deductions from a *single and specific employment* ... but there was no employment contract for the deemed employee (the clue being the word 'deemed') AND no certainty that the individual received the earnings after deductions - so a completed P60 is a lie?

This reeks of the typical HMRC-centric view of guidance ... in that the (in my mind invalid) P60 can be used by the taxpayer to report the tax deducted in their SATR - and so, if the intermediary pays the same (but without the tax being deducted again) then everyone's happy aren't they?
But not if the intermediary doesn't pay an equivalent salary and the taxpayer (in ignorance) uses the P60 tax figures (but not the earnings ones as they didn't receive these) and so bu88ers up their tax calcs.
Or if the intermediary does pay an equivalent salary and therefore issues its own P60 to the same taxpayer ... thereby facilitating that person 'accidentally' using both P60s when applying for say a mortgage (giving the impression of double earnings).

I will raise this issue at a meeting with HMRC due in the next month, but without feeling it safe to hold my breath whilst waiting on a logical resolution!

Thanks (1)
Replying to Hugo Fair:
avatar
By adf2410
05th Jan 2022 22:37

Hi Hugo,

I agree with you on many points! It's bonkers legislation and taxes people as if they were employees, but without any of the benefits of being an employee. (Just in case you think I'm sticking up for the legislation below - I'm absolutely not. It's hugely unfair.)

On some of your specific points:

Invoice/pay dates - when I was on the wrong end of the legislation with a public sector body, my company invoiced them on the last day of the month, and was paid on the 5th-ish of the following month. Looking back at my personal tax account, the date that the payment was recorded was the 5th-ish too - sometimes after the 5th though.

Points iii and iv - surely that's the whole point of the legislation? It takes the choice away from the owner of the company to decide when and how to extract money from their company. They have to take the money out as salary and it has to be in the tax year in which it is paid. So, even if they don't take it out of their company, they have to report it in their accounts as a credit in their director's account. From personal experience, it completely screws up any personal tax planning opportunities!!!

The taxpayer should have received the P60 from the fee payer, regardless of what they've paid themselves from their company - and that's the one they should use in their tax return. If they do anything else, then they've got it wrong, surely? If the taxpayer has paid themselves an additional salary from their company, then that should go on their tax return too (but, depending on amounts, I'm not sure why they would have paid extra in any case).

And on the double earnings point - well that's just fraud, isn't it? And that's why lenders ask for SA302s and similar?

This is the way it has been done (AFAIA) since public sector implementation in 2017...

Hope HMRC give you something of a resolution. I won't be holding my breath either!

Thanks (1)
avatar
By More unearned luck
06th Jan 2022 20:15

Subject to the payer being correct that the non-existent relationship between the company's client and the worker is that of a contract of service then it seems perfectly reasonable that the worker is given a P60 - otherwise he/she won't know what data to enter on his/her tax return, whatever the law says about the paperwork.

Thanks (0)
Replying to More unearned luck:
avatar
By Hugo Fair
06th Jan 2022 23:08

As above, I will try to get a formal answer from HMRC fairly shortly.

But my point is that the worker is not the recipient of any payment from the 'employing' company ... it goes direct to the intermediary company, who may (or may not) choose to pay the same gross amount as salary to the worker (who IS their proper employee).
And the Tax/NICs withheld by the 'employing' company are then 'available' to the intermediary company - in the sense that they can treat sums up to that gross amount that they process through their own payroll as being free of tax/NICs (but only for PAYE processed pay, not dividends or anything else).

So the worker only receives any money via one or more methods of extraction from the intermediary company - and has only been paid via PAYE if that is done through the payroll of the intermediary.
This is important and can have side-effects ... such as other deductions (like SL or AE contributions) or other payments (like SMP or holiday pay) returning to their normal position as an intrinsic part of PAYE processing - unlike the processing of a 'deemed' employee.

So my logic states that the worker should indeed get a P60 from the intermediary company (but not necessarily with the same figures as anything generated by the 'employing' company) but only IF they are paid by the intermediary.
However I can't see why the 'employing' company should issue a P60 to the worker when that company hasn't paid anything to her/him in the first place.

Thanks (1)
Replying to Hugo Fair:
avatar
By Tax Dragon
07th Jan 2022 06:17

Because the worker is taxed on the notional salary (from the client) but not the equivalent real salary (from the intermediary)?

Thanks (1)
Replying to Tax Dragon:
avatar
By Hugo Fair
07th Jan 2022 14:46

Yes I know that's the 'justification' for that P60 being issued, but it makes no sense to me ... as the worker cannot "be taxed" on something they never received.

The legislation requires the 'employing company' to operate PAYE on the notional earnings (and so to deduct Tax/NICs as appropriate and remit these to HMRC) ... but only as part of the procedures for paying the intermediary company (the contracted party) not the individual worker (even if that person is described as a 'deemed employee' for the purposes of operating RTI).

So IF the intermediary (for whatever reason and I can think of plenty) does not pay, through its own PAYE scheme, an amount exactly the same as the original 'notional salary' to the worker (as an employee of the intermediary) ... then what?

Are we (or you) saying that the taxpayer has paid tax on a salary that is never received and needs to know the figures (via the IMO invalid P60) in order to enter that tax as paid on their SATR?

I've absolutely no idea how HMRC allocate these tax amounts at their end, but (again IMO) they should not be recorded against the individual's taxpayer account - for the reasons I've outlined.
The intermediary must be notified (by the 'employing company') of the values that approximate to a payslip, accompanying each payment to the intermediary, so that:
a) the latter can reconcile its books against its original invoices; and
b) it knows how much gross pay it can pay to the individual free of Tax/NICs.

I am (almost) certain that an individual taxpayer cannot 'use' any of the Tax/NICs deductions (withheld by the 'employing company) in any other way than in the indirect sense I've mentioned (of allowing the intermediary to process some sums as free of Tax & NICs) ... so, in my mind, the Tax/NICs deducted do not 'belong' to the individual taxpayer.

And, to complete the circle, therefore neither does a P60 issued by the 'employing company' - which, if issued at all, should be to the intermediary company (from whom the deductions have been withheld).

Note: It is of course quite possible that I'm suffering from some kind of mental block brought on by the New Year and the cold and further near-lockdown ... or I may have a valid point? Any explanation as to the errors in my thinking would be appreciated before my meeting with HMRC on Tuesday!

Thanks (1)
Replying to Hugo Fair:
avatar
By Tax Dragon
07th Jan 2022 15:20

There are loads of cases where tax law charges income before it is received - and indeed that may never be received. ToAA, disguised remuneration... OPWR (see s61N(3)... "and the worker is treated as receiving").

Hugo Fair wrote:

Are we (or you) saying that the taxpayer has paid tax on a salary that is never received and needs to know the figures (via the IMO invalid P60) in order to enter that tax as paid on their SATR?

Tax and (taxable) deemed pay, yes. (There should be a form called P60OPW.)

Thanks (0)
Replying to Tax Dragon:
avatar
By Hugo Fair
07th Jan 2022 17:28

I know I'm in danger (or maybe worse) of using logic rather than legislation, but surely ToAA and disguised remuneration have in common that the taxpayer has received a benefit (in the colloquial sense) ... whereas a deemed employee who is not subsequently paid by the intermediary has nothing to show for her/his travails.

Anyway, on to the legislation ... I may have to invent a new acronym (IANATD) as an excuse for not managing to find the meaning in s61N (or at least to follow it through to anything that I would find a clear definition of what it is on about).

As far as I can see, s61N(2) says that a 'chain payment' (as defined) is only 'made' when (if it is money's worth) it is transferred ... by each person in the chain above the lowest (the intermediary) making a chain payment to the person immediately below them in the chain.
This makes no sense to me (as why would the worker be transferring money to the intermediary) ... so obviously my understanding has parted company with what the Act actually says!

Can you elucidate?

[BTW, I wholly agree that if a P60 is required then it should have an indicator of its different nature - as per your suggested P60OPW].

Thanks (1)
Replying to Hugo Fair:
avatar
By Tax Dragon
07th Jan 2022 23:25

Let's not get distracted with ToAA et al, but no, it's not as you say.

Re s61N, let's keep it simple - 'employer', intermediary, worker.
1a,b tell us the chain comprises employer, intermediary.
2 tells us what a chain payment is, and gives a new name to the employer - the 'fee-payer'.
3 tells us there's a deemed direct payment from the fee-payer to the worker.
4 tells us this deemed direct payment is made when the fee-payer pays the intermediary.

For completeness, s61Q tells us how to calculate the deemed direct payment.

Edit: I say 'made'... you know what I mean. Also see s61R if still in doubt about it being taxable on the worker. And s61W for the relief when/if the intermediary pays the worker.

Thanks (1)
Replying to Hugo Fair:
avatar
By More unearned luck
08th Jan 2022 15:29

"...surely ToAA and disguised remuneration have in common that the taxpayer has received a benefit...".

There are deeming rules that bite when the taxpayer receives no benefit, eg taxpayers are taxed on the income of their minor children if they have donated the capital and the income exceeds £100.

Thanks (1)
Replying to More unearned luck:
avatar
By Hugo Fair
08th Jan 2022 20:29

Good point - I was racking my brains, but obviously not hard enough, to come up with examples of deemed pay/benefit - on which real tax is due even though the taxpayer receives no pay/benefit.

So, in your example, what is the taxpayer meant to put in their SATR:
a) enter the child's income (although not actually received) + enter actual tax due/paid?
b) omit the child's income + omit the tax due/paid (even though due)?
c) omit the child's income but enter the tax due (and confuse HMRC)?

Option c) seems to me to be the closest to scenario where taxpayer receives P60 from 'employing company' but is not paid anything by her/his intermediary ... but makes no practical sense - and will almost certainly generate incorrect calcs by HMRC.

Thanks (1)
Replying to Hugo Fair:
avatar
By Tax Dragon
09th Jan 2022 06:18

Declare the income. The taxes acts operate as if you and only you had received it - s629 is express about that. Not all these deeming rules work as smoothly: reliance eg on reliefs as provided by s61W can lead to additional tax - eg if, as you say, you extract the money as dividend not remuneration.

Oh... back on OPW, the declaration of income and tax is made in a set of employment pages, in which you tick Box 8.

Thanks (1)
Replying to Tax Dragon:
avatar
By Hugo Fair
09th Jan 2022 12:34

Thanks ... at least that central point is now as clear to me, as it seems to have been to everyone else all along.

And you've pinpointed (one of) the scenarios that leaves me uncomfortable with it all in practical operation - it's basically a withholding tax that you can (as the individual taxpayer) only 'use' in specific circumstances (that may not suit you).

BTW, in your reference to Box 8 do you mean this should be ticked on the 'Employment' page ... for the earnings paid *to* the intermediary OR on the page for the earnings received *from* the intermediary?
I presume you mean the former, but the latter page will need to exist as well ... so does Box 8 get ticked on both pages (the phrase 'employment income is from inside off-payroll working engagements' isn't exactly crystal clear to me)?

It's going to be an interesting conversation next week - if I'm not thrown out!

Thanks (1)
Replying to Hugo Fair:
avatar
By Tax Dragon
09th Jan 2022 15:11

Bear in mind that I have never filled in a client's return to which these rules relate, and have never had cause to study the rules in any depth. Other contributors to this thread clearly have and could give you an answer based on need, knowledge and experience. My answers are based on brief glances at the law as the thread has developed, so should be treated with due circumspection.

My answer so based is that s61W allows the intermediary and worker to treat the actual payment as reduced by the deemed payment; I don't see the need to declare the income that you are now being treated as not receiving (if you see what I mean).

Btw, now that you've invited me to look, I would in turn invite you to look at s61W(6), which makes a mockery of some of both your and my comments made before either of us had looked.

Thanks (0)
avatar
By Ben10Rose
11th Jan 2022 11:41

Thanks everyone for replies, been looking into it further whilst reading what has been said on here.

I think we are all in agreement that logically this makes absolutely no sense, however in practical terms, so that I can get a set of accounts and a SAR done, I believe that my assumptions are correct.

On LTD co accs, Turnover is the Net of Vat figure income as per P60 (plus some non IR 35 income) then as an expense the NET IR35 income thus the IR35 income doesn't affect taxable profit on the company. Issue is the expenses client has put through that relate to the IR35 period of income. Presume these can't be claimed?

On SAR, P60 goes on as employment income and tax has already been dealt with.

Thanks (0)
Share this content