A client, the sole director and shareholder of his Ltd company, last year amongst other work, his company undertook a contract under IR35, although reading the paperwork it's not completely clear whether the contract is with the director or his company. Presumably it's with him as PAYE and NI have been deducted but the net proceeds have been paid into his company bank account by the 'employer'. This is the first time I've dealt with this type of income because I usually refuse work involving IR35 income but this has been sprung on me. I've tried to research how to deal with this situation and it seems that various accountants deal with it differently. I'm thinking that I should exclude this income from the P&L of the company and credit the director's current account, declaring the income on the director's tax return.
Is this a legitimate method of treating this matter or, if not, how?
Thanks very much in advance for any help.
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Understanding the contractual relationship is key. It's going to be difficult for anyone to give you a firm steer without sight of what the paperwork actually says.
Thanks, that's what I was afraid of! On balance though, I feel that the contract is with the director and if that's the case, would my treatment be okay?
I am an accountant and have had the unfortunate pleasure of completing an IR35 assignment for a public sector body. The way I dealt with it was:
1. I did the work. I paid for all my T&S expenses (which the public sector body was happy to pay for) personally, rather than through my limited company. I have not claimed those expenses from my limited company, because they wouldn't be allowable.
2. My limited company invoiced the public sector body for my total fee plus expenses plus VAT.
3. I entered the sales invoice into my accounting system as usual - dr SL, cr sales, cr VAT (traditional VAT accounting)
4. They paid my limited company a smaller amount than on my invoice. dr bank, cr SL
5. The amount left outstanding on the SL was posted to director's salaries dr dirs salaries, cr SL.
6. I immediately transferred the amount paid (less the amount of VAT on the full value of the invoice) to my personal bank account from the limited company's bank account. dr dirs salaries, cr bank.
7. I will declare the income on my personal tax return as x salary and y tax deducted - per the 'payslips' that I received. (I am no longer doing the IR35 work, haven't received a P45 and will be interested to see whether I receive a P60 in April/May!)
The reason I took the steps above was because netting off income and expenditure is completely against my (and hopefully everyone else's) accounting principles.
I agree that understanding the contractual relationship is key, but given that IR35 is being mentioned, it's got to be a contract with the limited company. If the contract is with the director himself, then a whole different set of parameters come into play (none of them to do with IR35) - that either he is self employed or employed. If employed (hence PAYE/NI deducted) then all employment benefits should be fair game - such as sick pay, holiday pay, auto-enrolment etc.
Hope that helps!
PS - if anyone reading this thinks I've got it completely wrong, then please tell me what I've got wrong and why (gently, please!).