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I'm aware that this has already been discussed at length but I don't know if a firm conclusion was reached and I've yet to see any more helpful guidance from HMRC (or anyone else for that matter).

PSC client has been advised by his sole customer that from 1 September 2019 PAYE will be applied to payments to the PSC. Current thinking seems to be that the gross sales value is included in accounts turnover, with the tax deducted hitting the P&L as a deductible expense. I understand also that the turnover is excluded from the CT computations, and that the individual is entitled to draw out the cash as either a salary or dividend without further tax. This leads to a question:

Ignoring all other expenses (although I don't think that we should) treating the PAYE as a deductible expense would lead to a CT loss. Further, if the cash extraction is taken as salary this too would create/increase the CT loss. Going forward, it probably makes no odds as the company will be unable to do anything with the losses but in year 1 it seems that there could be a sizeable loss to carry back. Common sense and logic would suggest that any expense items (PAYE, salary) related to non-taxable income should also be disregarded but I can't find anything that conclusively says that we need to - it's expenditure incurred wholly and exclusively for the purpose of the company's trade. So, the question is - do we in fact have an allowable loss to carry back?

And before anyone points it out, yes IR35 has been previously considered, but that's a separate matter.

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By Maslins
13th Jun 2019 13:05

I'm confused by your final sentence, and how that tallies with the client withholding PAYE.

Is this a public sector client, treating them as inside IR35?

If not (and on the basis this is pre Apr 2020 when rules for private sector planned to change), why is the end client proposing deducting PAYE from payments to a Ltd Co?

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to Maslins
13th Jun 2019 14:39

It's a public sector client - my point about IR35 is that previously our client did not consider it to apply. The end-client either thinks that it does or can't be bothered to check and is applying PAYE to be safe. But that is irrelevant to my question, which is about the treatment of the deduction etc.

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By SXGuy
13th Jun 2019 14:27

Why would there be a loss? Whichever method you decide to record the income the end result is the same.

I've seen people suggest you record turnover less paye tax and ni resulting in net pay bring equal to net profit, and I've seen some suggest they exclude any invoiced amounts subjected to paye all together. Either way the end result is the same. Where's the loss come from?

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to SXGuy
13th Jun 2019 14:47

From an accounting perspective, the consensus seems to be that one should record the gross amount as turnover, since that is the actual sales value to the company.

I'm talking about tax losses. Very basic example - assume no other costs:

Contract income gross £150,000, PAYE deducted £50,000.

Accounts show turnover £150,000 and expenses of £50,000 - net profit £100,000. In computing the CT liability, we're told to ignore the amount subjected to PAYE, ie £150,000. If we do nothing else, and allow the £50k PAYE expense, we have a £50k tax loss.

Further, if the director takes the £100k cash out as salary (no further PAYE) with the salary being charged to the P&L (and allowed for tax) we end up with a £150k tax loss. My brain tells me that cannot be right but I've yet to find anything that conclusively says that the PAYE and/or salary costs are not deductible.

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By Maslins
to Wilson Philips
13th Jun 2019 15:11

To my mind inside IR35 public sector contractors (assuming it was that for the whole year) will just end up with a loss equal to the admin expenses or running the company.

Ie:
- turnover £150k
- salary £150k (you may split out e'ers NIC if you like)
- other admin costs (say) £2k
- equates to loss of £2k.

Your suggestion is basically duplicating the PAYE in the P&L surely? Ie you're both counting the PAYE suffered as an expense, but then also counting the _gross_ salary as an expense.

The director simply takes out the £100k net salary. They take it tax free from their company as it already suffered PAYE in getting to their company.

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to Maslins
13th Jun 2019 15:24

You're completely missing my point, which is about computing the corporation tax profit or loss. We've been told, in preparing the computations, to disregard any turnover that has been subjected to PAYE, so £150k of income drops out of the equation. Although it seems sensible to also disregard related expenditure (PAYE, net salary) I have yet to find anything that says that we must. Taking your figures, the CT comp would look like this:

Loss per accounts £2k
Deduct turnover subjected to PAYE £150k

Tax-adjusted loss £152k

I'm not saying that is correct - I'm looking for authorative evidence that it is wrong.

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By Maslins
to Wilson Philips
13th Jun 2019 16:25

You're letting daft logic lead you to a ridiculous conclusion, and being rude with it. I'm out.

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to Wilson Philips
13th Jun 2019 16:45

Wilson Philips wrote:

You're completely missing my point, which is about computing the corporation tax profit or loss. We've been told, in preparing the computations, to disregard any turnover that has been subjected to PAYE, so £150k of income drops out of the equation.

You mention 'consensus' & 'we've been told' but exactly where are you getting that from?
If you follow HMRC's thoughts here:-
https://www.gov.uk/government/publications/off-payroll-working-in-the-pu...
and apply them to your figures then surely it becomes:-
£150k Invoiced
(£50k) PAYE deducted
(£100k) paid out to employee
(£2k) other expenses

(£2k) net loss = tax adjusted loss

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to Wanderer
13th Jun 2019 19:32

And just to clarify where my confusion originally stemmed from:

Salary

You can pay yourself for the work provided to public sector clients through your company’s payroll. As employment taxes have already been paid on the amount your intermediary receives, you can pay yourself that amount without deducting Income Tax or National Insurance contributions.

You should report non-taxable payments your company pays you on the Full Payment Submission (FPS) that your payroll software produces.

Secondary Class 1 National Insurance contributions will be payable on earnings paid through your company’s payroll on which you deduct primary Class 1 National Insurance contributions.
Dividends

If you’re a director of your own company, you might choose to pay yourself a dividend from the company’s profits. You can pay yourself a tax-free dividend up to the total of the deemed direct payment received from contracts in the public sector, where Income Tax and National Insurance contributions have been deducted at source. You do not need to declare that dividend on your Self Assessment tax return.
Corporation Tax calculations

When you are calculating your company’s turnover, you should deduct the VAT exclusive amount of the invoice, which is the amount from which Income Tax and National Insurance contributions were deducted at source. Your company accounts should show this deduction to make sure the amount is not taxed twice.

It is that last part that gave me the headache - it clearly indicates that the already taxed turnover is disregarded for CT purposes, but nowhere is there any mention of the CT treatment of the salary payment to the individual.

(And I'm still unsure as to the format of the CT computation if the individual takes the payment as a dividend.)

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to Wilson Philips
13th Jun 2019 16:52

Also that link includes a reference:-

HMRC wrote:
Chapter 9, Part 3 section 139 Corporation Tax Act 2009 will be amended to give relief to the business for employment income, tax and NICs costs it incurs (but not so as to give a double deduction).
Haven't bothered to read it but that should address the point you've made.
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to Wanderer
13th Jun 2019 17:26

Thank you for sensible and helpful answers - I hadn't seen that updated guidance. Although it is only guidance, it does make some sense. Originally, the advice had been that PAYE'd turnover would be excluded from the CT calculations but it appears that this is no longer the case, although it does seem to force the individual to 'take' the net cash - although that could be left on loan account I suppose.

My concern - and I will need to do some further reading - is that HMRC's original guidance was half-baked and so I'll need to convince myself that the revised guidance is in line with the legislation. It seems that to avoid a CT charge the net needs to be drawn as salary, to reduce the CT profits to nil, but it had previously been suggested that dividends could be taken instead, which obviously wouldn't (ordinarily) reduce CT profits.

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