Off payroll working business costs

Accounting for business costs in a company caught by off payroll working rules

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Hi All,

I have a client who is now caught by the off payroll working rule. I am generally fine with the whole income net of PAYE and how that is accounted for.

What I am not so sure about is how other costs are treated. I think there needs to be a distinction between accounting for the costs per financial reporting standards, and what actually happens in the CT600.

My thinking is that regardless of whether tax deduction is received on a cost (let's say accountancy fees for £1000), this is a cost of the business - its not a cost of anything else. As such in the accounts (just talking about the accounts here), the cost should be recorded.

Now when it comes to the CT600 I understand that the cost may not be tax deductible and so could/should be added back (assuming in this example that there is just the one contract).

Many may think that its a moot point in that given the income effectively equals the gross salary there would be no corporation tax anyway, but if the costs are left in there they would create a loss that could be carried forward against possible future profits outside of the off payroll working.

Have I got this right?

So so for example (simplified for ease) client invoices £50k fees subject to off payroll working. Sales 50k, salary £50k, accountancy £1k -> accounting loss = £1k but taxable profit = nil

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By richard thomas
23rd Oct 2022 14:38

Apologies in advance for any egg-sucking lessons here.

The general rule which I’m sure you know is that tax follows the accounts, not vice versa, so what goes into the accounts of the PSC, the intermediary in IR35 terms, is what appears in its records, fee in and PAYE & NICs on the fee, salary and expenses out, so an accounting loss of £1,000.

And that is what goes in the CT600, subject to two points. The first is whether the fee is allowable as a deduction in computing the profit from providing your client’s services, a question answered by BIM46450 in the affirmative.

The second is that s 141A CTA 2009 provides that amount representing the “deemed direct payment” to the client from the fee payer is excluded from the accounts for tax purposes. Thus the loss is £1,100, and I see no reason why it cannot be carried forward.

The result seems odd to me, which is why I wonder if I have missed anything. The fee payer gets a deduction for the amount paid to the PSC while the PSC pays no tax on it, but gets a deduction for the salary it has undoubtedly paid. The client pays tax on the salary less the “deemed direct payment” which has suffered PAYE (s 61W ITEPA) so only once.

I hope someone will come along to show that I am wrong as this seems rather generous treatment. Possibly it was assumed that most PSCs would pay most of the reward as dividends.

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Replying to richard thomas:
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By Bobbo
24th Oct 2022 14:14

richard thomas wrote:

The result seems odd to me, which is why I wonder if I have missed anything. The fee payer gets a deduction for the amount paid to the PSC while the PSC pays no tax on it, but gets a deduction for the salary it has undoubtedly paid. The client pays tax on the salary less the “deemed direct payment” which has suffered PAYE (s 61W ITEPA) so only once.

I hope someone will come along to show that I am wrong as this seems rather generous treatment. Possibly it was assumed that most PSCs would pay most of the reward as dividends.

Not the sort of thing I deal with *ever*, so absolutely no idea here. But is it something to do with s61N:

"(3)The fee-payer is treated as making to the worker, and the worker is treated as receiving, a payment which is to be treated as earnings from an employment (“the deemed direct payment”), but this is subject to subsections (5) to (7) [F2and (8A)] and sections 61T [F3, 61TA] [F4, 61V and 61WA]."

The PSC is deemed not to have paid anything so as well as the receipt from the fee-payer being excluded from tax, the onward payment to the worker is excluded as well?

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Replying to Bobbo:
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By richard thomas
24th Oct 2022 15:07

Section 61N is a classic deeming provision. It posits a counterfactual, that the client or a person in a chain above the PSC makes a payment of earnings and that the PSC owner receives an amount of earnings. This is a provision of ITEPA so applies for the purposes of that Act. These are to charge earnings to tax on employees and to require persons making payments of earnings to deduct PAYE.

Any consequential deeming has to bear that in mind, unless the legislation also deals with any consequentials. Section 61W does so deal and is what deals with the point in your last paragraph and prevents double taxation of the employee.

The point I was making was that in the real world (or at least the OP's scenario) the PSC receives a fee and pays it as salary to the employee. Section 116A CTA 09 exempts the receipt, but nothing, and certainly not s 61N precludes the salary from being a deduction. I would expect to see any such rule in CTA 2009, not in ITEPA.

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By Paul Crowley
23rd Oct 2022 16:47

When this was DIY the company had 5% that could be ignored for PAYE and left in as as company income to set company costs against.
Never yet dealt with the problem as the few that were impacted took the umbrella route and became employees of an intermediary
Each one had their company trade before and after the problem contract.

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