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Off-payroll working in public sector

The double entry required to account for these pay arrangements

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I have a couple of clients asking for advice on how to account for contract caught under the new off-payroll rules in the public sector.

I've read the "guidance" from HMRC here:

I think I understand the correct way to account for these transactions but I'm not 100% sure so I'm hoping someone on here will be able to confirm my thinking. I'll use the HMRC example figures from the guidance (where I have be able to prove the PAYE and NI figures current based on certain assumptions).

PSC invoices £6,000 + VAT and the fee payer deducts £1,871 before paying the invoice. In the books of the PSC, this leaves the sales ledger short paid by £1,871.

To my mind we have to release this into the P&L as a salary cost to the director which leaves the balance sheet clear but the company with a profitable sale and a double taxation risk.

Section 12 of the guidance indicates the director should report the income as employment income on their tax return but as things stand the money is currently sat in their PSC. The director should therefore be allowed to extract the net pay from the company tax free so we debit salary costs and credit the directors loan account for the net amount (£4,129 in the HMRC figures).

At this point the PSC has made no profit (£6k turnover, £6k salary) so no double taxation through CT but also no relief for expenses so in reality the PSC is going to report a loss (of the accounting fees if nothing else) which goes unrelieved?

HMRC implies the PSC could choose to pay the director as dividends but I cannot see how that treatment would work. Surely double taxation is inevitable if the net pay is declared as a dividend? Doesn't that lead to profits liable to CT charge and both dividends and employment income (for the same money) on the self assessment?

Can anyone confirm that my book entries make sense and that I have the accounting treatment correct?


Replies (7)

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By syrophide
08th Mar 2018 17:13

If you pay through dividend then you exclude the income on the CT return. The dividend is considered a 'tax-free' dividend out of the company - it is just a method of extracting the funds and it is still reported as salary in the individuals tax return. If paid as a wage it still must be processed by the company using RTI but as a tax-free salary. Everything else looks correct.

Thanks (1)
Replying to syrophide:
By MarkKing
08th Mar 2018 18:11

So there is no tax difference between drawing the funds as salary (reported through RTI but with no tax/NI) or as a dividend?

In which case dividend is easier as I don't have to faff about with the RTI filing (although I do have to faff with the CT return so maybe it's the same...).

Thanks (0)
By Maslins
08th Mar 2018 17:17

Invoice raised no different to normal.

Client "underpays" due to the taxes deducted, but of course the invoice is paid in full. The shortfall on the invoice we put as a debit to sales under a subcategory "Public sector taxes deducted at source".

The payroll software we use has a category for "Pay not subject to tax/NICs", so we put the whole of the net amount received (ie what the public sector physically paid the PSC) in there.

Net impact (ignoring any other transactions) is that the turnover is net of the PAYE/NICs deducted, and that exact same amount is a salary expense to the director. Profit on that transaction = £nil, so no CT payable. So I guess net difference between what we would report and what you are is we'd have turnover/salary of £4,129 each, rather than £6k each, but still profit of £nil. As I type that I think your end result is perhaps more accurate, but tax impact is no different.

Correct that if all the contractor's work is like this, then inevitably a loss will be made overall due to admin expenses.

There is then no dividend to pay to the shareholder, as there's no profit.

I believe there will then be a "P60" (possibly under a slightly different name but as good as a P60) that figures get used for personal tax purposes. Ie the company is virtually ignored from a tax perspective (except VAT, which is basically the same as if they hadn't been within IR35).

It's a bit of a pain/faff, but I think now we've got our head around it it makes sense (in a stupid politician kind of way).

Thanks (2)
Replying to Maslins:
By MarkKing
08th Mar 2018 18:12

Thanks. I feel more comfortable with turnover matching the VAT records.

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By MarkKing
08th Mar 2018 18:14

Presumably the P60 from the fee payer ensures the director receives a qualifying year on their NI record and I don't need the company to run anything through its own payroll scheme for this?

Seems obvious but it wouldn't be the first obvious thing this sort of legislation misses.

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By adjadj
12th Mar 2018 12:33

If the company makes contributes and employer contribution to the directors salary how is this handled?

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By atleastisoundknowledgable...
03rd Aug 2018 08:25

1. If the net cash (£4129) is paid out to the director as non-taxable salary (or in any ilk for that matter), where does the cash come from to pay eg accy fees?

2. Presumably we can do a CT carryback relief for the expenses that create a CT loss?

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