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Question on the process for operating IR35

How should a contractor with his own company process IR35 transactions?

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Probably a numpty question, but I am asking about the correct way to process IR35 transactions in the books of a limited company operated by a contractor to a large organisation. He is definitely inside IR35.

The large organisation uses Capita Resourcing to process contractor payments, and they have issued a self billing invoice/remittance advice to the contractor’s company. The payment includes VAT and has tax and NIC deducted, which they say they will remit to HMRC on behalf of the contractor. So far so good I think.

My question is about what the contractor has to do to account for this correctly in the limited company accounts. What he has done so far is:

  • He has raised a sales invoice for his daily rate plus VAT, which he hasn’t sent to Capita Resourcing as they have provided a self-billing invoice.
  • He has processed a payslip using his company’s employer registration that calculates his employee’s NIC and PAYE. The employee taxes are the same as the payment made to HMRC by Capita Resourcing, and he has reported this on an FPS.
  • He has matched in his accounts the unpaid balance of the sales invoice with the employees taxes due, so that both contra off and both the sales invoice and the HMRC liability are no longer outstanding (no effect on VAT).
  • He is left with a balance of employer’s NIC to pay to HMRC as he isn't eligible for EA.

I have searched widely for advice on the above process, and there is much online about status determination but little practical help for those definitely within IR35. Is anyone able to confirm that he is doing the right things, and that his Company should pay the employer’s NIC to HMRC? The IR35 helpline is closed (staff transferred to Covid help). I have emailed them, but goodness knows how long it will take to get a reply.

Also regarding the 5% deemed costs that can be deducted, should this be claimed by him from his Company as an employee expense so that a) he receives it tax free and b) the Company benefits from a CT deduction for that cost?

Finally regarding the Company’s CT comps, as far as I can see it will have sales of (say) £50,000, gross pay of £50,000 and employers NIC of say £4,000. Add to that a 5% deduction for costs and the Company will be reporting a loss every year. That doesn't sound correct.

Any thoughts people?

Replies (8)

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By SXGuy
29th Sep 2020 14:46

I'm not an Ir35 expert by any means, but I was of the understanding that it is the fee payer who is responsible for paying employers ni.

Given that scenario and your example above everything would net off and have a zero profit not a loss.

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By Chris.Mann
29th Sep 2020 14:51

There are some past threads on the Aweb site. This might be useful?

And this may also include useful information.

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Replying to Chris.Mann:
Stephen Youngs
By Stephen Youngs
29th Sep 2020 15:26

Thanks, that's a useful thread on accountingweb although not completely clear in its conclusions! The linked ICAEW guidance is also a 'page not found' now.

As mentioned in a reply below, it does seem that the contractor definitely shouldn't process payroll himself as the fee payer will already have reported under RTI and paid all employment taxes including employer's NIC.

One option mentioned was invoicing as normal (which I'm sure you have to do for VAT if nothing else) at the agreed daily rate. The resulting underpayment on the invoice due to employee taxes deducted can then be written off to presumably director's remuneration. Not credited as that would mess up turnover and VAT.

All that makes any sense after that is a journal to debit director's remuneration and credit director's current account with the invoice value before VAT minus the employee taxes deducted. That leaves the company at nil gain/loss, a VAT liability to pay in the normal way, and directors remuneration to declare in the accounts that will equal the P60 the fee payer will give them.

I think the 5% expenses allowance disappeared with the new off-payroll bit of IR35, which is just as well as I can't see what to do with it without creating a loss.

There are some questions remaining about allowable expenses and capital purchases, as with no profit how would tax relief be obtained?

It seems really strange that so much is published about IR35 yet there is so little I can find about this practical stuff. Literally reams on inside/outside decisions, but in this case that isn't an issue.

Thanks (1)
By jantill
29th Sep 2020 14:55

The 5% to which you refer is an expense that the company can use to offset any CT due but only if the contractor is not under S D or C.
Presumably he could reclaim any company losses against earlier years earnings.

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By SteveHa
29th Sep 2020 14:59

The fee payer will have already reported on FPS. If the worker has also done so HMRC will be expecting a duplicate payment.

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Replying to SteveHa:
Stephen Youngs
By Stephen Youngs
29th Sep 2020 15:10

Thanks, I was coming to the same conclusion. It is also the case that the fee payer has to pay the employer's NIC, so the contractor doesn't actually need to operate a payroll himself at all. Not looking forward to getting the FPS cancelled, RTI changes are a bit of a challenge. Hopefully an updated FPS with nil pay will work.......

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Red Leader
By Red Leader
29th Sep 2020 15:57

This thread makes me glad I don't do IR35 cases.

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By SXGuy
30th Sep 2020 07:29

I agree that there is little working examples online as I've tried myself to find some and think I only came across one at the time.

But as I said in the first reply, employer ni is paid by the fee payer, and as is all other taxes.

You should find that if you book the sales less vat as turnover and then add the paye details as an expenses as well as the 5% allowable you should arrive at a nil profit.
If it doesn't somethings missing.

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