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The IR35 payment process from start to finish?

IR35 deemed employement

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Hi All,

First time posting on here, so hello to all.  Started to go it on my own earlier this year.....exciting and nervous times!!!  

No doubt you heard about the ongoings in the world of contractors and IR35.  I guess I would like confirmation or correction on whether my understanding is correct.  Appreciate any input or thoughts, as I know its a topic with countless scenarios.

Lets just assume a contractor is inside IR35, works via the client - agency - ltd company(lets just call a PSC for ease) - contractor relationship.

  • Client pays agency the normal day rate. 
  • Agency pays the PSC a net amount after deducting EE NI and PAYE
  • Agency also calculates ER NI and apprenticeship levy out of its own pocket on top of the gross day rate amount that is owed to the PSC. 
  • Agency directly pays all these 4 taxes to HMRC and pays a net amount to PSC.
  • PSC then has to calculate the actual EE NI, PAYE (will get any/if any rebate at the end of the tax year)
  • PSC also needs to calculate its own ER NI out of this.

The calcualtion of the PSC ER NI is where my true questions lies, as technically the ER NI in this whole chain is being paid twice.  Is that assumption correct?

And surely the PSC ER NI would be within the day rate owed to the contractor not on top?  e.g gross earnings of the PSC = EE NI + PAYE + Net Pay + ER NI + allowable expenses

Hopefully the second part of my question makes sense, trying to explain this to a client in part time role I am currently working at (which happens to be an Agency)

Appreciate any help my fellow finance professionals can give.


Replies (10)

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By adf2410
19th Nov 2019 13:41

Your first four bullets are correct, but then it goes wrong. Er's NI is only calculated and paid once, by the agency (in the public sector, I've seen the agency passing the NI cost to the client).

PSC doesn't have to calculate anything (other than accounting for the correct amount of VAT if applicable). The PSC just receives the already taxed income and passes it straight on to the individual, either by paying the money out, or putting it to the director's loan/current account. The individual then treats it as employment income which has already been taxed in their own tax affairs.

Thanks (3)
By ireallyshouldknowthisbut
19th Nov 2019 14:15

Generally if the client is under IR35 its pointless having the company structure.

They would do better on a payroll of the agent from a time and cost POV.

Thanks (1)
Replying to ireallyshouldknowthisbut:
By adf2410
19th Nov 2019 21:47

Agreed if all the PSC does is under IR35 - 5 day per week contracts.

I had a public sector contract for 8 months, which probably shouldn't have been IR35 for all of the normal indicators of not being an employee (i.e. I decided when and where I worked, normally between 1 and 3 days per week at my discretion, the client didn't tell me what to do) but because I was part of the senior management structure, they decided it had to be within IR35. I wasn't too bothered about it, because it taxed more of my income at source, which was helpful at the time.

During the 2-4 days per week that I wasn't working on that public sector contract, I did other non-IR35 work. I would have hated to have been an employee of my public sector client because they would have been able to tell me where/when/how to work. So for me, it worked to be under IR35.

Thanks (0)
Replying to adf2410:
By the-financeman
25th Nov 2019 13:14

I agree. I think the push of the legislation in the private sector will just drive out most of those (for want of a better word) 'fake' contractors. And those who truly are in contracts inside and outside IR35 will take on and move between contracts regardless if in or out. As long as the net pay suffices of course.

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By DM1
20th Nov 2019 12:42

As I understand things the process would be as follows:

1. The agency calculates the PAYE and employee NIC on the net of vat amount and then pays the effective net pay and VAT to the PSC.

2 This payment is matched against the sale. This leaves an outstanding amount equal to the PAYE and NIC deducted. This is adjusted by crediting debtors and debiting payroll cost in the P&L.

3 The worker will be issued with a P60 by the agency in their name and not the PSC name. They have not received the net pay as it is paid to the PSC so an adjustment is needed, debit payroll cost in the P&L and credit the workers loan account in the balance sheet.

4 The result of the adjustments is that the payroll cost will match the sale so no profit.

5 The other costs of the PSC will create a loss than can be carried back to claim a refund of corporation tax. In the first year only.

I am sure someone will let me know if this is not correct

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Replying to DM1:
By Wilson Philips
24th Nov 2019 16:30

Point 5 - will those costs include a tax-free salary paid to the director?

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By Kate Upcraft
21st Nov 2019 18:43

there is just a little bit missing form the original chain of events. There PSC has to report any salary paid to the director as non-taxable/non-ni'able through RTI up to the limit of the income that has already been taxed by the fee payer

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By Bryank
24th Nov 2019 13:39

Is there any room for employers pension contributions in any of this, or are we limited to contributing out of post-tax income?

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By Wilson Philips
24th Nov 2019 16:28

Are we talking about a public or private sector engagement and, if the latter, existing rules or new rules from 6 April next?

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By jamezm
22nd Jan 2020 11:38

Surely, based on existing contracts, the agency will ordinarily be in breach of contract by making these deductions instead of paying gross?

Most agency>PSC contracts state a rate, say £500+vat per day, so agency is under a contractual obligation to pay £600 to that PSC, full stop. Although they have the statutory obligation to deduct the tax and ee's NICS, this is incompatible with the contractual obligation here so the PSC could separately sue them for that same amount, right? What am I missing here?

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