ACCA share this guide to Deemed payments and expenses when contractors in the public sector fall under IR35 – this regime will also apply to private sector contracts falling under IR35 from April 2020 unless current provisions are withdrawn
Expenses incurred wholly, necessarily and exclusively for the purposes of the business are deductible in the normal way. If the IR35 company does not have any other income than the income caught under IR35, this will create a loss. The loss is available for tax in the normal way if any profits do become available in future – usually tax relief will be obtained by carrying the loss forward.
Let’s consider the following example:
John is a top BBC presenter. He works through his company John Ltd. He has 80% of the shares. His wife has 20%. She does his bookkeeping and admin. John Ltd billed the BBC £160,000 in 2017/18.
BBC deducts the following taxes at source:
- PAYE at 20% £32,000
- NIC 1% £1,600
- net received is therefore £126,400.
The company also received £40,000 gross (no tax deducted) from personal appearances for 2017/18 (not caught by IR35).
The tax calculation is as follows:
| Income |
166,400 |
|
| Less | ||
| General admin costs |
12,000 |
|
| Travel relating to BBC work |
8,000 |
|
| Travel re private appearances |
2,000 |
|
| Accountancy fees |
1,500 |
|
| Company filing and other expenses |
800 |
|
| Postage and stationery |
1,400 |
|
| Computer expenses |
2,000 |
|
| Sundry expenses |
1,800 |
|
|
29,500 |
||
| Net profit |
136,900 |
Travel expenses are to a permanent workplace (BBC) and would not be an allowable employee expense.
Individual’s tax return
Income received by John Ltd from BBC would be taxed on John as a deemed direct payment. On his personal SA Tax return John will have to show £160,000 employment income and PAYE of £32,000 as already deducted at source.
Company’s tax return
S139 CTA 2009 allows a deduction of the deemed director payment from income of the company.
The tax calculation of the company will look like this:
| Income |
166,400 |
|
| Less | ||
| Deemed direct payment |
126,400 |
|
| General admin costs |
12,000 |
|
| Travel relating to BBC work |
8,000 |
|
| Travel re private appearances |
2,000 |
|
| Accountancy fees |
1,500 |
|
| Company filing and other expenses |
800 |
|
| Postage and stationery |
1,400 |
|
| Computer expenses |
2,000 |
|
| Sundry expenses |
1,800 |
|
|
155,900 |
||
| Net profit |
10,500 |
If the company did not provide any services for private appearances, there would be a loss of £29,500. This would be allowable under the normal company trading loss regime rules.
S139 CTA 2009 says:
139 Deduction for deemed employment payment
- This section applies for the purpose of calculating the profits of a trade carried on by an intermediary which is treated as making a deemed employment payment in connection with the trade.
- A deduction is allowed for—
- the amount of the deemed employment payment, and
- the amount of any employer’s national insurance contributions paid by the intermediary in respect of it.
- The deduction is allowed for the period of account in which the deemed employment payment is treated as made.
- No deduction in respect of—
- the deemed employment payment, or
- any employer’s national insurance contributions paid by the intermediary in respect of it, may be made except in accordance with this section.
- In this section ‘deemed employment payment’ and ‘intermediary’ have the same meaning as in Chapter 8 of Part 2 of ITEPA 2003 (see sections 49 and 50 of that Act).
Article from ACCA In Practice