IR35 - Accounting for withheld tax within personal company
Discussion
I have a personal service company through which I offer contracting services.
During the company's previous financial year, I worked on contracts both inside and outside of IR35.
For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company (properly, as far as I can tell), but let's say it was 20% of the ex VAT invoice total.
So, for every £100 (ex VAT) of inside IR35 invoices my company recorded as income, it only received £80 from the client and my client withheld £20 and paid that over to HMRC as my personal income tax.
Now I have to prepare my company's accounts and tax return. How do I account for the (personal income) tax that has been deducted from my company's invoice payments?
Currently my accounts software is showing £100 of revenue, £80 received and a debtor of £20.
Do I calculate my corporation tax as usual (using invoice value of £100 and ignoring the tax deduction) and then deduct the personal income tax already paid from the corporate tax owed?
So:
Revenue: £100
Costs: £0 (assume, for ease of calc)
Profit: £100
Corporation Tax @ 20% (say) = £20
Less personal tax already withheld by client: (£20)
Net corporation tax owed by company: £0
Accounting journal is:
Dr Corp tax payable £20
Cr trade debtor (outstanding invoice amount) £20
If that's correct, how do I submit that on the corporation tax return?
During the company's previous financial year, I worked on contracts both inside and outside of IR35.
For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company (properly, as far as I can tell), but let's say it was 20% of the ex VAT invoice total.
So, for every £100 (ex VAT) of inside IR35 invoices my company recorded as income, it only received £80 from the client and my client withheld £20 and paid that over to HMRC as my personal income tax.
Now I have to prepare my company's accounts and tax return. How do I account for the (personal income) tax that has been deducted from my company's invoice payments?
Currently my accounts software is showing £100 of revenue, £80 received and a debtor of £20.
Do I calculate my corporation tax as usual (using invoice value of £100 and ignoring the tax deduction) and then deduct the personal income tax already paid from the corporate tax owed?
So:
Revenue: £100
Costs: £0 (assume, for ease of calc)
Profit: £100
Corporation Tax @ 20% (say) = £20
Less personal tax already withheld by client: (£20)
Net corporation tax owed by company: £0
Accounting journal is:
Dr Corp tax payable £20
Cr trade debtor (outstanding invoice amount) £20
If that's correct, how do I submit that on the corporation tax return?
Edited by youngsyr on Wednesday 29th June 17:16
Edited by youngsyr on Wednesday 29th June 17:16
CorradoTDI said:
Never thought about inside IR35 payments into a company account...
I thought PAYE had to be direct to a personal account?
Maybe just move this money to your own account as it's been taxed at source?
That's the problem - the invoices are raised in the company name, but personal tax is deducted from them by the client and paid by them to HMRC. I thought PAYE had to be direct to a personal account?
Maybe just move this money to your own account as it's been taxed at source?
At some point you have to square that circle and it's not clear to me how you do it, despite searching around.
My latest thinking is that instead of what I posted in the first post (which only offsets corporate and income taxes if they're paid at the same rate), the only way to do it is to include your IR35 invoice income as a (corporation) tax allowable expense or non-taxable income in the corporate. Otherwise you could pay tax on the income twice.
However, that doesn't explain what to do with the the amounts withheld from invoice payment by the client - my company raised an invoice for £100, but only received £80. What do I do about the other £20 in my accounts?
Edited by youngsyr on Wednesday 29th June 22:02
Eric Mc said:
The system is a mess.
The amount deducted by the customer before it pays your company is a “debt” as far as the company is concerned. And the company will never get that money - so it gets written off as a charge in the company’s profit and loss account,
Thanks. Doesn't that write-off then lower the company's taxable profit, so in effect you get double relief on the personal income tax element of the inside IR35 income?The amount deducted by the customer before it pays your company is a “debt” as far as the company is concerned. And the company will never get that money - so it gets written off as a charge in the company’s profit and loss account,
E.g.
Company bills client £100 (ex VAT).
Client pays company £80 and HMRC £20.
Company records:
Turnover £100
Write off (£20)
Oerating Profit £80
Less: Non-taxable IR35 income (£100)
Taxable loss: (£20)
I.e. the compay would have £20 of tax losses to offset against non-inside IR35 income in the year???!
I think you need to account for it all as PAYE to staff. So your £100 income from inside contracts would be entirely spent on staff wages & employees NI/etc. There £0 Corp tax on that £100 as there’s no profit. Somehow you then deduct whatever tax was already paid at source from what you owe hmrc.
Getting it to all add up sounds a right pain. Might be easier to use an umbrella for inside contracts, then it just goes on your personal tax return and is fairly easy as the brolly will give you a p60/p45.
Getting it to all add up sounds a right pain. Might be easier to use an umbrella for inside contracts, then it just goes on your personal tax return and is fairly easy as the brolly will give you a p60/p45.
Quote:
For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company
/Quote:
Is the problem here that it was you who were put on their payroll, but rather than paying you, they made the payment to a company bank account. Therefore, the payment shouldn't be accounted for in the company at all, but directly to you personally. These arrangements are true if any director were to be on the payroll of another company, for instance as a non-exec director etc.
For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company
/Quote:
Is the problem here that it was you who were put on their payroll, but rather than paying you, they made the payment to a company bank account. Therefore, the payment shouldn't be accounted for in the company at all, but directly to you personally. These arrangements are true if any director were to be on the payroll of another company, for instance as a non-exec director etc.
WhiskyDisco said:
Quote:
For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company
/Quote:
Is the problem here that it was you who were put on their payroll, but rather than paying you, they made the payment to a company bank account. Therefore, the payment shouldn't be accounted for in the company at all, but directly to you personally. These arrangements are true if any director were to be on the payroll of another company, for instance as a non-exec director etc.
That's how IR35 through a personal service company works, unfortunately. The Company invoices the client, but the contractor is put on the payroll. As EricMc said above, it's a mess.For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company
/Quote:
Is the problem here that it was you who were put on their payroll, but rather than paying you, they made the payment to a company bank account. Therefore, the payment shouldn't be accounted for in the company at all, but directly to you personally. These arrangements are true if any director were to be on the payroll of another company, for instance as a non-exec director etc.
youngsyr said:
WhiskyDisco said:
Quote:
For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company
/Quote:
Is the problem here that it was you who were put on their payroll, but rather than paying you, they made the payment to a company bank account. Therefore, the payment shouldn't be accounted for in the company at all, but directly to you personally. These arrangements are true if any director were to be on the payroll of another company, for instance as a non-exec director etc.
That's how IR35 through a personal service company works, unfortunately. The Company invoices the client, but the contractor is put on the payroll. As EricMc said above, it's a mess.For the inside IR35 contracts, I was put on the client's payroll and they deducted the relevant personal tax rate from the payments they made to my company
/Quote:
Is the problem here that it was you who were put on their payroll, but rather than paying you, they made the payment to a company bank account. Therefore, the payment shouldn't be accounted for in the company at all, but directly to you personally. These arrangements are true if any director were to be on the payroll of another company, for instance as a non-exec director etc.
If the role is "inside" IR35 then, in order to account for the Tax/NI they've deducted at source, the Client HAS to put the Contractor on the payroll, so that the tax/NI they deduct is reported to HMRC via FPS and then marched up to the actual payment they hand over to HMRC.
TL:DR there is no point putting it through your Company's books. You will need to include it on your self assessment at year end but on the "Employment" page rather than Self employment.
Exactly - the client should not have accepted, nor paid an invoice from you. You are simply an employee on their books. PAYE at 20% and employye's NI and the rest will be due via self-assesment. Or, perhaps it will be PAYE at 40% plus employee AND employers NI (this is what I was preparing to have to fork out had I not bailed and gone to the dark side).
My insurances and regulatory permissions are held by my company, not by me personally. I also don't want to be personally liable if things go tits up - I work on projects that have values over £100m.
Hence doing the work through my company.
Also, what you guys are talking about is essentially making me an employee, isn't it? Doesn't that bring down requirements on the client re benefits, etc? That wouldn't work either - my client has internal pay structures and policies that wouldn't fit my contract.
Hence doing the work through my company.
Also, what you guys are talking about is essentially making me an employee, isn't it? Doesn't that bring down requirements on the client re benefits, etc? That wouldn't work either - my client has internal pay structures and policies that wouldn't fit my contract.
youngsyr said:
My insurances and regulatory permissions are held by my company, not by me personally. I also don't want to be personally liable if things go tits up - I work on projects that have values over £100m.
It depends what the contract between you and the Company said. if they're putting you on the payroll (which they would have to do if they're going to deduct tax/NI at source) then I'm not sure how (contractually) they could treat you any different to a normal employee (and that means not expecting the worker to provide their own insurances)youngsyr said:
Also, what you guys are talking about is essentially making me an employee, isn't it? Doesn't that bring down requirements on the client re benefits, etc? That wouldn't work either - my client has internal pay structures and policies that wouldn't fit my contract.
You'd be on a Fixed term Contract. Internal pay structures, policies etc are irrelevant. The only ones the Client has to comply with are statutory ones.Gassing Station | Business | Top of Page | What's New | My Stuff