Following on from our earlier blog in relation to the new tax rules being introduced for individuals who provide their personal services via an ‘intermediary’ to a medium or large business from 6 April 2020, we have set out below the potential tax effect of the new rules, if they were apply to you.
What is the tax effect on you?
The important point to appreciate is that you will be treated in tax terms as an employee of the entity that pays the PSC for your services. So if a contract ends during the 2020/21 tax year, the paying entity should send you a P45 showing the total deemed payment and deductions for PAYE and NICs. If the contract extends over the 2020/21 tax year, the paying entity should issue a P60 to you showing the total payment and deductions in the 2020/21 tax year.
You will need to show the amounts on the P45 or P60 as an employment on the employment pages of your 2020/21 self-assessment tax return.
The amounts of income tax recorded as paid by you on the P45 or P60 may well not be the correct amount of income tax payable by you. Please look at the first part of the example, which illustrates how PAYE and NICs are deducted from the deemed payment by the paying entity.
The other important point to appreciate is that it is your company which is receiving the amounts from the paying entity. How can you extract such income tax efficiently? The draft legislation has special rules to allow you to do so.
What procedures does your PSC need to follow if deemed payments are received?
The PSC will deduct the amount of the payment it receives, as well as the PAYE/employee NICs costs incurred, from its taxable income, so it will not be taxed twice.
Please see the second part of the example, which illustrates the procedures your PSC will take in passing the net deemed payment to you.
What if your company has other contracts hiring out your personal services?
Nothing is expected to change in respect of contracts your company has with small private sector clients. The possible application of IR35 needs to be considered, but there is no change in the law regarding IR35. If contracts are not caught by IR35, we will help you decide on an appropriate profit extraction strategy for the profit from these contracts.
Should you wish to discuss the effect of the above in more detail or discuss your tax affairs in more details, please contact us for a FREE initial consultation.
Example of potential operation of the off-payroll rules
This is an example of the likely effect of the operation of the rules based on how the rules for the public sector operate.
Derek provides personal services to a large business via his personal services company, Contract Ltd. The business considers the off-payroll working legislation applies. The contract will end on 30 September 2020.
In 2020/21, Contract Ltd invoices the business £4,000 a month. There is no VAT and no expenses in the invoices.
The business would treat each of the monthly payments as deemed salary payments. Derek will need to provide the business with his National Insurance Number, address, date of birth and P45 if appropriate in order that they can set him up on their payroll.
As Derek has a ‘primary employment’ with his PSC, the services he provides to the business are treated as a ‘secondary employment’. The authority would initially operate tax code BR which means income tax is deducted at basic rate. Employee NICs would be deducted at normal rates on £4,000 a month.
Employer NICs would be payable by the business on the deemed salary payment of £4,000.
The business will report and pay PAYE and NICs to HMRC. In due course, HMRC may issue the authority with a tax code to use against future payments made to Contract Ltd.
When the contract ends on 30 September 2020, the business should send to Derek a P45 showing the total deemed salary payment and deductions for PAYE and NICs.
If the contract extends beyond the 2020/21 tax year, the business should issue a P60 to Derek showing the total payment and deductions in the 2020/21 tax year.
The total amount invoiced by Contract Ltd and recorded as gross deemed payments by the business is £24,000 (6 X £4,000).
Assuming the tax code BR does not get adjusted the net deemed payments total (the figures shown are based on rates and allowances for 2019/20):
|Less: PAYE – £24,000 at 20%
|Less: Employee NIC –
6 x monthly NICs of £393.72
|Total net deemed payments
If VAT has been charged by Contract Ltd, the business would pay Contract Ltd £16,837.68 plus the VAT charged on £24,000.
The business will also need to pay employer NICs. The monthly amounts due will be £452.78, which totals £2,716.68.
Effect in Contract Ltd
The company will get relief from corporation tax for the VAT exclusive amount of the invoices i.e. £24,000.
Procedure if Contract Ltd pays Derek the net deemed payment through the payroll
Any amount of income paid to Derek up to £16,837.68 will have already been subject to deduction of PAYE and NICs. HMRC guidance is that the payment should be recorded on a Full Payment Submission as non-taxable income.
Procedure if Contract Ltd pays Derek the net deemed payment as dividend
Alternatively, Derek can receive a dividend up to £16,837.68. This will not be reported as a dividend on his self-assessment return.
Effect for Derek
Derek would be treated as having received the net deemed payment from the company in the 2020/21 tax year irrespective of whether he has received it as salary or dividend (or even if he has not received it from his company).
On his 2020/21 self-assessment return he will record the information supplied to him from the business:
Employment income £24,000
PAYE deducted £4,800
There may be a tax repayment due to Derek if he has not utilised his personal tax allowance against other income. Alternatively, income received from the medium or large business may attract a higher rate tax liability, if Derek has other taxable income.
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted by the author or Essex Abel Ltd.