ESM10035 | off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: CT accounting

Accounts can be prepared under either a gross or net receipt basis, but preparers of the accounts will need to consider the most suitable approach to ensure the financial statements are prepared in accordance with UK GAAP. HMRC recommends recording the amounts gross for completeness.

Since the deemed payment amounts have already been subject to tax and NICs, no further tax is due on those amounts or this would be double taxation. Avoiding double taxation can be achieved in different ways depending on whether income from off-payroll working arrangements is recorded gross or net within the PSC’s accounts and whether the money is taken out of the PSC as payroll payments or dividends. The worker can take remuneration or dividends at a time of their choosing from their intermediary.

Money recorded gross

Recording the income in the accounts as gross means it is recorded as turnover inclusive of the tax and NICs already deducted by the deemed employer. In other words, recording the amounts as if tax and NICs had never been taken. Then the value of the tax and NICs taken by the deemed employer would be debited as an expense in the profit and loss to record that payment of tax and NICs. Ultimately, this then leaves the PSC in the same position it would be if the amounts were recorded net (as example below).

If the worker then took the net amount out of the business as payroll payments to extract this money from the PSC, this would be done as a non-taxable and non-NICable payment. These payments should be reported through RTI in box 58A. The payments are protected from double taxation which is why no more tax or NICs are due. Taking the amount as a payroll payment would create another expense for the business that would reduce taxable profits. This also avoids double taxation as no corporation tax would be due.

Example

A worker offering their services through a PSC performs services for Major Retail Ltd, a large-sized business. The engagement is within scope of the off-payroll working rules and Major Retail Ltd deems the engagement would be one of employment if it were direct and deducts tax and NICs. For the twelve-month engagement the worker is paid £1,000 per month plus VAT of £200. Each month £400 is taken in tax and employee National Insurance with £600 plus the VAT of £200 paid to the worker’s PSC. The worker takes all £600 as a payroll payment (like a salary) each month without deducting anything further and submits this through payroll on a Full Payment Submission. The PSC has no other income during the year.

Turnover (12 x £1,000) = £12,000 (credit income)

Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)

Less Payroll expense (12 x £600) = £7,200 (debit in profit and loss)

Profit = £0

If the worker instead of receiving payroll payments, takes the net amount as dividends there would be taxable profit at the end of the year:

Turnover (12 x £1,000) = £12,000 (credit income)

Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)

Profit = £7,200

The PSC also gets relief, this time for corporation tax, to avoid double taxation. This relief is given by s141A Corporation Tax Act 2009. This relief is used when calculating the company’s taxable profit. A deduction equal to net amount received by the PSC, here £7,200, would be made to leave taxable profit of £0. The £7,200 can then be taken as tax free dividends.

If after filing accounts the circumstances change and the engagement should not have been one to which Chapter 10, Part 2 ITEPA 2003 applied, and tax and NICs are refunded, the necessary corrections to the accounts and tax computations must be made to reflect the new position, as the relief would no longer be due.

Money recorded net

Recording the income as net means recording as income the amounts after tax and NICs have been deducted. Under this approach no further expense for tax and NICs would be permitted otherwise deductions for these amounts would have been claimed twice.

If the worker then took the net amount out of the business as payroll payments to extract this money from the PSC, this would be done as a non-taxable and non-NICable payment. These payments should be reported through RTI in box 58A. The payments are protected from double taxation which is why no more tax or NICs are due. Taking the amount as a payroll payment would create another expense for the business that would reduce taxable profits. This also avoids double taxation as no corporation tax would be due.

Example

Using the Major Retail Ltd example above but recording the amounts net, the company would record the VAT exclusive amount of £600 as turnover in the accounts. Nothing would be debited for expenses of tax and NIC as the amount is net.

If the PSC takes the net amount out the PSC as payroll payments (like a salary), £600 would be expensed to represent the payroll payment taken and this is the same for each of the 12 months. This would result in taxable profits for corporation tax purposes being nil;

Turnover (12 x £600) = £7,200 (credit income)

Less Payroll expense (12 x £600) = £7,200 (debit in the profit and loss)

Profit = £0

If the net amount is not taken as payroll payments but instead taken as dividends, relief is given under section 141A Corporation Tax Act 2009, during the calculation of taxable profits. If, in the above example, the money was taken as a dividend rather than a payroll payment, there would be £7,200 profit at the end of the year. During the taxable profit calculation a deduction of £7,200 would be made to ensure taxable profit is reduced to £0.

If the PSC receives income outside of off-payroll working engagements, these would still be subject to taxes in the normal way. Only relief up to the amount of the deemed direct payment can be claimed.