ICAEW Tax Faculty has written a letter to HMRC in relation to the off-payroll working rules in the public sector, to urge the department to provide clarification of the accounting treatment of fees received in the personal service company (PSC). The letter has been published as ICAEW Rep 37/18.
Finance Act 2017 introduced changes to the operation of IR35 within the public sector. From 1 April 2017 it is now the responsibility of the end client, in this case the public sector body (PSB), to determine the tax status of individuals providing services through an intermediary, and if the contract is more akin to one of employment, the PSB must account for and pay the relevant PAYE and national insurance to HMRC.
This raises a number of difficulties when it comes to establishing the appropriate accounting treatment. In particular, it is not clear whether turnover should be recorded gross or net of the PAYE and employee’s national insurance in the PSC, both of which are payable by the PSB if the work is caught within the IR35 rules.
We would like to hear your views. How do you think turnover should be recorded in the PSC’s accounts? Please leave a comment below.
First, I don't follow your letter to HMRC, since the PSB will pay the PSC the gross fee, less income tax and NI, but plus the 20% VAT added to the invoice issued to the PSB. So there won't be a shortfall in VAT (apart from differences in relation to flat rate)
In my client's books, I recorded the gross fee in turnover, and the tax and NIC as a debit to salary costs. The net of these two elements equalled the cash received (ignoring VAT). I then debited the net amount (gross less tax) to salary account, and credited this to the DLA. Whether the director chose to remove this cash or not is not relevant. There is no 'book profit' now, so no corporation tax due.
In the payroll scheme, the net amount is shown as additional pay, but not subject to tax or NIC.
This may not accord with the HMRC Help sheet, but that was mostly incomprehensible anyway from an accounting viewpoint