Applying IR35 and corporation tax

How do you account for IR35 under the off-payroll rules and corporation tax?

If adhering to the off-payroll rules were not confusing enough, the accounting procedures surrounding operating inside of IR35, are even more confusing. As well as HMRC’s guidance on the issue being vague, to say the least, there has been much confusion in regard to the treatment of Corporation Tax, where a worker is considered to fall within the scope of the off-payroll rules.

Corporation Tax is based on the profits of the business and the rate depends on how much profit is generated. Currently the corporation tax rate is 19%. The calculation of the amount of corporation tax due is already complex. Additionally, the payment deadline is different from other major taxes, such as income tax and VAT.

The Off-payroll rules shift the responsibility for determining employment status from the PSC themselves to the end client organisation. If the PSC is determined to fall inside of IR35 following the end client’s status determination, it is the ‘fee payer’ (very often the agency) who will be required to deduct PAYE and NICs prior to payment being made to the PSC for the work provided.

Even though PAYE and NICs are being deducted from the ‘fee payer’ where an inside of IR35 decision has been made by the end client, this makes no difference to a PSC's status with regard to employment law. The decision concerning status with regard to the off-payroll rules is for tax purposes only.

This means that that there is no entitlement to employment-related benefits, such as sickness and holiday pay, and although income tax and NICs have been deducted at source by the fee payer, you are still operating through your limited company. Therefore, you will still be required to cover all the operating costs of your business, including paying the relevant corporation tax at the end of the accounting year.

HMRC’s guidance on the calculation of Corporation Tax is minimal as follows;

Calculate VAT and Corporation Tax

When calculating Corporation Tax liability, your intermediary/the fee payer can deduct the amount of the deemed employment payment and any Class 1 employer’s NICs due on it. This deduction is only allowed when you calculate the taxable profits for the accounting period in which the deemed employment payment is treated as paid.

The fees charged by your intermediary for providing services will still be subject to VAT, even if the engagement is within the off-payroll working rules. This is because it’s still the intermediary that’s contracting to provide services to its clients and as such the supply remains within the VAT regime.

It’s also important to note that the corporation tax computation must also be adjusted so that a double deduction for the costs associated with the engagement cannot be claimed. This is laid out in the off-payroll legislation for the public sector and it is expected that this will also be applied to the private sector legislation, to be introduced in April 2020.