Off-Payroll – The Nitty, Gritty

How the off-payroll rules affect your taxes

HMRC has recently published guidance for agents regarding off-payroll working in the public sector, but contractors will find this equally useful.

Lower fees

The guidance confirms that because the fee payer (likely to be the agency) has a liability to deduct and pay employees’ NIC, they may be keen to renegotiate the fee with the contractor to reduce the rate for the job. They cannot lawfully deduct employees’ NIC from an agreed fee but could, dependent on the contractual terms, negotiate a lower fee. Contractors should therefore be aware of this and remain vigilant. Check the contract and ensure that there is no room for the agency to manoeuvre and suppress your fee rate.

This reform of the IR35 legislation is not of the freelancer industry’s making. Is it not enough that contractors have to suffer PAYE tax and NIC deductions without having to endure a decrease in their fee rate?

PAYE calculations

Section 8 of the guidance provides an example of how the fee payer will calculate and deduct the tax and NIC from the contractors’ fee.

Contractors should note that there is no requirement for them to be given a payslip but they will be given a form P60.

RTI

Just because the fee payer is operating PAYE and NIC, this does not absolve the contractor from their own RTI obligations. However, the employment income that has already suffered tax and NIC needs only to be recorded as non-taxable income on a Full Payment Submission (FPS), and the amount of gross taxable employment income reduced accordingly.

To report non-taxable income in this way, use the FPS date field 58A:  Value of payments not subject to tax or NICs in pay period.

Tax return

The engagement with the fee payer must be shown on a contractors’ Self-Assessment tax return, by completing the employment supplementary page. All relevant information should be exported from the P.60.

Accounts and corporation tax

A PSC’s accounts will need to reflect the amount that the company actually receives, ie the net amount after deduction of tax and NIC.

Example 1:

XYZ Ltd raises monthly invoices for £7,200, ie £6,000 + £1,200 VAT. The fee payer deducts tax of £1,458 and employees’ NIC of £413, leaving a net amount of £4,129 which it pays to XYZ Ltd together with the VAT of £1,200. This gives rise to a total payment of £5,329.

A total net turnover of £49,548 (£4,129 x 12 months) will be reflected in the annual accounts of XYZ Ltd. The company can pay the contractor up to this amount without any further deduction of tax and NIC. It can also retain an amount that is not greater than the sum of the net fees less salary/dividend costs without further liability to tax.

Example 2:

In addition to the income above, XYZ Ltd also receives additional fees of £20,000. If the company pays the contractor more than the £49,548, the guidance states that further tax and NIC will be chargeable but what it fails to point out is that would only be the case if IR35 applies to the fees of £20,000 or, if not, the contractor decides to extract this as salary. If the company retains this income, then a corporation tax liability will arise on it.

The guide to Off-payroll working in the public sector: reform of the intermediaries legislation – information for agents can be accessed below.