How do you account for workers that fall within the new IR35 rules for tax purposes?

The new IR35 rules ensure that individuals who provide personal services to clients through their own company pay employment taxes and National Insurance contributions (NICs) in a similar way to employees.

The impact on the worker is that where IR35 applies, the client will deduct tax and NICs from the fee for the workers services.

What does the accounting look like?

Mr Tait’s personal service company (Tait Limited) invoices one of their clients, Walker Limited (a large company) an amount of £3,000 (including £500 VAT) per month. Mr Tait has been assessed as falling within IR35 for tax purposes. The deemed payment processed through payroll and subject to PAYE tax and NIC is £2,500.

Walker Limited will deduct and pay to HMRC:

  • PAYE £500
  • NIC £214

Walker Limited will also account for Employer’s NIC of £345 and apprenticeship levy of £13.

Walker Limited’s accounting entries would be:

  • Dr Profit and loss – staff costs £2,500
  • Dr VAT £500
    • Cr Bank – to Tait Limited £2,286
    • Cr Bank – to HMRC £714 
  • Dr Profit and loss – staff costs £358
    • Cr Bank – to HMRC £358

But what about Tait Limited who issued an invoice for £3,000 including VATm but have only received a payment of £2,286?

Where does the difference go?

There has been some debate as to whether the service company’s revenue should be measured gross (before any deductions) or net (the amount after the PAYE and NIC deductions). Whilst HMRC have said that they will accept accounts prepared under either a gross or a net receipt basis, in order to comply with UK GAAP turnover should be measured at the gross amount reflecting the fee and therefore the value of work done. The amount deducted by the client would be treated as an expense – generally as a staff cost within administrative expenses in the service company’s accounts.

Tait Limited’s accounting entries would therefore be:

  • Dr Cash £2,286
  • Dr Profit and loss – Admin expenses £714
    • Cr Profit and loss – Turnover £2,500
    • Cr VAT £500

Contact us

At MHA Tait Walker, we have a comprehensive understanding of the new IR35 legislation, which comes into force on 6 April 2020.

If you have any queries on this or any other matters relating to the new IR35 legislation, please don’t hesitate to contact us on 0191 285 0321 or email advice@taitwalker.co.uk.

Other blogs in this series

Is your business ready for the new IR35 rules?

How do you determine the size of the end client for the purposes of the new IR35 rules?

How do you determine employment / IR35 status?​

Do the IR35 changes only apply to engagements with medium and large businesses in the private sector?