The outcome of working a role in scope of IR35 is that any payment for that role received by the intermediary (your company) is classed as a “deemed direct payment”. This means that it is assumed by HMRC to be a salary payment for the individual completing the work and is expected to be taxed as such. For a contract with a private sector client you will need to administer this within your company.
Your PSC will invoice the client as usual. You (or your accountant) will need to work out the amount of the deemed payment. This is calculated as the invoice amount net of any VAT, less 5% to cover the company’s expenses. This 5% allowance is universal and does not require proof of expenditure, however if not actually spent on allowable expenses it will form a part of the company’s profits and subject to Corporation Tax.
The deemed payment is subject to Income Tax and National Insurance contributions. The easiest way to handle this is to have your accountant run payroll for the amount, and pay the tax and NI through the PAYE system and RTI reporting.
You work 20 days at £500 per day for a private sector client inside IR35
Invoice Value £10,000 plus VAT = £12,000.
Deduct £2,000 VAT (for quarterly payment to HMRC)
= £10,000 net of VAT
5% to cover business costs = £500
Net – to be taken as “deemed payment” = £9,500
Employer’s NI = £1,217.11
Employee’s NI = £483.63
Income Tax = £3,091.37
Net income = £4,707.89
As you can see from the example above, you end up retaining considerably less than when operating outside of IR35. It is important to remember that travel and subsistence expenses cannot be claimed against tax for an engagement inside IR35.
For contracts in the public sector different rules and processes apply. Read our guide to deemed payments in the public sector to find out more.