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 contracts in the public sector, since April 2017, the Off-Payroll Working in the Public Sector rules take precedence over the pre-existing IR35 rules. The basic criteria remain the same but it is now the responsibility to determine IR35 status now sits with the “fee payer” (the organisation that pays your limited company, typically a recruitment agency), rather than you.
Many public sector engagers are sidestepping the whole issue by refusing to engage with PSCs, insisting instead that all of their contractors engage through umbrella companies. For those that will engage with you through a PSC, if they determine that the role is inside IR35 then they must deduct tax and National Insurance from your invoice amount prior to paying your company. You can then take this money from your PSC as salary without the need for further taxes (your accountant should record this as a non-taxable payment on a Full Payment Submission).
You must still account for VAT on the gross amount and file company tax returns and Companies House returns. Controversially, under the public sector rules there is no 5% allowance to cover business expenses.
You work 20 days at £500 per day for a public sector client inside IR35
Invoice value £10,000 plus VAT = £12,000
The fee payer deducts Tax and NI on the invoice amount net of VAT (£10,000)
Employee’s NI = £493.63
Income Tax = £3,391.37
Net Deemed Payment = £6,115.00
Total paid to your limited company (Including VAT) = £8,115.00
You should retain the £2,000 VAT for payment of your quarterly VAT bill.
You can take the £6,115 as salary from your company with no further taxes, since you have already paid Income Tax and National Insurance on the gross amount. From your net income you will need to fund the company’s ongoing costs, such as accountancy and insurance, leaving you even further out of pocket.
If you are working a contract in the private sector that is inside IR35, responsibility for operating deemed payments sits with you. Our guide to operating deemed payments in the private sector describes how this works.