IR35 deemedemployment calculation: which months' PAYE & NICs to include?

[Glencky]

Morning, all! A very specific accounting question from me today.

I am operating within IR35 (contracts support outside but working practices don't.) I have had some problems with my accountants (it's a long story I won't bore you with, but I've got to the point where I have to check every single thing because there have been so many mistakes. I will, of course, be moving elsewhere as soon as I can, but that's not going to happen in the next few days and this is a question for the next few days). I mention this mainly to make it clear that the standard (and understandable) response of 'what does your accountant say' is not going to work in this case!

My question is very specific and it's about exactly what elements of PAYE & NICs to include in, or exclude from, the IR35 deemed employment calculation. After a bit of complexity due to flat rate VAT, the calculation starts out with, essentially, the value of all income MyCo has received in the year - and this is definitely on a receipts basis, not accruals, from reading the HMRC guidance. Then there are various deductions, including the 5% allowance, allowable expenses, pension contributions etc. And then at Steps 6 and 7 of the calculation (see link below) you deduct first Employers NICs and then salary (inc PAYE and Employees' NICs) paid during the year.

ESM3145 - How to calculate the deemed payment

My question is, which months' PAYE & NICs do I include and exclude here? To explain, I've been paying myself a full salary targeting a zero position by the end of the tax year so no deemed payment is required, which is common practice when operating under IR35, as I understand it. I pay my salary towards the end of the month, so the net salary element for March has definitely left the company before 5th April. However typically I make payment to HMRC for the Employers' NICs, Employees' NICs and PAYE for that month's salary, the following month. So in the case of this month, I wouldn't expect to make that payment to HMRC until later in April. If the IR35 calculation were taking place on a standard accruals basis it'd be easy, you'd include this amount within the calculation. But based on the HMRC guidance about what to include 'at the top' of the calculation, it's not, it's operating on a received basis.

In a 'typical year' it might be that this wouldn't make a lot of difference as you'd have included the last month's PAYE from the last year an excluded the last month's PAYE from this year, and it might roughly cancel out. But this year it does make a difference as it's my first year of operation.

Does anyone have any knowledge and can help? If it can be backed up with any external source, especially HMRC, I'd be even happier - I've got paranoid now I've spotted so many errors with what my accountants have done!

[Kenny@MyAccountantFriend]

Hi

The amount to include is the amount calculated per the payroll for the month on the deemed payment.

The NIC/PAYE payment is not made until the following month but becomes payable to HMRC when the salary is paid to you, hence is included in the calculation per your link.

Please see the description for stage 8 which states the following: 'Deduct the amount of the Employer’s NICs on the deemed payment. It is therefore necessary to calculate the amount, which, together with the employer’s NICs on it, equals the result of Step Seven (see ESM3169).'

[Glencky]

Hi there, and thanks for the quick response. I got excited when I read the first part of your reply (the bit where you said it becomes payable to HMRC even though you're not actually paying it until the next month) but then your reference to Step 8 confused me. I may be being very dense, but my issue/ concern is probably best illustrated with an example - numbers made up to make the maths easy:

Step 1 - £100k less £5k allowance, = £95k start point
Step 2 - no deduction
Step 3 - deduct £15k for expenses (running total now £80k)
Step 4 - no deduction
Step 5 - deduct £20k for pension contributions (running total now £60k)
Step 6 - deduct £5k E'ers NI already paid* (running total now £55k)
Step 7 - deduct £58k salary, NI, PAYE already paid* (now running total is a negative number)
Step 8 - not necessary because it's already clear there's no deemed payment required

BUT some of the E'ers NI, E'ees NI and PAYE included in the amounts shown in step 6 and step 7 (*) haven't actually been paid yet, they won't be paid until late April. If I therefore reflect that in the calculation and change those last few steps to

Step 6 - deduct £4.5k E'ers NI (now running at £55.5k)
Step 7 - deduct £55k (now running at £500)

THEN there's a £500 value going into step 8 and a (small) deemed payment is required.

So my point is, which of these sets of numbers is correct? Basically I'm trying to end up with no deemed payment and still have the chance to slightly increase March's salary. If I leave March's salary as is, there's no deemed payment based on the approach in the first calculation, but there is one based on the approach in the second calculation.

[Kenny@MyAccountantFriend]

Step 6 - deduct £4.5k E'ers NI (now running at £55.5k)
Step 7 - deduct £55k (now running at £500)

THEN there's a £500 value going into step 8 and a (small) deemed payment is required.

If these are the figures up to and including your February salary only, you would then add the amounts you plan to pay for March to the figures, which would then provide the figures in the original calculation above.

[Glencky]

Hi, they're the figures up to and including February salary PLUS net salary for March. The logic (if there is any!) is simply thinking about things on a 'cash basis' - as at 5 April, then for salaries up to and including February, not only the net salary but also the Employers NICs, Employees NICs and PAYE have all physically been paid. But if I do things as I usually do in a monthly cycle, for the March salary, only the net salary has physically been paid - the Employer's NICs, Employees NICs and PAYE on the March salary have been calculated and are due to HMRC but have not yet physically been paid.

Given I know (because the HMRC guidance is very clear) that on the invoicing side I am not supposed to include anything invoiced but not yet paid 'at the top of the calculation', it seems inconsistent to include payments owing to HMRC but not yet physically paid 'at the bottom of the calculation'. Which is why I felt it simplified things conceptually (even if a little strange) if I were to pay HMRC early for the NICs & PAYE relating to the March salary. If I did that, then definitely see no reason why they couldn't be included.

I'm hoping though that what you're actually saying is that the IR35 calculation is internally inconsistent in that it works on one basis 'at the top of the calculation' and a slightly different basis for these elements of the calculation! in which case I don't need to pay HMRC early to achieve the calculation that demonstrates I have no deemed payment to make!

Sorry- I do appreciate this is probably very painful for you!

[Kenny@MyAccountantFriend]

I believe the reason for the income having to be recieved is to account for any potential bad debts where you could end up paying HMRC PAYE and NIC on funds you may/will not receive, which wouldn't be fair on your company as you may then not have the funds to pay your salary.

The RTI submission made when you run the March payroll will show the amounts as due to HMRC, hence they are payable, so different to the bad debts that could occur in part 1.

[Glencky]

Hi, OK, so that does make some kind of sense. Yes, I'd appreciated it was a 'fairness' point that led to the way the income is calculated (received with no accruals). And now that you talk about the RTI point, I understand that too, so even though from one perspective the two aspects are inconsistent, actually there's a logic to the inconsistency!

Thanks very much for your time.