IR35: Computation - Question 1  

What tax and NICs liabilities will arise (tax year 2007/08)?

Mr and Mrs A work through a Personal Service Company (PSC) in which they own all the shares. They each carry out some engagements during the year which fall within the IR35 rules ('relevant engagements') and some which do not.

Assume the PSC receives £20 000 in respect of relevant engagements for Mr A and £40 000 in respect of relevant engagements for Mrs A and that there is a further £40 000 income from other business activities which do not fall within the new rules.

Assume the PSC also incurs the following expenses during the course of the year:

Expense Mr A Mrs A Notes
Salaries £20000 £20000 Paid in year.
PAYE and NICs deducted and accounted for under normal provisions.
Employer's NICs £1891 £1891 Paid in year.
NICs calculated on an annual earnings period, as for directors.
Assumes that the employer's threshold (£5225) has been set against these earnings, and 12.8 per cent paid on remainder.
Employer's pension contributions £4000 £4000 To an approved scheme
Travel costs related to relevant engagements £2000 £500 All would be deductible under normal provisions relating to employees.
Other expenses £10000 business expenses, all allowable for Corporation Tax purposes.

Under the new proposals, at the end of the tax year, the PSC will have to calculate the amount of PAYE and NICs due on Mr and Mrs A's earnings. If they have not paid enough PAYE and NICs during the year, then PAYE and NICs will be payable on a 'deemed payment' on the last day of the tax year.

Calculation of IR35 deemed payment

  Mr A Mrs A
Income from relevant contracts
20 000
40 000
Less
Expenses
2 000
500
Employer's NICs paid in year
1 891
1 891
Pension contributions
4 000
4 000
Flat rate 5% of gross relevant contract income for general running expenses of intermediary
1 000
2 000
 
11 109
31 609
Deduct
Salary paid in year
20 000
20 000
 
 
No deemed payment
11 609
Employer's NICs on deemed payment
1 317
Deemed payment
10 292
 
Company accounts
Turnover
100 000
Less
Salaries
40 000
Employer's NICs on salaries
3782
Pension contributions
8 000
Expenses
12 500
 
64282
 
Accounting Profit
35718
Deemed Payment 10 292  
Employer's NICs on deemed payment 1,317  
    11,609
Profits for Corporation Tax purposes
24109

Summary

Mr A brought in £20 000 from relevant contracts during the course of the year. The PSC paid the whole of that amount onto him in salary and deducted and accounted for full PAYE and NICs. No further action is required.

Mrs A brought in £40 000 from relevant contracts during the course of the year and the PSC paid £20 000 onto her in salary and deducted and accounted for PAYE and NICs on that salary. This left £20 000 from her relevant contracts on which PAYE and NICs were not been deducted and accounted for during the course of the year. Under the IR35 rules this £20 000, less the deductions allowed, will be deemed to be paid to Mrs A as salary at the year end (on 5 April).

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