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RE: Inland Revenue reply about IR35 - part 2
by No10.Official
on 2000-09-19 16:26:00
in IR35

4. Workers employed by intermediaries may generate fees after leaving the employment of the intermediary for example in royalties or with ongoing service/maintenance contracts. How is this income to be treated under IR35?

Income of the kind described, which does not relate to personal services provided by a worker to clients which meet the definition of employment, will not be affected by IR35.

5. Workers affected by IR35 have actual salaries paid and deemed salaries “due”, relative to the income generated by the worker (defined as payment received). When a worker leaves the employment of the intermediary and a P45 is issued the fees may not have been received. It the calculation of the deemed salary based on a projection that fees will be paid and the final deemed salary adjusted accordingly? What happens if the payment is not received or deductions are made after the worker has left the intermediary and the P45 needs adjusting?

The P45 should be completed on the basis of both the actual salary paid and the deemed salary calculated by reference to fees received up to the date when the worker leaves the intermediary; once a P45 has been issued it cannot be amended. If additional fees are received after the P45 has been completed the employer should account for tax at the basic rate on any additional amount of deemed payment and let the employee know of this. The procedures for payments after a P45 has been issued are on page 94 of the Employer’s Further Guide to PAYE and NICs - CWG2 (2000 ) .

6. The attributed deemed emolument may entail the worker paying tax at the higher rate. Higher rate taxation would preclude the worker from claiming such new HMG/IR initiatives such as Family Tax Credit or Children’s Tax Credit. As identified above the actual salary paid to the worker may involve a considerable shortfall to the deemed emolument. Hence the tax/NIC deductions will not be commensurate with actual income and the worker even more so may require application of the new Tax Credits!

People organising their affairs through an intermediary are not precluded from claiming the Children's tax credit (CTC) or Working Families’ Tax Credit (WFTC). However, the intention is to focus CTC on low to middle income families and that is why the amount of the tax allowance is gradually tapered away when the taxpayer becomes higher rate. Their liability to higher rate tax can be affected by all taxable sources of income, including the deemed payment and any dividend income that they receive, so where the worker was previously taking substantial amounts of income in the form of dividends the change to the deemed payment may not affect their liability for higher rate tax. The government believe that the deemed payment fairly represents the worker’s income for tax purposes, and for the purposes of eligibility for CTC, where he or she has a material interest in the intermediary. This ensures a level playing field with someone who is directly employed.

The income definition used for Working Family Tax Credit is different, and is not based on tax liability.

7. How would the company’s existing computerised payroll and accounting systems operate under IR35? (Page/Sage/Quicken/Quickbooks have no plans at present to update software to cope with IR35.) Accounting systems cannot process deemed emoluments, they always show the employee being owed the remainder of the actual salary. How do you allow for this in the Profit and Loss account, balance sheet figures and cash flow projections?

The IR35 legislation only requires a single calculation to be done each year. It should be possible to do this manually, if commercial software is not available. The amount of the deemed payment should be included in the worker’s pay for the purposes of calculating the PAYE tax and NIC due, and in the calculation of the company’s Corporation Tax liability. But there is no need to include it in the balance sheet or profit and loss account.

8. How does the company produce a payslip that has deemed tax/NIC deducted when the actual salary paid to the employee is less? Should the entry on the payslip be actual salary or deemed emoluments with deemed tax/NIC deductions?

Payslips should only reflect actual salary and the tax/NICs on actual salary. The only employee documents where deemed payments and tax/NICs on them should be reflected are the P45 or the end of year P60.

9. If the employee leaves the company, should the P45 entries be deemed salary (not paid) or the actual salary paid with tax/NIC deducted on the deemed emoluments? Either option results in a “false” P45 which will impact upon the NEW employer’s PAYE system. If actual salary entered – then the new employer would re-pay all the tax and NI deducted under IR35 on processing the P45. If deemed salary entered – the worker will have deducted a larger amount of tax and NI from the next salary, based on pay to date that the worker has not received.

P45s do not require any entry for NICs. The P45 should show taxable pay to date, including the deemed salary, and tax deducted, including the tax on the deemed salary. If the P45 is completed on this basis and handed to the new employer, then the new employer will deduct the correct amount of tax in relation to any actual salary, or any deemed payment, in relation to the new employment. The employee is assessable to tax on both actual and deemed payments, and so any in-year deemed payments have to be taken into account in the operation of PAYE. This will not affect the amount of tax and NIC deducted from the next payment by the new employer.

10. How should “end of year” returns (eg P14, P60 and P35) be completed? Should the P60 show deemed emoluments or actual salary? (The P60 may enable the employee to obtain a loan/mortgage at 3 x “salary”, when of course this is actually just “deemed” and not deemed “actual”!)

The deemed salary, and the tax and NIC deducted, should be included in the figures shown on all Inland Revenue end of year returns and so will be reflected in the P60 given to the employee. In addition, there will be a box to tick on the P35 to indicate that a deemed payment is included in the figures.

11. How does the employee complete the IR Self-Assessment Return based upon deemed emoluments rather than actual salary/income?

The pay and tax figures from the P60, which include the deemed payment, should be used in the self assessment return.

12. Regarding SERPS how is a personal or state pension now calculated based upon actual NI contributions paid against a salary that has never actually been paid?

Deemed salary on which NICs have been paid will count as income for the purposes of calculating entitlement to SERPS.

13. Pension contributions (personal or EPP) – is the maximum tax free pension limit calculated as a percentage of deemed emoluments or actual salary?

The deemed payment will count towards the calculation of income for the purposes of the maximum contributions and benefits from personal and occupational pensions schemes."

If you would like further information about IR35 you can visit the Inland Revenue website at http://www.inlandrevenue.gov.uk/ir35/index.htm. If you have specific queries you can ring the Inland Revenue helpline on 0845 303 3535.

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