At the end of the tax year, 5th April, all income earned by the company that is within IR35 must be calculated as a Deemed Payment and tax and schedule E NICs charged accordingly.
Payment has to be made by the 19th May following the tax year end.
We recommend that the deemed payment is calculated by the end of the fiscal year and then paid through the payroll as salary in that month (March 31st Salary).
This ensures that the P60, P35 and P14 are all correct at the tax year end.
Once the salary has been accounted for there will be no deemed payment as the correct income will have been put through as salary.
On the P35, the following two questions may be answered "yes" when you account in this way:
6a) Are you a Service Company?
6b) If "yes", have you operated the intermediaries legislation (sometimes known as IR35) or the Managed Service Company legislation?
Where the deemed payment is not being paid through the payroll each month during the financial year, a calculation needs making (use the HMRC calculator) so that an accrual entry can be made each month into the accounts as a liability, this is because you know that this amount will have to be paid as salary at the end of the fiscal year.
To make the Deemed Payment calculation:
|
Step
|
Action
|
|
1
|
Total all the net of VAT income invoiced on all contracts within the year that are subject to IR35 and the cash equivalent value of any benefits received that were not cash (e.g. accommodation provided) |
|
2
|
Deduct 5% from the total of your total net of VAT income |
|
3
|
Deduct from above figure any other expenses and benefits that can be claimed such as travel and subsistence, subscriptions and other necessary costs that were incurred to enable the employee to perform their duty |
|
4
|
Deduct capital allowances on assets that are required for the employee to perform their duty |
|
5
|
Deduct any company pension payments made to employees |
|
6
|
Deduct salary, employer NICs and class 1a NICs paid on wages and benefits |
|
7
|
If the total is NIL or negative, this is the end of the calculation and no deemed payment is due. |
|
8
|
On the above balance calculate Employers NICs by dividing the figure by 112.8 then multiply by 100. Profit minus deemed payment is the employers NICs |
|
9
|
This balance is the deemed payment for which tax and NICs (schedule E) are then calculated and reported on the P60, P35 and P14. |
A worked example of an Annual Deemed Payment calculation
John Smith's contract falls under the IR35 rules.
He is contracted to work for 40 hours per week at an hourly rate of £25.
His contract duration is for 1 year (48 weeks).
The journey to the temporary worksite is 35 miles round trip daily, and John goes and eats lunch in a café near the site every day.
He takes his laptop to work daily which his Limited Company owns.
The Company contributes £2500 to John's pension scheme a year, and pays him an annual salary of £10,000.
|
Step
|
Action
|
Amount
|
|
1
|
40 hrs x £25/hr x 48 wks (no cash benefits were provided) |
£48,000
|
|
2
|
5% of £48,000 |
£2,400
|
|
|
Balance of £48,000 - £2,400 |
£4,5600
|
|
3
|
Deduct the total of 35 miles x 5 days x 48 wks = 8400 x 40p = £3,360
+ £924 meals claimed = £4,284 |
£41,316
|
|
4
|
Deduct the capital allowance of the laptop (e.g. value £1,200 x 25%) = £300 |
£41,016
|
|
5
|
Deduct pension contributions of £2,500 |
£38,516
|
|
6
|
Deduct £10,000 paid as salary and employers NICS (12.8% x £10,000) totalling £11,280 |
£27,236
|
|
7
|
Deemed payment before employers NICS deducted |
£27,236
|
|
8
|
Deduct Employers NICS (£27,236 / 112.8 x 100 = £24,145 - £27,236) |
£3,091
|
|
9
|
Deduct balance after Employers NICS deducted is the actual deemed payment |
£24,145
|
The balance of £24,145 is then subject to PAYE schedule E and is due for payment on the 19th May.
Accounting for the deemed payment when the financial year end precedes the tax year end
Where you have an accounting year end before the tax year end, all the additional income that will be earned by the end of tax year end must be calculated as a deemed payment so that it may be shown as an accrual on the balance sheet.
This will come under the heading of 'current liabilities'.
This calculation will reduce your corporation tax liabilities in the financial year for the company too. An alternative method would be to calculate the deemed payment in the last month of the financial year for the company, and add it to payroll for that month.
This will be taken into account in the Deemed Payment when making the calculation at the end of the fiscal year.
To make a personalised deemed payment calculation you can download a spreadsheet from the HMRC .