14 September 2018
Accounting for Personal Service Companies
Many people undertake work through an intermediary structure such as their own personal service company (PSC). Often this is not done for tax advantage, but for commercial reasons, such as limited liability, flexibility, or simply because the customer (engager) insists.
Unlike employment law, when a person undertakes work for another person or business entity, the tax system requires the relationship between the engager and the individual worker to be categorised as either employment or self-employment. The off-payroll tax rules (commonly known as IR35) requires this categorisation to be carried out irrespective of the PSC standing in between. Until April 2017, the individual worker has the obligation for determining whether IR35 applied to the contract, and pay the tax (PAYE, employee’s and employer’s NICs) accordingly.
Finance Act 2017
New rules were introduced by the Finance Act 2017 and the responsibility for deciding whether IR35 applies to a contract was shifted to the engager from April 2017 if the engager is a public sector body (PSB). If IR35 does apply, the PSB has to pay the PSC through the payroll as if it were a natural person, so deducting the PAYE and employee’s NIC and it must also pay employer’s NIC. The amount deducted will reduce the cash received by the PSC on the settlement of the invoice.
Whilst the private sector contracts are currently unaffected, the government has published a consultation document recently to consider extending the new rules to private sector.
Accounting Implications
The PSC will still have its own legal obligation to produce accounts and follow the generally accepted accounting principles (GAAP). The issue here is whether the PSC’s revenue should be measured “gross” or “net”, i.e. whether the amount of the contract fee should be measured before or after the PAYE and employee’s NIC has been deducted by the PSB.
The Institute of Chartered Accountants in England and Wales (ICAEW) has confirmed that the PSC’s accounts should be measured at the gross amount, reflecting the contract fee and the value of the work done, which has not changed as a result of the amounts deducted by the PSB in accordance with the new tax rules.
When the gross method is adopted, there will be a difference between the turnover recognised and the receivable. This difference will not be recoverable by the PSC. ICAEW’s view is that this should be treated as an expense under staff cost, matched by a reduction in the debtor. This staff cost should be recognised in the same accounting period as the contract revenue. Therefore, if the amount that the PSB deducted for PAYE and employee’s NIC is only known after the period end, this would give rise to an adjusting post balance sheet event (debit staff costs and credit debtors).
HMRC has indicated that where this approach is used, the expensed amount will normally represent an allowable tax deduction in computing the PSC’s trade profits.
The above information is intended merely to highlight issues and not to be comprehensive, nor to provide advice. Should you have any questions on issues reported here or on other areas, please contact one of your regular contacts, or alternatively please contact enquiries@mytaxadviser.co.uk.
