Contracts inside IR35 – calculating deemed payments

 

Since last year’s changes to IR35 in the public sector, it is often the recruitment agency who takes on the mantle of “fee payer”. This means having the responsibility of operating “deemed employment payments” on engagements judged to be inside IR35 by the public sector body.

Currently in the private sector, it remains the responsibility of the off-payroll worker to determine the IR35 status of their assignments and operate deemed payments for work which is caught by IR35.

However, it’s looking increasingly likely that the public sector rules will be extended to the private sector. The government is consulting on the subject at the moment, but HMRC sees the public sector reforms as a huge success, claiming they have resulted in an additional £410 million raised in income tax and NICs.

Private sector IR35 as early as April 2019

It looks probable therefore, that a roll out to the private sector will be pushed through as early as April 2019, despite the disruption and damage widely reported in the public sector.

Assuming this happens, as we predict it will, more and more agencies will have the additional administrative burden of having to calculate deemed payments for perhaps thousands of workers.

“The Government appear to have decided that IR35 Public Sector reform has been a roaring success. We believe that this is, at the least, optimistic. However, based on all HMRC communication and the recent Consultation, Private Sector reform is likely just around the corner. An interesting admission from HMRC is that they have not, and have no plans to, cost any of the ther options presented in the consultation document except a full role out of the IR35 reforms as is. This in itself says a lot.” – Joe Taffurelli, Liquid Friday

What are deemed payments?

If an assignment is determined to be inside IR35, then the worker is deemed to be employed for that job.

It follows then that “deemed payments” are the amount paid to the worker that should be treated as employed income for tax purposes.

Calculating deemed payments for IR35 caught contracts

For an assignment caught by IR35, there are a number of steps involved in the calculation of a deemed payment:

Step 1 – Work out the value of the payment to the worker’s limited company, after deducting any VAT due

Step 2 – Deduct the direct costs of materials used by the worker in providing their services

Step 3 – Deduct expenses met by the worker’s limited company that would have been deductible from taxable earnings if the worker was employed

Note: If the resulting amount, after these initial 3 steps, is a zero or negative figure, there is no deemed payment

Step 4 – Deduct tax and NIC, as appropriate and pay Class 1 Employers NIC

Step 5 – Report pay and deductions to HMRC under RTI

Step 6 – Provide a detailed remittance to the worker

Outsource your deemed payment payroll

If you are a recruitment agency supplying workers to private sector organisations, it may not be long before you have to operate deemed payments for all engagements caught by IR35. That could be quite a stretch on your resources.

Forewarned is forearmed! IR35hepline.co.uk and our partners can help with all aspects of deemed payment payroll.

Just get in touch to discuss your requirements.