IR35 | April 2021

Balancing your books and tax records

If, because of the new off-payroll rules, your client will deduct PAYE tax and NI when settling your invoices, you will need to make important changes to your admin and how you draw income from your business.

What steps do you need to take?

New rules

The signs are that the new off-payroll ( IR35 ) rules, which apply from April 2021, will result in many more workers having PAYE tax and NI deducted from income. If you’re affected you’ll need to consider how you should deal with this in your business and tax records.

Tip. The new off-payroll rules only apply to contracts where your client is a medium-sized or large business or other organisation (including all public bodies). You can continue to process income from other contracts in the usual way.

VAT – no change

Even where you know your client will deduct tax and NI from payments – in effect treating you as if you were an employee – if you are registered for VAT you must continue to add it to your invoices and account to HMRC for it on your VAT returns in the usual way.

Is essence, as far as VAT is concerned you can ignore the new off-payroll rules.

Recording income

There are various ways to correctly record income from which tax and NI has been deducted in your business’s books.

Our advice, which we believe more accurately follows generally accepted accounting principles, is to record the full amount that you invoice your client as sales income. You can then record the PAYE tax and NI deducted as an expense, say as a salaries and wages cost.

How much tax and NI?

Where your client decides that the new off-payroll rules apply, they should ask you to complete a “starter checklist”. This allows them to operate the correct tax code.

Paying yourself

Having included the sales invoices as income and the PAYE tax and NI as expenses in your business records, the net amount is income for your company. You can either pay this out or retain it in your company.

Our recommendation is that you pay it as salary and credit the amount to your director’s loan account or draw the funds immediately.

HMRC says that the salary payment from your company does not need PAYE tax or NI deducting from it as this has already been done by your client.

In Summary

  • Your VAT records and returns are unaffected.
  • Record invoices for off-payroll work as sales and the PAYE tax and NI deducted as an expense.
  • The net amount your company receives can be paid to you without accounting for further tax or NI.

To discuss how the IR35 changes will impact you and your business give Esther a call on 01737 652 852.