In this guide, we explain what has and what hasn’t changed if you provide services to a Public Sector authority. We’ll also show you how easy it is to manage a contract determined to be inside IR35, using inniAccounts.
From 6th April 2017, contracts with public authorities see the responsibility for deciding if IR35 legislation applies move from the contractor / PSC to the public authority that the services are provided too. The rules used to determine if IR35 applies to a contract remain unchanged. HMRC have released a new Employment Status Service (ESS) tool to help contractors, agents and the end client assess and record the outcome of the contract assessment.
Checking your contract status
Remember, the influence you have when negotiating contracts is not just about your rate, but also the contractual terms. Public authorities must assess their contracts on a case by case basis and not mandate IR35 across the organisation or insist that everyone uses an umbrella company. You still have a say and a limited company remains the safest and most flexible way to provide services as an independent professional.
It is inevitable that some contracts will be inside IR35. Should you be in a position where one of yours is, features built into our software to support IR35 make running your business and getting paid even easier. Continuing to trade as a limited company with no additional intermediaries in the contractual supply chain, such as an umbrella company, means you always remain prepared to accept future contracts irrespective of their IR35 status.
Receiving payments when inside IR35
With a contract with a public authority that is deemed inside IR35, the fee payer (either your agent or public authority if you contract direct) will calculate and deduct Income Tax and National Insurance from your invoice payments. These deductions are then reported and paid to HMRC on your behalf by the fee payer.
When setting up a public authority contract in inniAccounts that’s inside IR35, you’ll be able to identify it as such. This tells the software that you won’t receive full payment of invoices for that contract and that your company has no further PAYE Income Tax or National Insurance to pay. When you receive payment into your Business Bank Account and record invoices as paid in your Bookkeeping, a simple step will allow you to transfer the net payment of your invoice straight to your next payslip ready for payment.
The guide below and our video take you through the process of managing a public sector contract inside IR35 where Income Tax and National Insurance is deducted at source by your agent or the public sector body.
Creating a Public Sector IR35 contract and invoices
To get started you need to create a new contract and identify it as being within IR35. You can find a detailed guide on creating a new contract here, this guide focuses on the extra settings you need to apply.
Once you have entered the details of your contract, you need to set its IR35 status. Simply select the Change button as shown below.
There are 3 settings to apply. First, ensure the Inside IR35 check box is marked. Then, as IR35 contracts are employee specific you then need to select the employee that will be working on the contract. In doing so, payment of this invoice will be applied to the named employees payslip automatically.
Finally, as your agent or end client will deduct taxes from your invoice payments, tick the box to indicate your payroll taxes for this contract will be deducted at the source. This prevents any further Income Tax or National Insurance from being deducted.
Once you’ve populated your contract, select Save at the top of the screen. You can review your contract on the next screen to confirm it is set as IR35 off Payroll with PAYE taxes deducted at source.
Select the Done button to complete your contract set up, you can now continue to raise invoices as normal. You’ll notice when creating new invoices, an additional status message is displayed to remind you that the invoice is awaiting payment under IR35 off payroll rules.
Receiving invoice payments
Income Tax and National Insurance will already have been deducted when you receive invoice payments. This means you won’t receive full payment for invoices and your company will not need to deduct or pay any further Income Tax or National Insurance when paying the employee.
When you receive payment of invoices, access your Business Current Account in the Bookkeeping area and click the Match button against the pending payment of the invoice you have received payment for.
Next, enter the date shown on your bank statement when you received the payment and decrease the amount shown so it matches exactly what you received into your Business Bank Account. This is important to ensure your LiveCash, tax calculations and company accounts remain accurate. Remember to save your updates.
In this example, £5,329 is received of a £7,200 invoice.
Confirming Income Tax and NI deductions
As you’ve confirmed receipt of the invoice payment into your Business Bank Account, the employee that provided the services can be paid.
To do this, you simply return to the invoice you have received payment for by clicking it in the list of your invoices.
When you display the details of your invoice, you’ll see a new message to say you have received payment of your invoice. Assuming you will not receive any further payments for that invoice, click the Confirm tax deductions button.
A summary is displayed that allows you to check and confirm the unpaid amount of the invoice is the Income Tax and National Insurance your agent or end client has deducted on your behalf.
When happy that everything shown is correct, simply click the confirm button.
Once confirmed, the message displayed on the invoice confirms payment has been received under IR35 off payroll rules and the outstanding balance of the invoice is now zero.
Automatic payments on payslips
After confirming the payment, the net amount of the invoice (excluding VAT) is automatically added to the employees next payslip as non-taxable income, meaning no further deductions will be made.
If you receive payment for multiple invoices during a payroll period, each invoice will be added to the next available payslip. You can view all non-taxable income added to payslips by previewing your next payslips in payroll.
When you near your pay date you’ll receive an email to remind you to check your payslips before they are submitted to HMRC via RTI. You need to check that all non-taxable income is included as expected.