If you provide services for the public sector, you could be paying double taxation on your PAYE/NIC.
The Public Sector Body assesses the status of a contract when it is awarded to a company, or when the first payment after 6 April 2017 is made. This assessment will normally involve HMRC’s employment status tool and if the contract is assessed as one of employment, PAYE will be applied to the payment.
Take Joe the IT consultant as an example. Joe provides a server upgrade to a council office.
- Joe issues an invoice for his services for £5,000 plus VAT of £1,000. £6,000 in total.
- The Public Sector Body deducts £1,377 (£1,000 tax and £377 primary class 1 NICs) that it pays to HMRC.
- Joe receives £3,623 for his services plus £1,000 of VAT. £4,623 in total.
If Joe had paid himself for the work done on this contract, then new provisions would be applied to this payment from his company. How this is treated for tax purposes depends on whether he paid himself a salary and/or dividend.
HMRC advise that the net amount received by the company, net of VAT, is deductible from the company profits so that it is not taxed twice. Joe’s sale was for £5,000 but only £4,623 is deducted from taxable profits, so corporation tax will be payable on £1,377 – so that part will be taxed twice.
Documenting payments correctly
If Joe had paid all the payment of £4,623 to himself as wages, then there would be no further PAYE to be applied to the payment. It would be challenging to get this payment properly declared to HMRC for the payroll full payment submission, especially if Joe is working on more than one contract, or undertaking other work outwith the public sector or within IR35. Joe can do this, but he needs to make sure his record keeping reflects the payments correctly for corporation tax and payroll.
If all the money received were not paid as salary, then the dividends paid from the Joe’s company from the public sector contract would not be taxable and would not go on his tax return. Again, accurate records are required for determining whether dividends are taxable or not.
Make the right choice to avoid double taxation
Joe’s example demonstrates an element of double taxation on the PAYE/NIC deduction.
If you pay yourself mainly in dividends then your declared taxable income on your tax return will not reflect your actual income. This could lead to more challenges when getting or renewing your mortgage.
Many contractors now feel it is no longer worth being an off-payroll worker in the public sector because of the changes. We can help you analyse your options and decide on your best course of action. Please get in touch if you would like help exploring the consequences of these changes on your contract(s).