One area I expect to feature in the Advanced Tax exam is Personal Service Companies (IR-35)
If the final client is a small organisation, the responsibility falls on the PSC to account for PAYE on the deemed salary.
However, it is possible to claim the 5% statutory deduction and to deduct any salary and employer’s NIC paid by the PSC. In addition, any pension contributions and allowable employment expenses incurred by the PSC can also be deducted.
The relevant payment is inclusive of employer’s NIC so is 113.8% and to find the deemed salary, you simply multiply by 100/113.8
On the other hand, if the final client is a medium or large organisation, the responsibility falls on the final client who must issue a Status Determination Statement to the PSC.
The end client must then pay the income tax and NIC on the deemed direct payment (DPP). This is computed as payment for services (net of VAT) less direct material costs and deductible employee expenses incurred by the PSC.
The PSC can claim a credit for the DPP in computing the deemed salary to avoid double taxation.
Accountants now have to be extra vigilant when approving payments to a PSC to avoid any penalties and being responsible for the PAYE on the deemed direct payment (DPP)
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