One of the areas due to be examined in the December 2023 BPT and Advanced Tax exams is Personal Service Companies.
Many freelancers invoice their end clients through their companies and benefit from the lower rates on dividends compared to salaries.
IR35 holds PSCs responsible for paying PAYE on the deemed salary when the end client is a small organisation.
This is computed based on the amount invoiced less a 5% deduction for expenses and any salary and employer national insurance paid by the PSC.
The amount is inclusive of employer’s national insurance so is 115.05% and the deemed salary is therefore 100/115.05 of the relevant payment.
Sangeeta is an IT Consultant, and her company is subject to the PSC rules and has an end client that is a small organisation. The gross income is £100,000 and the PSC incurred expenses of £4,000. The PSC paid Sangeeta a dividend of £50,000.
The deemed salary is (£100,00-£5,000 deduction for expenses) = £95,000. This amount is 115.05% as it is inclusive of employer’s NIC.
The deemed salary is £95,000 x 100/115.05 = £82,573 and the PSC must pay the PAYE on this amount.
Sangeeta can make an election to treat the dividend of £50,000 as part of the deemed salary to avoid double taxation.
If the end client is a medium or large organisation, the client must issue a status determination statement to the personal service company and deduct income tax and national insurance on the deemed direct payment.
The deemed direct payment is computed on the amount invoiced by the PSC (net of VAT) less any direct materials and employment expenses incurred by the PSC. In so doing, the end client is treating the PSC as an employee.
The PSC is allowed to deduct this deemed direct payment when computing the deemed salary to avoid a double charge to PAYE.
If Sangeeta was invoicing an end client that was a medium or large organisation then the PSC would receive the amount net of PAYE and would not have to do the deemed salary calculation.
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