One of the areas due to be examined in the December 2022 Advanced Tax exam 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 113.8% and the deemed salary is therefore 100/113.8 of the relevant payment.

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 you are planning on doing Taxation or Advanced Tax in December 2022 or March 2023, I recommend you purchase Tax Condensed or Advanced Tax Condensed which will allow you to learn the technical rules. If you then practice the key questions I recommend, you too will be ready for anything the examiner throws at you.

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