Accounting for the new IR35 changes?

Are you affected by the new public sector IR35 changes?

The challenge which Limited Company contractors operating in the public sector now face, is how to account for invoice payments which have already been subject to tax and national insurance, deducted by the end client or agency.

To overcome this challenge, Abacus Jack Free Agent bookkeeping software has been updated to include the ability to add a New Income Category called "Public Sector Taxes Deducted at Source".

Here's how to do it using Abacus Jack systems...

1. Raise an invoice

Contractors using their online Abacus Jack Free Agent account should raise an invoice in as normal, and send to the public sector organisation or end client for payment. Be sure to select ‘Sales’ as the income category.

2. Split the bank transaction for charges deducted

Once the invoice has been paid and a corresponding bank transaction appears in the contractors Free Agent account (less tax and National Insurance contributions deducted by the public sector organisation), the next step is to split the bank transaction to explain the amount of tax which the end client has deducted from the invoice.

To do this, users should navigate to the relevant bank account in their Free Agent account and select the payment from the public sector organisation. Choose ‘More Options’ and then edit the amount to reflect the full value of the invoice that was raised (e.g. if the client was paid £4,000 for a £6,000 invoice, change the value of the bank transaction from £4,000 to £6,000). Explain the transaction as an invoice receipt and save the changes.

Doing this will generate a negative transaction for the amount of tax and NI that the public sector organisation deducted at source (i.e. the difference between the amount invoiced and the amount paid). This new transaction should be classified as ‘Sales Refund’ as the transaction type. Then, select the new income category you created earlier for public sector taxes deducted at source from the ‘Category’ field and set the VAT rate to N/A. Select ‘Explain Transaction’ to complete the process.

3. Report the amount that the client received to HMRC through RTI

The final part of the process is reporting this information to HMRC through Free Agent’s RTI payroll system.

Assuming Abacus Jack manage your payrol on a month-by-month basis, we would prepare your payroll for the month in question as normal and generate a payslip for that month.  Your payslip will show the amount that you were paid by the public sector organisation as ‘Pay Not Subject to Tax or NI’ field i.e. it is the amount which the end client paid you, after they had deducted the necessary tax and NI.

If you are affected by the new IR35 changes, and are unsure how this will affect your Limited Company accounting, please get in touch and we will be able to advise on a variety of options which can help you.

0191 486 2126