Corporation Tax inside IR35

[Winger300]

I received a surprise this morning with a bill for corporation tax. I am working fully inside IR35, and had assumed that since all earned income must be paid as PAYE, there would be zero company profits, and therefore no corporation tax to pay.

it looks like the accountant has counted outstanding invoices and work in hand as assets of the company, and therefore I have to pay tax on money not yet received? It means I have to pay an additional 21% tax on Money that is then going to be taxed again as salary!

Surely this can't be right can it?

[SackmanandCo]

yes it is correct. sales are based on activity done in the period. so if you invoice late, this income is back dated for tax purposes.

[Winger300]

Is there any way this can be avoided though?

Can I not claim more salary, but account for it as a debt to be paid when the company has available funds?

[SackmanandCo]

yes you can increase salary as long as net amount paid within 9 months.

[Wanderer]

it looks like the accountant has counted outstanding invoices and work in hand as assets of the company, and therefore I have to pay tax on money not yet received? It means I have to pay an additional 21% tax on Money that is then going to be taxed again as salary!

I'd give my accountant a kicking if I were you. Why can't they just account for it as salary?

[Clare@InTouch]

Adding work in progress is standard correct accountancy practice - it gets reversed the next year so the overall result is nil.

Why add in extra salary and pay (at least) 20% tax, plus 11% NI plus 12.8% employer's NI when you could pay 21% CT?

[Manic]

Adding work in progress is standard correct accountancy practice - it gets reversed the next year so the overall result is nil.

Why add in extra salary and pay (at least) 20% tax, plus 11% NI plus 12.8% employer's NI when you could pay 21% CT?

Because the OP is inside IR35.

[Clare@InTouch]

Because the OP is inside IR35.

I'm aware of that.

Being inside IR35 means 95% of cash received is taken in salary. In this case the OP has ended up with a CT bill because of work in progress - that's extra profit that doesn't have to be taken as salary and is free to be taken as a dividend, but that will of course be taxed under CT rates. The OP is wanting to take it as salary to avoid CT, even though the CT is less than the tax that would be paid on salary. I'm curious why.

[Nixon Williams]

There seems to be two aspects to this "problem".

An invoice appears to have been raised but presumably not paid by the end of the year, whilst this will increase the profits, a simple procedure is for your accountant to accrue for the salary due on this invoice.

Provided the salary is actually paid within 9 months of the year-end, corporation tax relief is given. Therefore no corporation tax will be payable on this "profit".

The second point is that even if the income is caught by IR35, generally there will be a small profit due to the 5% allowance, if this has not been used up from other costs then corporation tax will be due on this small profit.

If all the income is caught by IR35, the corpoartion tax will generally be no more than a few hundred pounds.

I hope this helps.

Alan

[Winger300]

Thanks for the explanation.

I wasn't aware that I could take this profit as dividends, so that's fine. My accountants are useless and never explain any of this.

I was under the impression that this profit would be taxed, then I would have to take the remainder as salary and incur income tax on top of corporation tax!