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IR35: recording income received from contracts where your client’s company is required to make a deemed payment

This article explains how FreeAgent supports IR35 rules for private sector contracts where your client’s company is required to make Income Tax and National Insurance contributions to HMRC by adding a deemed payment to the individual’s salary. For other types of contracts in the private sector and for public sector contracts, please read the guidance on how FreeAgent supports IR35 when your client’s customer deducts Income Tax and National Insurance contributions from their invoice.

When your client completes a contract in the private sector for a customer that doesn’t meet HMRC’s definition of a medium to large-sized business, and the contract falls within the scope of IR35 rules, the client’s company is required to make Income Tax and National Insurance contributions to HMRC by adding a deemed payment to the individual's salary. There are two ways of doing this:

  • Your client’s company can pay them the same salary each month as before, and then make the deemed payment to the individual as a lump sum at the end of the tax year. HMRC collects Income Tax and National Insurance contributions on the amount of the deemed payment. 
  • Your client’s company pays them an increased salary each month, which includes the deemed payment in addition to their usual salary. HMRC collects Income Tax and National Insurance contributions from this increased monthly salary so that at the end of the tax year the company has no further salary or tax payments to make.

FreeAgent takes the data that you or your client enters about each of their IR35 projects to calculate the total deemed payment that their company is required to make. However, these figures will only be accurate if your client is the only employee of their company. If your client’s company employs more than one person, you will need to perform the deemed payment calculations manually. 

If your client is the only employee of their company, you or they should follow the steps outlined below when they work on an IR35 contract that requires their company to increase their salary by way of a deemed payment and pay extra Income Tax and National Insurance contributions to HMRC.

Set up the contract as an IR35 project

You or your client should create the project in FreeAgent as normal and tick the box marked 'Is 'Employment' under IR35?' in the 'More Options' area. 

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You or your client should then manage the project in FreeAgent as you normally would, entering any invoices, allowable expenses, bills and bank transactions and linking them to the project.

Please note that if any of these allowable costs are out-of-pocket expenses, you or your client should only link them to an IR35-enabled project in FreeAgent once the expenses have been reimbursed.

If other users have access to your client’s FreeAgent account, they should not include income and expenditure information relating to the IR35-enabled projects. Otherwise, the figures they enter will be included in your client’s deemed payment calculations.

Review the information in your client’s IR35 report

Once you or your client have entered all the invoices, allowable expenses, bills and bank transactions associated with the IR35 contract (and made sure that they have been linked to the project in FreeAgent), their IR35 report will be ready for you both to review.

The report can be found via the ‘Accounting’ tab at the top of the client's FreeAgent account. Select ‘Reports’ from the drop-down menu and then choose ‘IR35’ from the ‘Breakdown’ section.

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Your client’s IR35 report includes a month-by-month view of the accumulated income and allowable expenses across all their IR35 projects. In accordance with HMRC’s guidance, income and costs are included in the report on a cash basis.

The report also displays the deemed payment that FreeAgent calculates that your client will be required to add to their salary at the end of the month or tax year. 

If your client has other income from non-IR35 contracts and their company has made pension contributions on their behalf, you may need to help them make some adjustments to their IR35 report. 

Edit your client’s payslips to account for the deemed payment

Whether your client chooses to make the deemed payment as a lump sum at the end of the tax year or through a monthly increase to their salary, you or they will need to account for this by editing their payslips in FreeAgent’s payroll. 

If your client chooses to make the deemed payment as a lump sum at the end of the tax year, you or they will need to edit their month 12 payslip. Enter the ‘Potential Deemed Payment’ value displayed in the relevant column of their IR35 report in the ‘Basic Pay’ field of the payslip. 

If your client chooses to make the deemed payment by increasing their monthly salary, you or they should enter the relevant ‘Potential Deemed Payment’ value displayed in their IR35 report in the ‘Basic Pay’ field of each month’s payslip. Bear in mind that this figure may change each month across the course of the tax year, so you or your client should check the report before entering their payslip details each month.

If your client chooses to increase their monthly salary, you or they will need to check that the ‘Potential Deemed Payment’ figure on their IR35 report has changed to zero once their month 12 payslip has been generated. If the figure hasn’t reduced to zero, you or they will need to return to the payslip and increase their gross salary and/or employer pension contributions.

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