A lot of contractors will purchase membership with IPSE (the association of Independent Professionals and the Self Employed, previously PCG – Professional Contractors Group). They predominantly provide assistance against IR35, but also other things which impact many contractors.
Question many people ask is what is the tax treatment of the membership fees? IPSE are pretty clear on it here. In summary, you can reclaim VAT on the cost, but it’s not an allowable expense for corporation tax purposes.
Next question for FreeAgent users is how to correctly account for that in the software. As things stand, I don’t think there’s any suitable code which gives it the correct tax treatment. Whilst there is a “subscriptions” code, FreeAgent assumes there’ll be no VAT on these costs (which can be easily overwritten, just change the “Auto VAT” option) but also that it will be allowable for corporation tax (which can’t easily be overwritten).
FreeAgent does however give you the ability to create new codes, with whatever tax settings you choose. Step by step instructions on how we recommend doing it below:
- Go to “Settings” –> “Income & Spending Categories”.
- Click “Add New” –> “Admin Expenses category”.
- I’d suggest calling it “IPSE Membership”, but this is free text, so put what you like.
- Nominal code, I’d suggest “357” so it sits as near as you can get it to subscriptions.
- Reporting name “Subscriptions to professional and trade bodies”.
- Make sure you remove the default tick in “Allowable For Tax”.
- Leave VAT at “Standard rate”, then “Create Admin Expenses Category”.
Now, whenever you allocate a payment to that code, FreeAgent should correctly reclaim VAT (barring unrelated factors like whether or not you’re on the flat rate scheme) but not allow it for corporation tax purposes.