Client refuses to sign contract to ltd company only to me personally

[Fred Bloggs]

For the avoidance of doubt and to benefit those of perhaps a little lesser experience - The "intermediary" referred to in the IR35 intermediaries legislation is (usually but not always) the limited company you work through.

[WordIsBond]

For the avoidance of doubt and to benefit those of perhaps a little lesser experience - The "intermediary" referred to in the IR35 intermediaries legislation is (usually but not always) the limited company you work through.

True. But agents are not going to be down with the client's stipulation (because then they are on the hook), so I assumed this was a direct client rather than one through an agent.

It really makes no difference to the point, though. IR35 is not the OP's concern if he's a sole trader. If he's through an agent, IR35 is the agent's concern. If he's not through an agent, there's no IR35 concerns, there is false self-employment concern, and that's the client's liability.

[check51]

Sorry, but I have to disagree with much of what others have said.

This does not make you an employee, and it does not put IR35 in view. It puts IR35 completely out of the focus. There is no intermediary in such a situation, they are paying you directly. No IR35.

It's a question of whether it is employment or self-employment. If it is self-employment, you have self-employment NICs and personal income tax on the income. Depending on the levels and how much it drags you into higher rate band and/or additional rate tax, that's not a lot worse than paying corporation tax and the dividend tax.

The big risk for you here is personal liability. If they don't like your work or something you do, they can sue you.

But this is workable, you can do this by adding 5-10% to your rate. That will let you buy really good PII and cover any extra tax.

The real liability is theirs. If HMRC decides you were an employee, they get to pay employer NICs on everything they paid you. And if you are despicable, you could come back and say this was false self-employment, they forced you into it but really you were treated like an employee all along, and you should have had employment rights, holiday pay, etc. By going the self-employment route they leave themselves vulnerable to that kind of thing. If you would really rather do it through your Ltd, you could tell them I'll never do that but most clients work with Ltd Co contractors to protect themselves from that kind of thing and from the NIC liability.

I personally think you are getting a break here. You can do this as a sole trader and for this contract you don't even have to worry about IR35. The only real drawbacks are the liability (easy to fix with insurance) and the fact that all income will be attributed to you in the year it is earned. That's really only a problem if you need to do income smoothing or if you are income splitting by paying your spouse dividends.

If I already have a ltd company setup and they are willing to pay into the company account (and yet aren't willing to have the ltd co mentioned on the contract!!), can I just do that? or is that not possible? if I accept the contract it seems like a waste to go through the contract via self employment if I already have a ltd co running? and if that is possible since the contract is in my name would that prevent me doing the usual ltd co salary/dividend etc.

Since I already have indemnity insurance I am not bothered about the liability side of accepting the contract on that side of things

[SueEllen]

If I already have a ltd company setup and they are willing to pay into the company account (and yet aren't willing to have the ltd co mentioned on the contract!!), can I just do that? or is that not possible? if I accept the contract it seems like a waste to go through the contract via self employment if I already have a ltd co running? and if that is possible since the contract is in my name would that prevent me doing the usual ltd co salary/dividend etc.

Since I already have indemnity insurance I am not bothered about the liability side of accepting the contract on that side of things

Is the indemnity insurance in your name or the company's name?

[check51]

My company's name.. Yeah I think I see where you are going with this one!

[WordIsBond]

If I already have a ltd company setup and they are willing to pay into the company account (and yet aren't willing to have the ltd co mentioned on the contract!!), can I just do that? or is that not possible? if I accept the contract it seems like a waste to go through the contract via self employment if I already have a ltd co running? and if that is possible since the contract is in my name would that prevent me doing the usual ltd co salary/dividend etc.

Since I already have indemnity insurance I am not bothered about the liability side of accepting the contract on that side of things

You probably can run it through your ltd co, and do the usual Corporation tax / min salary / dividend compensation. But it might be a big mistake.

If you do that after signing the contract personally, I'd say you are probably at very high risk on IR35. It does solve the liability concern, probably.

But let's just compare. Assume expenses are the same either way, so you have the same amount of profit either way. Let's assume that it's a six month contract worth £48K, you have expenses of £3K, and so you end up with £45K profit, either way (before compensating yourself).

As a sole trader, you'd pay 9% of about £37K, £3.3K, in NI. You'll have taxable income of £33.5K so you'll pay £6.7K of income tax. So, a total of very close to £10K in tax. And you don't have to worry about IR35.

If you run it through your company, and take a salary of £8160, you'd have profit after salary of £36,840. So you'll pay corporation tax of £7K. Your after tax profit will be £29.8K, which you'll pay out in dividends. The first £8,340 will be tax free (using personal allowance and dividend allowance). So you'll pay about £21.5K in dividends at 7.5% tax, which runs to £1.6K in tax. So, a total of around £8.6K in tax.

So going as a sole trader costs you £1.4K in tax, plus a little extra for PII for yourself personally as a sole trader. An extra 5% on your rate covers it. Tell them it's because of liability and other concerns in operating as a sole trader, and add 10% to your rate and pocket the difference.

Disclaimer #1. I'm not an accountant. But those numbers are, I think, pretty close to accurate.

Disclaimer #2. I don't know how VAT works if you are a sole trader for one six month contract and operating as a Ltd Co the rest of the time. There might be issues here but I suspect there's nothing major, you just need to find out how to do it right and do it.

Disclaimer #3. This analysis doesn't take you into higher rate band tax. If the contract on offer is bigger than I've been discussing, the analysis changes, and in part depends on whether or not you would be taking higher rate band dividends out of your Ltd Co or not. If you want to tell us exactly how much the contract is for (rate and length), I'll pop back and run the numbers for you, unless someone beats me to it.

Disclaimer #4. This analysis doesn't consider whether or not you have a spouse that is a shareholder. That also would change the picture, perhaps substantively.

[check51]

thanks - it'd be closer to 80k annual, no extra shareholders and Id probably be keener on retaining the profit rather than higher tax dividend payout

Does anyone know if there is any legal or accounting issue with running payment through the Ltdco if contract is signed personally? ir35 issues aside?

[jamesbrown]

Does anyone know if there is any legal or accounting issue with running payment through the Ltdco if contract is signed personally? ir35 issues aside?

In principle, anything is possible, but I certainly wouldn't be willing to expose my business to paying some entity that is not party to the contract (i.e. to make a third-party payment) for a whole host of reasons. Has your client actually confirmed that they're willing to pay a third party? I highly doubt they are (if they have any sense, and if they don't you should be worried ).

[SueEllen]

My company's name.. Yeah I think I see where you are going with this one!

Then it won't cover you personally.

I wouldn't touch the contract.

There are ways of ensuring the personnel delivering the contract are named in advance and any changes are agreed, but in this case they are making you personally liable to do the work and for any screw ups.

[WordIsBond]

Yeah, you can run it through YourCo. It probably doesn't happen much with IT contracting, but in other sectors it happens all the time when someone has a contract as a sole trader and then decides to incorporate before the end of it. In general, it's not a great idea, but unless one of our friendly accountants pops in to tell us it's illegal, I'd assume it isn't, because I know it happens a lot.

So, if you are going to do this for a full year at £80K, assuming no other income, again assuming £3K or so in expenses. These numbers would be different if you have significant travel & subsistence expenses (which would also make IR35 a much bigger danger). But for these purposes, we'll assume £3K, so £77K profit. Again, assuming no other income:

As a sole trader, you pay 9% Class 4 NI on £37K, so £3.3K as before. You pay 2% NI on profit about £45K, so another £640. I also think Class 2 NI is still around for the current year, so that adds another £140 or so. So, in total, you're close to £4.1K in NI as a sole trader. Income Tax on £65,500 taxable income (after the personal allowance) is £19,500. Total combined tax hit is about £23.6K, total take home is £53.4K, which is all in your pocket with no more tax liability.

As a LtdCo, you pay a salary of £8160 tax free, so you have about £69K taxable profit. You'll have about £13,080 in Corporation Tax, leaving about £55,750 in retained profits. You'll pay £8340 in tax-free dividends. You'll pay another £28,500 in basic rate dividends, taxed at 7.5%, for another tax hit of £2,137.50, so take home of close to £42,850, with £15.35K paid in tax, and another £19K or so retained in your company, but which would be taxable if you withdraw it. If you take the £19K as dividend, it will be taxed at 32.5%, so another £6K+ in tax. If you take it all in dividend, your total tax would be about £21.5K, not that far off the £23.6K as a sole trader, easily covered by a 5-10% increase in rate.

If you choose to make a pension contribution as a sole trader, you'll save 40% of it in tax (you'll still have to pay the 2% NI). If you choose to do it through YourCo, you'll save 19% in Corporation Tax and so reduce your retained profits by 81% of the contribution. So making large pension contributions will reduce the tax gap between the two options.

If you have children / get child benefit, your income as a sole trader is £77K, and the child benefit will be entirely clawed back by tax. If you go through your LtdCo, your income would be £45K and you would lose none of the child benefit -- unless you paid the entire after-tax profit as dividend, then you would also lose the child benefit.

I would not agree with SE that you walk away over the liability issue. That can be insured against, and at not too great a cost. You've not said what the sector is, but if this client were operating in a massive liability environment, they would know that nobody is going to take this on without LtdCo protection. So I'd call a couple insurers and get a price for a hefty chunk of Professional Indemnity cover. Then, I'd go to the client and say, "Look, I'm probably willing to do this but it is going to cost more. You are asking me to leave myself open to liability by not having Limited Company protection, so I have to insure against that." They should pay, they are the ones asking you to risk your own finances, for no obviously good reason. So they should pay that insurance.

You also need to weigh up what the value is to you of deferring the income by retaining some of it in YourCo. It probably isn't £6K, because you are probably going to end up paying tax on it someday anyway. If you end up shutting down your company and taking Entrepreneur Relief, if that remains available which it might not, you'll still pay 10% Capital Gains tax on that £19K. So you can pay £6K to get it out of the company now, or £2K (or more if they remove / restrict ER) to get it out later. So what is it worth to you to defer the income? If you have some retained profits in the company already to cover future bench time, it's probably not worth that much.

You also need to weigh up the value to you of not having to worry about IR35. If this client is wanting you to sign personally, they probably are not clued up at all into the way the UK contractor market works, and so they are probably clueless about IR35. That means working practices are likely to be problematic for IR35. If you go through your Ltd Co, this is very likely to end up being inside IR35. If that happens, you are far worse off through your LtdCo than as a sole trader. You can't defer income / retain it in YourCo, you are taxed on it anyway. The tax is far higher under IR35. You lose in every way.

The above analysis doesn't reflect that a year-long contract starting now would overlap into next year. What that means is that some of that higher rate income as a sole trader would actually overlap into 2018-2019, and so would probably just go against next year's personal allowance. In other words, the above analysis probably overstates the tax hit on the sole trader route, pretty substantially.

None of this really changes my view that a 10% increase in rate, if they'd agree to that, would probably adequately compensate you both for the tax hit (because you are bringing tax forward) and the liability (but get prices on insurance to make sure of that cost). If you talk to them about the liability, they may just agree to work with YourCo. If not, well, you aren't prepared to take on the liability without being compensated for it.

If you like the project, if you think they'll be a good client (they might be a GREAT client who just aren't working in familiar territory in engaging a contractor), if you like the rate, I wouldn't walk away because of this. It's just a few thousand quid in tax, you can't let tax drive your business. Especially if you have nothing else lined up and you need the work. If all that is true, I'd insist on being compensated for the liability, but if it were me, I'd take the contract.