Should I trade as a Limited Company, umbrella or composite

[Bradley]

Form 42

I'm not aware of any legislation that prevents the issuing of and the benefits derived from multiple share classes - certainly any composite Company trading today uses that method to administer things.

It's the legislation that meant the introduction of the Form 42. The Revenue's argument is that the composite company is using shares to remunerate workers who would otherwise be paying PAYE. Hence the interest in composites. The Revenue see composites as a very easy target.

IMO the next logical step in this particular argument is for the Revenue to increase (if that's possible!) attempts to re-classify contractors as employees. Thier difficulty is how to re-draw the legislation without affecting "legitimate" business i.e. all the plumbers, electricians etc that incorporated because of the CT nil rate band.

Fight the power!

[css_jay99]

Contract value Own Ltd Co Umbrella Composite
£50,000 pa £107,609.74 £89,595.48 £100,590.86
£75,000 pa £148,510.44 £124,251.50 £138,490.02
£100,000 pa £189,410.75 £158,898.50 £171,764.77

I dont want to appear too thick, but i dont understand your figures !

each row represents each year right ?,
If contract value (Turnover I take it) is £50k, then how does that translate into £107,609 for Ltd or what exactly is the figure for ?

can you please give a brief explanation

cheers

[The Master]

I dont want to appear too thick, but i dont understand your figures !

each row represents each year right ?,
If contract value (Turnover I take it) is £50k, then how does that translate into £107,609 for Ltd or what exactly is the figure for ?

can you please give a brief explanation

cheers

As already stated, that's over 3 years.

[DaveB]

I dont want to appear too thick, but i dont understand your figures !

each row represents each year right ?,
If contract value (Turnover I take it) is £50k, then how does that translate into £107,609 for Ltd or what exactly is the figure for ?

can you please give a brief explanation

cheers

The figures are totals over 3 years.

So if your turnover is £50k pa after three years you would end up with (roughly):

£107k running your own ltd,
£90k with an Umbrella and
£100k with a composite.

Thats from a total turnover of £150k over 3 years.

Interestingly though the Own Ltd gives a return of ~%71 but SJD's advert on this site claims %83 is possible. Any ideas on the discrepancy Simon? You said in the original post that expenses were taken into account in the calculations already.

Edit - D'oh, you said the expenses wern't taken into account. Anyway, still interested as to where the other 12% comes from.

[Bradley]

Conservative

How much will I take home?

Outside IR35

If you fall outside IR35 the comparative income to you on the three choices, would be as follows, taken over a three year period:

Contract value Own Ltd Co Umbrella Composite
£50,000 pa £107,609.74 £89,595.48 £100,590.86
£75,000 pa £148,510.44 £124,251.50 £138,490.02
£100,000 pa £189,410.75 £158,898.50 £171,764.77

I have not taken into account expenses in calculating these figures as whichever system you use, the allowable expenses will be identical. Do NOT believe the marketing hype regarding “special dispensations” you may have come across. For an expense to be allowable you must have actually spent the amount in question.

Inside IR35

If you fall inside IR35 then the tax payable via an umbrella or composite Company will be around the same. There will be a saving of around 5% if you operate through your own Limited Company.

Hope this helps, and feel free to add anything else you think useful.

Simon - did you assume a minimum wage? Did you assume that all profits would be paid as dividends? Is it for one shareholder only?

[simondolan]

Answers

Few unanswered queries in the thread, so here goes:

1. Bradley - yes, assumed wage of £4800 and dividends to the sole shareholder. Obviously if the S660 result comes out on our side you could split the shares with a non working spouse and get an even better return, but at the time of writing this is so uncertain that I didn't want to build this into the projections;

2. DaveB - in those take home figures I assumed expenses at 15% of the contract value, so on the example of £50,000 a year you have expenses of £7500 pa. Multiply this over the three years gives you £22500, added to the £107,000 gives £129500 which is actually around 86% of the contract value;

3. Bradley - Form 42. See what you mean. It could well be that the Revenue are sitting on these and formulating a strategy for taking down the composites, but I think it fair to say that they have a very limited shelf life the way things are going.

[philip@wellwoodhoyle]

Bradley - Form 42. See what you mean. It could well be that the Revenue are sitting on these and formulating a strategy for taking down the composites, but I think it fair to say that they have a very limited shelf life the way things are going.

I went on a course just last week when this very point was covered, but the speaker warned everyone that this new legislation may not be limited just to composites, but also to S660 and IR35 cases, which really made people sit up and listen. He thought that the HMRC may have put the legislation in place "just in case" they lost the S660 case, the logic being that if they won, they could go back the six years for S660, but if they lost they can at least go back to 2004 and activate the legislation as a "catch all" for anyone paying dividends instead of wages. His opinion does tend to make sense as the HMRC are losing most of the IR35 cases and with S660 as well, one has to wonder why they havn't brought in new legislation to prevent the low salary/high dividend scenario - perhaps they have brought in the legislation and are just sitting on it!

[funkyd]

assumed wage of £4800

Isn't this asking to be picked up by the IR? Wouldn't a more sensible salary be minimum wage? At least it can't be argued that it isn't enough to live on and obviously a way to dodge taxes?

I pay myself a £20k salary and the rest in a dividend spread though the year. Sure you can get more but why take the risk?

[philip@wellwoodhoyle]

Isn't this asking to be picked up by the IR? Wouldn't a more sensible salary be minimum wage? At least it can't be argued that it isn't enough to live on and obviously a way to dodge taxes?

I pay myself a £20k salary and the rest in a dividend spread though the year. Sure you can get more but why take the risk?

This is a well rehearsed argument between contractors (& their accountants) and HMRC.

The thing is that HMRC have no powers to argue whether a director's remuneration should be £4,800 or £20,000 - in fact they would argue that neither is high enough and they'd be looking for £50k plus.

There is no law which says what a director must earn - the minimum wage does not apply to directors unless they have a contract of employment.

They have specific "tools" for chasing contractors - they are IR35 and S660 and if you aren't caught by either, there isn't anything HMRC can do about a £4,800 salary - conversely if you are caught by one or the other, even a £20k salary is unlikely to satisfy them. I would imagine the same would apply to the Form 42 legislation - they'll be wanting "all or nothing".

Even if it is "an obvious way to dodge taxes", there is nothing the HMRC can do about it unless it falls under IR35, S660 or the Form 42 thingie!

[simondolan]

Salary

Also, from experience, I can say that not once in the last 15 years have the Revenue ever even raised a question about a low salary.

Further, again from experience, there is no correlation between a low salary and the likelihood of an investigation.