Contracting Couples - How Should We Set Up A Limited Company?

[ChapSmurf]

Hi,

Sorry for the long thread title, but I didn't really know how else to say it.

So here is the deal. My partner and I are both going back in to contracting. My partner has just finished a FTC and has been offered a 6 month contract (with possible extension) and has accepted. I am being interviewed tomorrow for a contract role (with the same company) and if successful, I will also accept. The question I have is what is the best way to operate as a Limited company? Neither of us are currently Directors/owners of any Limited company.

At first I thought it might be an idea to set up one company, and maybe have one of us as a Director and the other as an employee (as I think this helps with IR35), but then a friend of mine suggested it might be better if we setup 2 Limited companies, with my partner as the sole Director of her company, and me as the sole Director of mine. We could then cross invoice each other for services (leave it out! ) to possibly reduce taxation.

I am sure we won't be the first couple to both be contractors, so could anyone give advice on the best legal way to do this, and what we can and cannot do with regards to reducing tax etc.?

[cojak]

I'm with your mate on this one.

But if you do decide to go with one company, make sure that you need 2 signatures before you can take out a Director's Loan from the bank.

[northernladuk]

Deffo two companies. Loads of reasons like VAT threshold yadda yadda but keep it clean and simple. You'll have so much money rolling in with tow of you contracting you don't need to fudge the system.

Oh.. First job is get an accountant you trust and ask him questions like this and get a professionals opinion.

[ASB]

By "cross invoicing" I assume you mean engage in an accounting fraud in order to broadly equalise income. It would of course be OK if there really were some services and they were paid at market rate (or something justifiable as market rate). Otherwise HMIT may choose to make noise about settlements.

In any event I fail to see how this fraud ^h arrangement would make any real difference to reduce corporate taxation. Sure it would reduce CT on one side but increase it on the other.

However it could conceivably reduce personal taxation by ensuring with careful calculation of dividends that you both maximise your 20% band.

Two companies of course has 2 sets of costs for insurances, accountancy etc.

There is nothing fundamentally wrong with one company and both of you. It reduces costs. If you are both 50% shareholders then it is arguably easier to manage your basic rate band. There could be a theoretical issue with settlements. However if you do this from the off and you are both billing a normal rate (even if fairly different) then it is hard to see HMIT sucessfully challenging under settlements legislation. Further it may conceivably give additional flexibility if you believe some arrangements are caught by IR35.

The main issue with one company is relationship failure. Then it gets a bit messy. (If you are married it is arguably moot anyway since however it is arranged it will be marital property and "up for grabs" in the settlement).

It is not necessarily the case that 2 signatories should be required, but it would be prudent to have 2 bank accounts each signing on "their own". This prevents either one of you running off with all the money. [Though you could of course run away with whatever is in one and leave the other in a mess with VAT, TAX etc]

You can make a case either way.

But general advice would be to keep separate, personally I think if it is genuinely a joint enterprise then there is no real reason not to have 1 company combined, it really comes down to personal preference in my view.

[northernladuk]

Good post ASB. I would argue two contractors on independant contracts isn't really a joint venture but that aside. Nice post.

[northernladuk]

To the OP. IR35 is on a contract by contract basis. Setting the business up as you suggested wouldnt make an difference if you are on different contracts. Very important to get your head around IR35 quickly.

[Maslins]

Pros and cons of both.

As mentioned above, main con of one company is that it'll be more unpleasant to unpick should you split up as a couple. As turnover will inevitably be higher (as combined), might mean it's too high to join the flat rate scheme for example. Also, what happens if one of you gets an awesome PAYE job offer? You'll then either have to accept their dividends put them well into higher rates, or faff around with the set up again.

Potential downsides of two companies are:
- virtually doubling accountancy costs/admin,
- if you're invoicing very different rates, harder (without questionable "management charges") to evenly spread profits between you for personal tax.

[TheCyclingProgrammer]

By "cross invoicing" I assume you mean engage in an accounting fraud in order to broadly equalise income. It would of course be OK if there really were some services and they were paid at market rate (or something justifiable as market rate). Otherwise HMIT may choose to make noise about settlements.

So long as they are going into business as a joint venture, then any settlements noise HMRC would make would fail at the first hurdle - there wouldn't even be a "settlement" as there is no element of bounty. People, including partners and other family members, go into business all the time. Its a non-issue.

Personally, if you both expect to be doing decent business, I wouldn't rule out the idea of a joint business. I think most of what ASB says is true - less admin, lower overheads etc. and so long as you're both happy to share the profits equally even if you might not always have the same amount of work, then I think it could work out well. You could of course choose to have an unequal share split if you charge very different rates.

As NLUK says, VAT thresholds could become an issue IF you're business takes off but lets be honest, that's a nice problem to have. Most contractors register for VAT voluntarily under the flat-rate scheme anyway so you'd just have to watch out for the FRS threshold. Moving back to the normal VAT scheme shouldn't be a big deal.

Only OP can really answer the question of what would happen if the relationship broke down. You may want to discuss this in advance. It could be as simple as closing down the company, taking a capital distribution each and going your own separate ways and starting your own separate businesses.

[ChapSmurf]

Thanks for the quick replies. Seems it is a no-brainer then? 2 companies it is.

Definately not looking to do this with anything fraudulant in mind, just trying to maximise the amount of money we can both legally "take home". I do of course understand that by cross invoicing the CT of one company will rise, so this may not be worth it in the end. Plus double the PI/Accountancy fees etc.

We have both contracted before (within last couple of years) so we know a little bit about this. We do know/have an accountant, but at £1200.00 p.a. I think it is a little steep. I may be wrong though. So if anyone in S. Yorks knows of a good accountant, please let me know.

[TheCyclingProgrammer]

To the OP. IR35 is on a contract by contract basis. Setting the business up as you suggested wouldnt make an difference if you are on different contracts. Very important to get your head around IR35 quickly.

True, although if OP and their partner have a broadly similar skill set its a good opportunity to present themselves as a multi-person business/consultancy without any personal service element - i.e. if they can both work on the same contracts together interchangeably then that would pretty much rule out IR35 being an issue.

Depends a lot on the sort of clients OP expects to have though whether or not this is realistic.