Help! From perm to contractor - what are the tax issues?

**Cowboy Bob** · 20 September 2006, 12:21

Originally posted by Kim

I've recently decided to go contracting, and my first client was my permanent employer of 5 years. It was all agreed at the outset that I would consult through a limited company rather than remain as a PAYE employee.

After submission of 2 months of invoices they are now telling me that they cant pay me through my company and must treat me as PAYE. The reason for this, they say, is due to Inland Revenue restrictions. As there hasn't been a break in service, my employment under PAYE terms must be considered continuous and my contractor status has been denied. Unfortunately, there were no contracts drawn up for this period.

Can anyone please offer some advice as to how I can get my payment as promised without the hefty tax liability?

You must get payed as PAYE in this situation. Going from permie to contractor at the same client is exactly what the IR35 legislation was set up for. You are, according to the revenue, a "disguised employee". Meaning that you are working for the same company in the same role as you were before. The difference now is that instead of the client (your old employer) paying your employer's NI contributions, YOU are liable for them on top of your employee's NI, ie. you will now pay more tax than before. If you try and take dividends you will find yourself at the wrong end of a Revenue investigation (at your expense) which will land you with a hefty tax bill at the end.

This is what happens when you mix a greedy employer (who wants to pay less for their staff) with a greedy employee (who wants to reduce their tax burden) and only the employer does any investigation into the implications beforehand...

**Ardesco** · 20 September 2006, 12:22

If you don't have a signed contract you are going to have problems.

**Pondlife** · 20 September 2006, 12:23

Originally posted by Kim

I've recently decided to go contracting, and my first client was my permanent employer of 5 years.

.....

As there hasn't been a break in service, my employment under PAYE terms must be considered continuous and my contractor status has been denied. Unfortunately, there were no contracts drawn up for this period.

If your practical working relationship with your 'client' hasn't changed which they seem to think is the case i.e. your doing the exact same job, same responsibilities, controlled by same manager etc

And you have no contract stating that it has changed then you are more likely than most to be caught by IR35.

If this is the case then either stay permie or work through an umbrella but either way you will be PAYE and subject to the same tax although I believe that through a brolly you have 5% you can offset againt expenses/training etc but don't quote me.

If your job has changed and you can justify that it has then you aren't (or shouldn't be) caught by IR35 and should operate as a Ltd Co.

Edit: Dammit, too late again.

**Cowboy Bob** · 20 September 2006, 12:24

Originally posted by Ardesco

If you don't have a signed contract you are going to have problems.

Exactly, you may find that they don't have to pay you at all for the last 2 months.

**Asterix** · 20 September 2006, 12:25

Amazing...

... how can anyone 'buy' this sort of offer. Obviously not researched or done any homework, typical permie attitude, now 'help me pls'. But it's too late !!

**oraclesmith** · 20 September 2006, 14:58

[QUOTE=Kim]I've recently decided to go contracting, and my first client was my permanent employer of 5 years.....Unfortunately, there were no contracts drawn up for this period.QUOTE]

You can't be a contractor without a contract.

I broke from permie employment to contract at my old firm, but it was a genuine break in service and there was a proper lawyer-drafted contract involved. And... not least.... there was a genuine reason for me to be there as they had a crisis and needed my services about a month after I left, having decided to go a couple of months earlier. Contrary to the norm, it cost them much more in real terms to have me as a consultant than it did to have me as permie staff and there was always pressure to terminate. I also bore the financial risks of setting the contract up without knowing how long it would last and as these were significant I could have made a loss. I also dealt with the procurement side of the business and not HR.

If you've just drifted into contract work without understanding how it's different, then you're going to have big problems. You can still correct it though, providing you don't mind paying full tax. At least you get to carry on working.

**ASB** · 20 September 2006, 15:21

Originally posted by Kim

After submission of 2 months of invoices they are now telling me that they cant pay me through my company and must treat me as PAYE.

That is total bollocks. There are no restrictions which force that upon them, anybody who says there is is simply wrong.

But.......

In your particular circumstances it seems likely that IR35 will apply to this contract. I am sure you are entirely aware of the implications of this. If not I'm sure you can figure out the sensible questions with a bit of research.

Originally posted by Kim

Unfortunately, there were no contracts drawn up for this period.

Actually there were. It's just that they were not written. Unfortunately that makes the terms rather difficult to argue about should push come to shove.

Now, what you don't do is give any idea of the relationship between your PAYE rate and the rate you agreed for the consultancy. So before you go in guns blazing just consider what you will be left with under IR35. You'll be paying employers NI out of the gross rate, and also you will not be entitled to any employment benefits (sick pay, holiday pay etc) except from your employer (i.e. the limited company you happen to own). Overall this amounts to about 20% of gross.

So, unless you managed to negotiate an increas of > 25% they will be doing you a favour by saying "nah you are still our employee".

If you do actually discover the magic tax alchemy you seem to be looking for, please do let us know.

**oraclesmith** · 20 September 2006, 16:09

Originally posted by Kim

After submission of 2 months of invoices they are now telling me that they cant pay me through my company and must treat me as PAYE. The reason for this, they say, is due to Inland Revenue restrictions.

It's not complete boll*cks. HR probably getting you confused with casual staff and sent in a P38/P14, thinking you were actually an employee. That's the problem with dealing with HR instead of procurement.

**ASB** · 20 September 2006, 16:22

I think we'll just have to differ on how much b******* it is. According to the OP he implied that they said inland revenue restrctions prevented them from paying the limited company.

The only circumstance where that could be true is if they have been engaged as temporary staff via an emplyment agency - which isn't apprently the case.

Just because HR have got confused does not make their incorrect assertion true does it?

Help! From perm to contractor - what are the tax issues?