IR35 clampdown - would it help if I became employee of my partner's company?

[ian2012]

Hello

My fiance already contracts through her own sole limited company. Like most people her contract terms are outside IR35 although she scores very poorly on the new points scheme introduced by HMRC.

I am about to start an IT contract for the first time (for the same client as my fiance), and was planning to become a director of her limited company to simplify administration and avoid the need to set up a separate company.

Would there be any benefit to me becoming an employee instead, given this scores hugely in the new points scheme and would mean we were then low risk?

(I recognise the tax implications on me drawing salary rather than dividends and the risk of not being a director despite generating 50% of revenue). Or would HMRC take a dim view of me being an employee given we both live at the same address?

Thanks!

[Wanderer]

I am about to start an IT contract for the first time (for the same client as my fiance), and was planning to become a director of her limited company to simplify administration and avoid the need to set up a separate company.

If you contract though your fiancé's company and take a salary as an employee then the company will have to pay employer's NI (13%) and you will have to pay PAYE and NI on your income, effectively you will be getting hit for IR35 caught levels of tax. You can possibly avoid this if you restructure the company, becoming a director and shareholder of your fiancé's company and do a dividend split. Alternatively, you may want to consider forming your own company to keep it tidy.

If you have worked as a permie on PAYE then this will impact the salary/dividends and tax calculations because you will possibly have used up a fair amount of your tax allowance for this year.

Come the 6th April 2013 and presuming you are both working outside IR35 then to minimise your tax liability you should take £7488 salary each for the tax year and each own 50% of the shares in the company so you can split the remainder of the company's income 50/50 in dividends. Note that there will be no "her income" and "your income", it will all be company income and will be split between both of you as shareholders.

If you both work in similar professions then you may be able to work together and substitute for each other when required. This will help you build up the business into more of a partnership where you both work interchangeably on contracts which will help you in the event of an IR35 investigation. However, you need to consider how your financial and tax affairs will become bound up by this and you definitely need to get professional advice from an accountant on how to proceed. If you mess this up then it could cost you thousands in tax.

If you are already completely committed in that you jointly own property, have kids or have been together for years then maybe you are ready to go into business with the same company. Alternatively, you may prefer to keep your finances a little more independent of each other and form separate companies.

I suggest that you discuss this with an accountant and ask them for a frank assessment of the situation and see what they advise. Bear in mind that an accountant's fees for a LTD company are going to be £1000-1500 a year so they may be happy to advise you to just form your own independent company rather than using your partner's existing one...

Good luck deciding, choose wisely.

[Clare@InTouch]

Agree with wanderer above.

You may also want to consider flat rate VAT - if the turnover of you combined takes you over the limit of £150,000 then you'll lose out on the FRS profit. Having two separate companies may cost more in accountancy fees, but its less than the FRS profit you'd gain.

Being an employee of her company would result in more tax & NI, and I can't see it impacting her IR35 status. You're not her employee in the sense that you work for her, you're just using the same limited company to carry out a different role.

If you're contracting long term, and earning over £30k, I'd usually suggest you look to get your own company set up. It keeps things cleaner, and there's no concern over having shares split between an unmarried couple (with the possible income shifting issues that could bring if you split dividends to make better use of both tax bands).