permanent position and contractor

[martgriff]

Hi,

I am currently in a permanent position with a company that have recently been bought out, the old MD has retained 1 of the divisions and set it up as a new company using the software package developed by the original company. He has approached me and wants me to develop and support the package going forward but he is unable to employee me for 12 months due to the contract when he sold the company so we agreed I would stay in my permanent position and do work for him out of hours at a hourly rate, in the last 2 weeks I have already done 60 hours for him so I was thinking of setting up as a contractor (limited company) to bill this work. How is this going to affect tax, NI and would this mean I would fall into the IR35 rule?

What other options do I have?

[Liamxtype]

Hi Martgriff,
I don't think you'll get many replies from the experienced professionals on here as your questions have been asked many times before. Have a browse around the forums, in particular look at the sticky's and notes for first timers, you'll find your answers in there. Good Luck.

Liam

[Taxless]

Hi,

I am currently in a permanent position with a company that have recently been bought out, the old MD has retained 1 of the divisions and set it up as a new company using the software package developed by the original company. He has approached me and wants me to develop and support the package going forward but he is unable to employee me for 12 months due to the contract when he sold the company so we agreed I would stay in my permanent position and do work for him out of hours at a hourly rate, in the last 2 weeks I have already done 60 hours for him so I was thinking of setting up as a contractor (limited company) to bill this work. How is this going to affect tax, NI and would this mean I would fall into the IR35 rule?

What other options do I have?

I would recommend that you get a written contract of some sort even if you really have a good working relationship with your old MD to ensure you protect yourself.

You have effectively commenced an (albeit) part time self employment and need to register with HMRC.

Is the only job you will have like this and will it only last 12 mionths. If so and unless the income is likely to be substantial, you may be as well trading on a self employed basis. A good written contract should keep you within the self employed family (no IR35 for self employed) and in fact if anything went wrong HMRC would initially chase your former MD if they think you should have been classed as an employee.

Depending on your combined income from both sources, some of your income might end up being taxed at 40%, or even higher.

If you have a low or non-income spouse, a partnership might help split the profits and keep the overall tax bill down.

If the numbers are substantial enough it may be worth operating through a company (IR35 raises its head) but if for only 12 months its unlikely. IR35 would be down to working arrangements and contracxts so get it right and in writing.

Are you sure you won't get dumped after 12 months.

If he is so keen on you, why didn't he offer you some sort of stake (shares) in the new company, unless there is something in your employment contract/his exit agreement that precludes such a link up?

This would save him having to spend so much on you upfront and would keep you motivated as you stand to benefit from the future success of the project, both income and possible capital on a future sale. Not too late to explore this.

I think that's enough for starters.

[Taxless]

Sorry, I should read my posts before submitting them.

The part about operating as a company is meant to infer that for 12 months, it is unlikely to be worthwhile trading as a company, not as it now appears to read, that operating as a company for only 12 months will avoid IR35.

[northernladuk]

I am not comfortable with a couple of aspects of this...

I would recommend that you get a written contract of some sort even if you really have a good working relationship with your old MD to ensure you protect yourself.

You have effectively commenced an (albeit) part time self employment and need to register with HMRC.

Surely by working for him in whatever capacity you have broken the handcuff clause that is in place as you have already pointed out? Not sure what the penalties for this could be but it can't be good for you, particularly if the company you work for takes a dim view and calls it gross misconduct or anything. What does your existing contract say about working for other companies at the same time let alone the handcuff?

Is the only job you will have like this and will it only last 12 mionths. If so and unless the income is likely to be substantial, you may be as well trading on a self employed basis.

I would think 60 hours in two weeks would be substantial. If not you are being screwed over

A good written contract should keep you within the self employed family (no IR35 for self employed) and in fact if anything went wrong HMRC would initially chase your former MD if they think you should have been classed as an employee.

Doing something he did before will surely most definately make him look like an employee whatever the contract says. Situation > contract everytime. If he is working on something he did before it won't look good, particularly when there is potential legal issues him working for his old boss which he isn't allowed to do.

Depending on your combined income from both sources, some of your income might end up being taxed at 40%, or even higher.

I would assume it would doing 70 hour weeks. Well I should hope so anyway!!!!

If you have a low or non-income spouse, a partnership might help split the profits and keep the overall tax bill down.

Ok I don't know anything about self employed. How would he split the profits without divis?

If the numbers are substantial enough it may be worth operating through a company (IR35 raises its head) but if for only 12 months its unlikely. IR35 would be down to working arrangements and contracxts so get it right and in writing.

But this would again mean he is directly breaking the handcuff clause as he is now officially contracted to work for his old boss?

Are you sure you won't get dumped after 12 months.

If he is so keen on you, why didn't he offer you some sort of stake (shares) in the new company, unless there is something in your employment contract/his exit agreement that precludes such a link up?

I am sorry but why would you give shares in a company to someone who codes applications unless he is a valuable asset to the company and it's future. Maintaining an app part time would not be enough for me to give a portion of my company away. THere maybe more to it than that but this looks like a very temporary adhoc arrangement and nothing more.

[TykeMerc]

Hi,

I am currently in a permanent position with a company that have recently been bought out, the old MD has retained 1 of the divisions and set it up as a new company using the software package developed by the original company. He has approached me and wants me to develop and support the package going forward but he is unable to employee me for 12 months due to the contract when he sold the company so we agreed I would stay in my permanent position and do work for him out of hours at a hourly rate, in the last 2 weeks I have already done 60 hours for him so I was thinking of setting up as a contractor (limited company) to bill this work. How is this going to affect tax, NI and would this mean I would fall into the IR35 rule?

What other options do I have?

Few clarification questions:-

1. Are you still employed by the original, now bought out company? I think it reads that way, but I want to be sure.
2. How are you currently billing for the 60 hours work you've already done?
3. Do your employers know you're doing paid any work on the side?
4. Did you sign any agreement yourself that you wouldn't accept work from Mr OldMD for a 12 month period or is it only Mr OldMD who's potentially twisting if not breaking an agreement?
5. Do you have any agreement in writing for the contract work you're doing?

I'll go out on a limb here and say I wouldn't be that worried about IR35, the original company still exists and you're contracting for an unconnected and competing company so it's not the classic Friday to Monday issue.

Assuming the answer to 1. is yes then there most certainly will be tax and NI implications if you're being paid personally by the new company. You've already got an income and are undoubtedly over the NI minimum on your salary alone.
If you're being paid as a Sole Trader on the contract work (which is a viable approach, no agencies involved) then you will need to declare the additional income on your Self Assessment Tax Return and pay the additional NI and Income Tax due over and above that deducted from your PAYE income. With 2 income streams if you're not already out of the lower tax band then odds are very high the second income stream will push you over.
If you set up a MyCo Ltd then it's viable to retain all of the contract income in the company (even in the long term), but if you remit any of that to yourself via dividends; salary would be insane as you would pay Employers as well as Employee NI plus Income Tax; then again you're likely to be in the higher tax bands which is really painful.
Since your post implies you will take permanent employment with Mr OldMD you're likely to keep the cash in MyCo Ltd's accounts for a long time until you've headroom in your tax allowances or lower tax bands, inflation could then be a long term issue.

It's quite a complicated scenario to be honest and I can't immediately see how you're going to avoid a chunky tax bill unless you use it to build a warchest in a MyCo. If you're going to want access to the cash and don't want the hassle (it's not that much, but you do have responsibilities) of running a MyCo then the Sole Trader approach and declaring income would probably be best.
Admittedly I'm assuming you prefer to play with a straight bat and don't want to hide the income from the taxman which of course is tax evasion and a criminal offence.

[Taxless]

"Surely by working for him in whatever capacity you have broken the handcuff clause that is in place as you have already pointed out"

I am not a lawyer and the answer provided was on the assumption that the poster had done nothing wrong, subject to his employment contract. I have not attempted to look at things from the ex-MD's position. If he had made the post my answer would have been completely different.

"I would think 60 hours in two weeks would be substantial. If not you are being screwed over"

Agreed, but he doesn't tell us what rate he his getting, nor does he give any clues as to what level of input he will have over the remaining 12 month period (maybe, worryingly, he doesn't know). I had assumed, possibly incorrectly, that he may not have been charging a full market rate in anticipation of what he would get after 12 months.

"Doing something he did before will surely most definately make him look like an employee whatever the contract says."

He is working for a new legal entity, irrespective that his old boss runs it. There are cases that have gone to court with the individual securing self employed status, in one notable case, a barristers clerk left employment on a Friday and returned to the same Chambers doing exactly the same job the following Monday. The courts held him to be self employed. It was all down to the working arrangments and the contract.

"I would assume it would doing 70 hour weeks. Well I should hope so anyway!!!!"

Agreed, subject to what I have said above.

"Ok I don't know anything about self employed. How would he split the profits without divis?"

It is down to the section of the partnership agreement covering partnership profit allocations. This can be left flexible to allow annual changes to whatever suits you best. Provided the paperwork is correct there is nothing HMRC can do about this and they concede the point in their internal instruction manuals.

"But this would again mean he is directly breaking the handcuff clause as he is now officially contracted to work for his old boss?"

Only the poster can confirm this for sure based on his employment contract. I don't know if he is contracted with his old boss. Could he be doing it for free to help an old colleague? He certainly sounds like an obliging chap?

"Are you sure you won't get dumped after 12 months."

Agreed 100%.

"I am sorry but why would you give shares in a company to someone who codes applications unless he is a valuable asset to the company and it's future."

Again I don't know enough about what is involved to be 100% sure but is the ex-MD so busy that he needs aother guy to spend so much time on this on a part-time basis. Another assumption, my thoughts were there was something of value here and maybe the ex-MD couldn't deliver it without the input of someone like our poster and who better than him given his (presumed) past knowledge. As a good Scot I go on the basis, "if you don't ask, you don't get".

If you have a great idea but don't have the ability to deliver it, you need some input to do that and you might just give something up to achieve that. (Dragon's Den with pure know-how replacing know-how and cash).

Obviously it needs some thought as to what the poster is bringing to the party, looking at the long term plan for the project (commercial potential) and how he approaches his colleague, but it might be worth the conversation.

"THere maybe more to it than that but this looks like a very temporary adhoc arrangement and nothing more."

From what we know so far, I would agree.

[Taxless]

Few clarification questions:-

Since your post implies you will take permanent employment with Mr OldMD you're likely to keep the cash in MyCo Ltd's accounts for a long time until you've headroom in your tax allowances or lower tax bands, inflation could then be a long term issue.

A very long shot. If you traded as a LTD Co for 12 months and then had no further use for the company (because you were now in full time employment) it might be possible to wind up the company and extract the "warchest" as a capital sum, claiming ER with a 10% tax charge on exit.

A minimum 12 months trading is required and as I say, it is a very long shot and there would be lots of i's and and t's to be dotted and crossed.

Just a thought, but depending on the numbers, I would prefer the partnership.

[TykeMerc]

One thing I forgot to ask is do you have a spouse who earns very little or even nothing?
If so a MyCo Ltd with all of the shares owned by the spouse could be an option, you do the out of hours work, the spouse draws the cash down as dividends, salaries to a non working spouse are frowned upon somewhat (to their personal account not a joint one) and then you have income to the family which exploits the spouses tax allowance and lower band income level.