Software Development contract for US co - questions

**kal** · 12 February 2014, 16:59

Originally posted by fatmcgav View Post

Afternoon all,

I've been lurking for a while, but first time posting... I've had a quick search round for some of my questions and found answers, however I've got a couple more that I'd like to ask...

Anyhow, down to business.
I've been contacted by a US based IT company to sub-contract on a piece of software development.
Said software dev will be based on an hourly rate, and I've provided some initial estimates based on the scope provided. Totting the numbers up, there's potential for this project to deliver 5 figures US$.
All dev will be done in my spare time, in addition to my 9-5 M-F perm job.

Now, my biggest question is around the most efficient means to get paid. Currently, the company have identified a UK based Systems Integrator co. who potentially will employ/contract me for the purpose of this delivery. However I haven't yet found out how the SI are going to handle paying me, whether it will be based on a weekly billing cycle or on completion, etc. I would guess that I'd be registered as an employee, and PAYE'd, etc...
However I've got some reservations around whether that is the most efficient/least impact on my tax bill, as I'm currently tittering on the edge of the higher rate tax bracket.

So, is this method OK, or is there a better way of doing it?
I've got no objections with registering with an Umbrella co if that is a better option. I guess the fact that the IT co are US based makes things a bit more challenging.

As a more general question for software dev's, is it normal/acceptable to ask for a proportion of the estimate up-front? Kinda like pre-pay hours? In my mind it makes sense, as both parties are then vested in delivering the end-solution.

So yeh, any information greatly appreciated, and thanks in advance for your time.

Regards
Gavin

What does your perm employment contract say about working for another software company (competitor?).

**fatmcgav** · 12 February 2014, 17:02

Originally posted by kal View Post

What does your perm employment contract say about working for another software company (competitor?).

I've run the project past my current employer and they're fine with it...

We're a consumer of the software companies products, and I've already contributed some stuff back to the open source side.

Cheers
Gav

**VectraMan** · 12 February 2014, 17:03

Start a Ltd. company. Then you can collect the money in that and pay yourself dividends as and when it suits you.

**fatmcgav** · 12 February 2014, 17:12

Originally posted by VectraMan View Post

Start a Ltd. company. Then you can collect the money in that and pay yourself dividends as and when it suits you.

VectraMan,

I did toy with the idea of setting up a Ltd. company, but wasn't sure if it was worth it for a single piece of work. However I guess with the amount of money on the table, it may well be worth the overhead...

Is there anything special to consider when trading as a Ltd. co and working with a US co?

Cheers
Gav

**jamesbrown** · 12 February 2014, 17:57

The option you mention (as with an umbrella) is not the most efficient, but you have to ask yourself whether it's worth the hassle of setting up a company and handling all the responsibilities that entails for a relatively small piece of work. If you plan to make this an ongoing thing, it may be worthwhile. If the US company will allow you to do so (read: they don't know any better), you may want to register this as self-employed income on your SAR, but there are then personal liabilities to consider (i.e. you don't have the protection of a Ltd., but you can get insurance in place as a partial protection). Ultimately, a Ltd is tried-and-tested, it will definitely work, it is the most tax efficient, and offers a degree of protection, but comes with overheads and responsibilities.

**kal** · 12 February 2014, 18:32

What about setting up as a sole trader (if client are ok with it), not as tax efficient as a Ltd but better than a brolly.

**fatmcgav** · 12 February 2014, 20:32

Originally posted by jamesbrown View Post

The option you mention (as with an umbrella) is not the most efficient, but you have to ask yourself whether it's worth the hassle of setting up a company and handling all the responsibilities that entails for a relatively small piece of work. If you plan to make this an ongoing thing, it may be worthwhile. If the US company will allow you to do so (read: they don't know any better), you may want to register this as self-employed income on your SAR, but there are then personal liabilities to consider (i.e. you don't have the protection of a Ltd., but you can get insurance in place as a partial protection). Ultimately, a Ltd is tried-and-tested, it will definitely work, it is the most tax efficient, and offers a degree of protection, but comes with overheads and responsibilities.

James, cheers for the reply. It'd starting to look like going the Ltd route way well be the most efficient.
There's 2 phases to this project, and potentially another project of equal size of this one goes well. So feels like putting the effort in up front will be most practical...

Ltd would also allow me to Vat reg, which may be beneficial as I'm probably guna have to spend some money on new IT hardware to support testing etc.

Originally posted by kal View Post

What about setting up as a sole trader (if client are ok with it), not as tax efficient as a Ltd but better than a brolly.

Kal, will take a look at sole trader, and ask the US Co what they think/can do.

I think I might try and give a couple of contactor accountants a call tomorrow and see what they suggest.

Keep em coming though ppl, and Cheers for the responses thus far.

Gav

**TheCyclingProgrammer** · 12 February 2014, 20:50

Originally posted by fatmcgav View Post

VectraMan,

I did toy with the idea of setting up a Ltd. company, but wasn't sure if it was worth it for a single piece of work. However I guess with the amount of money on the table, it may well be worth the overhead...

Is there anything special to consider when trading as a Ltd. co and working with a US co?

Cheers
Gav

Somebody was asking about something similar over in Accounting/Legal.

As I posted there, it can be beneficial to set up a Ltd Co because, as VectraMan says, you can leave the money in the company, where it will only attract corporation tax at 20% regardless of your own personal tax situation. You are then free to take the profit as a dividend as and when it suits you (i.e. when it is most tax efficient).

Things to weigh up whether or not this is worth it:

* How much the contract is going to be worth, will this outweigh accountancy fees? (from the sounds of it, it should do)
* Whether you'll ever be in a good position any time soon to take the money from the company in a tax efficient manner. If you want/need this money now then you will probably have to pay higher rate tax anyway. The Ltd company route might still work out slightly more tax efficient than going through am umbrella but is it enough to justify the extra faff?
* Even if you don't need the money now, you can't do much with it sitting in your company bank account. If it was in your hands, you could potentially stick it in savings, investments or an offset mortgage account.

It depends how much we are talking, but on balance, if it was me, I'd be inclined to take the tax hit and just work through an umbrella if you really think it will just be a one off. If you felt that you could move towards contracting/freelancing full time in the future then the Ltd co route might be worth considering.

**fatmcgav** · 12 February 2014, 21:00

Originally posted by TheCyclingProgrammer View Post

Somebody was asking about something similar over in Accounting/Legal.

As I posted there, it can be beneficial to set up a Ltd Co because, as VectraMan says, you can leave the money in the company, where it will only attract corporation tax at 20% regardless of your own personal tax situation. You are then free to take the profit as a dividend as and when it suits you (i.e. when it is most tax efficient).

Things to weigh up whether or not this is worth it:

* How much the contract is going to be worth, will this outweigh accountancy fees? (from the sounds of it, it should do)
* Whether you'll ever be in a good position any time soon to take the money from the company in a tax efficient manner. If you want/need this money now then you will probably have to pay higher rate tax anyway. The Ltd company route might still work out slightly more tax efficient than going through am umbrella but is it enough to justify the extra faff?
* Even if you don't need the money now, you can't do much with it sitting in your company bank account. If it was in your hands, you could potentially stick it in savings, investments or an offset mortgage account.

It depends how much we are talking, but on balance, if it was me, I'd be inclined to take the tax hit and just work through an umbrella if you really think it will just be a one off. If you felt that you could move towards contracting/freelancing full time in the future then the Ltd co route might be worth considering.

Tcp, cheers for the response. Will take a look at the topic in accounting/legal as well.

To answer your points:
* I'm estimating the first phase of this project to be worth in the region of US$15k, with a potential 2nd phase of a similar size.
There's then potentially another equal size project to come after if this one works out.
* if I'm honest, the money would be quite useful now, as it would allow me to clear a lot of my outstanding debts, and get on a much better financial footing.

With regards to future aspirations, part of me quite likes the allure of contracting. I've been permie in the current Co for 7+ years now, and have recently built up a desirable skill set that is worth between 300-500pd on the contractor market. However I would need to get a war chest behind me, and clearing my debts is an essential stepping stone to that.
Or the flip side could be using this as the catalyst to go contacting, and then pay the debts off from contactor income. Choices choices...
Cheers again, n keep em coming :-)

Gav

Software Development contract for US co - questions