Planning an MVL - preparation

[northernladuk]

Interesting point about the MoO, I'm not sure if this is relevant, but maybe.
They periodically and without warning declare a "furlough" for some or all contractors. Basically to hit budget targets they just inform you that next month there is only one week of work available and none for the remaining three weeks. Obviously that's not something they can do to permies and suggests that there is no MoO on their side to provide the service company with regular work.
It's sort of the reverse of me informing them when I'll take holiday and not feeling obliged to stick to any 5 or 6 weeks that permies might be allocated. Except they're much less polite about it and don't give much notice!

Those are certainly big plus's in your favour so yes, it appears you are probably in the clear. Just a couple of points to be a pedant seems we are discussing it though.

MoO is not about taking time off whilst doing the role. There is a form of obligation to do the work in the contract/SoW that you've agreed to do. Them asking you not to come in to do work is more part of the T&M work we do. It's the same as you saying you aren't available to work (you don't ask a client for holidays really, you are just unavailable to work). MoO is about giving you more work once what you contracted for is complete. If you were a PM and they just gave you another project straight after and expected you to do it and you accepted it would be an indication of MoO. This is why a clear SoW for every piece of work is important.

Now if you are contracted in to a role as you indicated before then it's possible the working practices with regard to giving the next project after you've completed the current one have not changed and that's where you might have an issue. But as you say, furloughs is a financial risk that generally does not exist to permies. There is also D&C to think about in a situation like this.... but I'm sure you aren't working like this

[Cyc1one]

Just the fact you are calling it a role is bad. Contractors don't fill roles.

But if you've got all those in that list then you should be OK. They are minor flags but should be enough to have a case. Its your direction and control and MoO that would really clear you. As long as you've not been letting them do that and you have paperwork such as a SoW to back it up then you should have enough.

Interesting point about the MoO, I'm not sure if this is relevant, but maybe.
They periodically and without warning declare a "furlough" for some or all contractors. Basically to hit budget targets they just inform you that next month there is only one week of work available and none for the remaining three weeks. Obviously that's not something they can do to permies and suggests that there is no MoO on their side to provide the service company with regular work.
It's sort of the reverse of me informing them when I'll take holiday and not feeling obliged to stick to any 5 or 6 weeks that permies might be allocated. Except they're much less polite about it and don't give much notice!

[northernladuk]

Perhaps I've always misunderstood IR35, but it says nothing about who should be doing a role. It's only interested in whether you are in fact a hidden employee and not an independent.

Now, the role won't change, but many things that mean I'm not currently an employee will change. There's the obvious like the right to substitution, holiday pay, sick pay, there will be objectives and reviews, company meetings to which I'd become invited, I'd have to ask to book holiday instead of informing that I won't be there, amount of time absent will be limited and monitored, etc, etc... These are the indicators that I've been lead to believe differentiate between in/out of IR35.

Still, keeping the IR35 investigation insurance running isn't a bad idea.

Just the fact you are calling it a role is bad. Contractors don't fill roles.

But if you've got all those in that list then you should be OK. They are minor flags but should be enough to have a case. Its your direction and control and MoO that would really clear you. As long as you've not been letting them do that and you have paperwork such as a SoW to back it up then you should have enough.

[Cyc1one]

You've been doing an enduring role that a permie should be doing. That's exactly what IR35 is all about so I'd say you are wrong. Most of the articles talk about perm to contract and the Friday to Monday rule but the converse is true (but not as obvious). IR35 investigations try and find if you've been working as a disguised employee and claw back the tax you should have been paying. To switch remuneration methods but the work doesn't change will indicate to HMRC you've been a disguised permie up to now.

It shouldn't be too hard if your working practices are slightly different and you've been working to a very well defined Statement of Work previously but now you can be directed and controlled.
If your old gig just had a role title and you took on work as the client wanted you could be in a difficult situation.

Hope you've got IR35 insurance and if so keep. It going for a full year of your LTD after swapping.

Perhaps I've always misunderstood IR35, but it says nothing about who should be doing a role. It's only interested in whether you are in fact a hidden employee and not an independent.

Now, the role won't change, but many things that mean I'm not currently an employee will change. There's the obvious like the right to substitution, holiday pay, sick pay, there will be objectives and reviews, company meetings to which I'd become invited, I'd have to ask to book holiday instead of informing that I won't be there, amount of time absent will be limited and monitored, etc, etc... These are the indicators that I've been lead to believe differentiate between in/out of IR35.

Still, keeping the IR35 investigation insurance running isn't a bad idea.

[Cyc1one]

You've been doing an enduring role that a permie should be doing. That's exactly what IR35 is all about so I'd say you are very wrong.

Right, thanks. So as long as I clear the loan before the end of this accounting period, in July, and keep the company open long enough to get that money back (claim in April 2020), then I won't lose it (I definitely don't want to, it's approaching 11k that I had pencilled in to claim back over the next 5 years!).

So apart from the delay in executing the MVC, that's manageable. But actually that probably impacts my desire and ability to reduce my dividend payouts for the next 9 months. I could do that on the basis of getting the MVC executed soon afterwards, but with an additional minimum 7 month delay after moving to perm that becomes less practical.

[northernladuk]

The role will be the same, they have budget and a desire to hire people perm to replace contractors and are offering the roles to the people currently doing the job to start off with.
If it were going the other way I'd have been immediately concerned about IR35, but AFAIK there's no issue with going from contract to perm, if that's the angle you were thinking of.

I'd ask my accountant about the MVL, but this is getting into tax planning and I'm fairly sure they won't give me an answer, or they'll get it wrong.

You've been doing an enduring role that a permie should be doing. That's exactly what IR35 is all about so I'd say you are wrong. Most of the articles talk about perm to contract and the Friday to Monday rule but the converse is true (but not as obvious). IR35 investigations try and find if you've been working as a disguised employee and claw back the tax you should have been paying. To switch remuneration methods but the work doesn't change will indicate to HMRC you've been a disguised permie up to now.

It shouldn't be too hard if your working practices are slightly different and you've been working to a very well defined Statement of Work previously but now you can be directed and controlled.
If your old gig just had a role title and you took on work as the client wanted you could be in a difficult situation.

Hope you've got IR35 insurance and if so keep. It going for a full year of your LTD after swapping.

[MrButton]

If it were going the other way I'd have been immediately concerned about IR35, but AFAIK there's no issue with going from contract to perm, if that's the angle you were thinking of.

If it were me I’d be concerned this way too.

Especially as you’ve said it’s the same role. But you were previously declaring yourself outside.

But it’s your risk appetite.

[Maslins]

What's the advantage of paying back the directors loan so early apart from hitting that 9 months and a day a little bit sooner?

It's exactly the reason you mention above. Assuming you don't want to lose the S.455 amount already paid permanently, you're going to have to keep the company open for a prolonged period. Putting the company into liquidation won't make HMRC refund the S.455 any earlier. It will also add a complication to the liquidation, so likely mean higher fees for that.

[Cyc1one]

I'd forget about the finer details of precise tax planning, and just focus on the bigger picture.

Get the director loan repaid as soon as you can. If you've historically suffered S.455 on this, you're only entitled to get that back 9 months and a day after the end of the accounting year in which you repay it.

Also, as long as you easily use up the 7.5% band for dividends, your overall tax liability will be lower if you take as low dividends as possible (which would otherwise be suffering 32.5%) to then leave as much as possible for the capital gain, suffering just 10% (assuming you'll qualify for entrepreneurs relief etc). For the current tax year, ensure you use up your basic rate band in full. For the next tax year, sounds like your salary for the 2nd half of the year will use up the bulk of basic rate band anyway.

If you can live a bit more frugally, or take out a personal loan to enable director loan to be cleared and modest dividends, it will likely be worth it in the long run.

What's the advantage of paying back the directors loan so early apart from hitting that 9 months and a day a little bit sooner?
Or would winding up the company mean that it was impossible to then reclaim it because the company simply wouldn't exist?
If it's the latter then it throws a bit of a spanner in the works, I'd have to keep the company open but dormant until it was reclaimed. My accounting year is Aug - Jul, so if I paid it back now, the end of this accounting year is this July, 9 months after that is April 2020. I suppose it wouldn't be the end of the world to keep the company open until then, 8 months longer than I was initially thinking, but I could execute the MVL in Apr 2020.

[Maslins]

I'd forget about the finer details of precise tax planning, and just focus on the bigger picture.

Get the director loan repaid as soon as you can. If you've historically suffered S.455 on this, you're only entitled to get that back 9 months and a day after the end of the accounting year in which you repay it.

Also, as long as you easily use up the 7.5% band for dividends, your overall tax liability will be lower if you take as low dividends as possible (which would otherwise be suffering 32.5%) to then leave as much as possible for the capital gain, suffering just 10% (assuming you'll qualify for entrepreneurs relief etc). For the current tax year, ensure you use up your basic rate band in full. For the next tax year, sounds like your salary for the 2nd half of the year will use up the bulk of basic rate band anyway.

If you can live a bit more frugally, or take out a personal loan to enable director loan to be cleared and modest dividends, it will likely be worth it in the long run.

[Cyc1one]

The role will be the same, they have budget and a desire to hire people perm to replace contractors and are offering the roles to the people currently doing the job to start off with.
If it were going the other way I'd have been immediately concerned about IR35, but AFAIK there's no issue with going from contract to perm, if that's the angle you were thinking of.

I'd ask my accountant about the MVL, but this is getting into tax planning and I'm fairly sure they won't give me an answer, or they'll get it wrong.

[northernladuk]

I don't know, I paid someone to do it all for me.

This. Remember you are asking a bunch of contractors and maybe someone who's slightly more intelligent if you are lucky. Your best bet is to drop Chris Maslin a note at MVLOnline. He does post on here but for a question about your specific situation you'll probably want to take it offline. He knows all about this jiggery pokery.

What's the role you currently do at your client as a contractor and what will you be doing in the perm role out of interest?

[cojak]

I don't know, I paid someone to do it all for me.

[Cyc1one]

Hi,
This is my first post, but I did a search and can't find an answer to this question or a similar question already.

I've been offered the option to go permie with my current client, but there's a long lead time on it, like it's now January and we're talking about it being in Sept. In the meantime my contract will be extended and I'll continue working through my limited company until then.
Personal tax year ends in April as I'm sure we all know, and I take dividends through the year such that I go marginally into the 40% tax bracket each year.
So initially I'm thinking that I could reduce my dividend for the next 3 months, Jan - Mar, in order to avoid that first tax hit.
Following that, I'd be looking at an MVL to wind up the company. Assets will be far in excess of the 25k limit for the informal winding up, I've not run the numbers exactly, but probably looking at over 100k, perhaps 120k.
My thinking at the moment is that if I can lower my dividend pay from Apr - Sept to the minimum I can survive on, then the remainder will attract lower tax through the MVC.
Actually, scratch that, perhaps I should try to target hitting exactly
Dividend Tax Rate - 7.5% on earnings up to £33,500
I've also got ongoing PAYE obviously, partly in order to continue hitting NI contribution thresholds. But the entirety of that PAYE is then paid into a personal pension.
Which the company account contributes to directly as well.

Is aiming to pay
(dividend+paye-private pension contribution) = £33,500 + personal allowance
by Sept the correct approach to minimise tax paid?

Perhaps not, because then Sept - Apr 2020 will be paid as PAYE, and if I've exhausted my allowance and lower tax band, then the entire income will be pushed into the upper tax bracket.
So perhaps what I'm best paying myself from Apr - Sept is;
(dividend+paye-private pension contribution) = £minimum possible.
Then assuming I have some lower tax bracket left post Sept, the PAYE will fall into that, and the increased monies that were left in the company will be taxed as capital gains at 10%.
In terms of how much I could potentially reduce my dividends by, probably about 10k between now and Sept without crippling myself. Which then falls into the 10% bracket instead of being pushed into the 40% bracket. Saving about 3k in tax then, by the time the smoke clears and everything settles down after Apr 2020.

I don't have exact details of the PAYE I'll be receiving after going permie, but it'll be in the region of £70k gross/annum (or it won't be happening at all). Which means that approx half a year will be paid in the tax year 19/20.

There is an option to increase the contributions, possibly starting at the end of this month, I think that the 40k limit would stop me pushing all the assets into the pension anyway, and even if they didn't I don't want to do that.

For a final wrinkle, there is a directors loan outstanding, it's correctly reported to HMRC, I correctly charge interest on that loan, and annually I fill in the correct paperwork to claim back the tax that was initially surrendered to HMRC for that loan. I'm not quite sure how that loan would be converted when the MVL executed. Perhaps the simplest thing to do would be to take out a short term loan, repay the loan to the company and reclaim the tax from HMRC, and then the funds will come back to me via the MVL and I pay off the short term loan.

Hmm, that was quite long and rambling, sorry. Anyone got any relevant thoughts on how best to proceed?