Reply to: Sole Trader VS Limited - ongoing long term contract / IR35

[swissdt]

I believe JB is correct. The only tax helpline I've found to be reliable was Germany, and that was a while ago, so who knows.

Everything changes if you are a US citizen or otherwise considered to be a US Person. If you've never lived there and aren't a citizen then all of this is none of their business and the IRS person you talked to is an idiot.

Sounds exactly right!

[swissdt]

I think IRS have probably sent you down the same garden path as HMRC, TBH.

I'm afraid national tax/revenue agencies are pretty much universally crap.

You will be performing services wholly in the UK, as I understand it. That makes it "non-US source income". You are not a US citizen (I assume) and you will not be physically present in the US at all. Thus, you are a "non-US person" too. There should be no tax liability *and* no reporting requirement for the "non-US source" income of a "non-US person", so 1040NR is irrelevant. The client may ask you to complete a W8-BEN for their benefit (something they hold on file, but don't share with the IRS).

Basically, I would expect the client to treat you as a contractor and for you to register w/ HMRC for DPNI as having an overseas employer. Like I said, the contract and tax are two different things.

By all means, get some professional advice, but I think you've been sent down the garden path by both HMRC (I did warn ) and the IRS. Forget about them and speak to someone that has a clue.

Thanks James, I didn't have high hopes after some pre warnings on here about HMRC and ringing them up for a satisfactory resolve

The IRS chap too who was manning the international enquiry line, it felt like he was googling the answer when he kept putting on hold at each question!

I've found some good accountants on Friday so all being well i'll be able to get everything up and running, depending which path I take.

[WordIsBond]

I believe JB is correct. The only tax helpline I've found to be reliable was Germany, and that was a while ago, so who knows.

Everything changes if you are a US citizen or otherwise considered to be a US Person. If you've never lived there and aren't a citizen then all of this is none of their business and the IRS person you talked to is an idiot.

[jamesbrown]

I think IRS have probably sent you down the same garden path as HMRC, TBH.

I'm afraid national tax/revenue agencies are pretty much universally crap.

You will be performing services wholly in the UK, as I understand it. That makes it "non-US source income". You are not a US citizen (I assume) and you will not be physically present in the US at all. Thus, you are a "non-US person" too. There should be no tax liability *and* no reporting requirement for the "non-US source" income of a "non-US person", so 1040NR is irrelevant. The client may ask you to complete a W8-BEN for their benefit (something they hold on file, but don't share with the IRS).

Basically, I would expect the client to treat you as a contractor and for you to register w/ HMRC for DPNI as having an overseas employer. Like I said, the contract and tax are two different things.

By all means, get some professional advice, but I think you've been sent down the garden path by both HMRC (I did warn ) and the IRS. Forget about them and speak to someone that has a clue.

[swissdt]

Update, spoke to HMRC, several times today, who didn't really have a clue, they kept trying to put me through to tax technicians/call to support, who then advised to write in which is a 14 working day response time. A lot of them mentioned the UK-US1 form, which on googling looks completely wrong!

In the interim spoke to a few accountants who run DPNI schemes for existing clients and they could do it all for me which seems the favorable way.

Finally spoke to the IRS, who advised the 1040NR form, schedule OI, page 5, to ensure I don't pay US Tax, https://www.irs.gov/pub/irs-pdf/f1040nr.pdf + https://www.irs.gov/pub/irs-pdf/i1040nr.pdf

Although they couldn't confirm whether the tax treaty would cover me, and i'd have to read/research publication 901



Imgur: The magic of the Internet

Publication 901 has an odd bit here which doesn't seem to make sense, RE the employer is a US resident?

Income that residents of the United Kingdom receive for services performed in the United States as employees (dependent personal
services) is exempt from U.S. income tax if the residents meet the following requirements.

They are in the United States for no more than 183 days in any 12*month period beginning or ending in the tax year.

Their income is paid by, or on behalf of, an employer who is not a U.S. resident.

Their income is not borne by a permanent establishment that the employer has in the United States.

[WordIsBond]

When considering Limited vs Self -Employed, it is not always just the tax incentives you need to consider. Having a limited company allows you to control your remuneration strategy so you could build up a war chest for periods when you may not have active contracts.

Sorry, but this isn't clear thinking at all.

As a sole trader you can build up a war chest, too. The difference is that you pay tax on your war chest when you earn it as a sole trader, and your war chest is in your personal funds, while with Ltd your war chest is in company funds and you pay tax when you take it out of your company. It really is just a matter of tax incentives for Ltd (and war chest handling / remuneration is one of those incentives) vs lower regulatory burden for sole trader.

There is no reason at all to 'control your remuneration strategy' except to gain a tax benefit. If there were no tax benefit, for a one-man band there would be no reason to leave any excess funds in a Ltd Co.

[swissdt]

Thanks again James, i'll probably end up with a call to HMRC and IRS depending what the US company says, but the advice on here has been invaluable, and set it all out perfectly in my mind.

[jamesbrown]

Thanks James, i very much doubt the US company would go for the DPNI, as its a contract, but I can certainly broach the idea! If they could employ me would they get hit with tax US end on the payment to me? or is that IRS questioning material?

They are responsible for their own compliance and your role in that (they may ask you to complete a W8-BEN, for example). The contract and how you pay tax are two different things. Equally, on your end, the correct payment of UK tax is between you and HMRC. The US company will know nothing about that. Again, though, I think sole trading is probably your best option. You’ll submit a SATR at year-end and you won’t need to worry about running a company or IR35, for example. Just make sure you do all the work in the UK, otherwise things will get more complicated for several reasons.

[swissdt]

I think you can basically plug that into any online tax calculator for PAYE + EeNI (most show ErNI too as an FYI, but you won't pay that). The US company won't pay anything - there's no ErNI. They just pay you into your personal bank account and you deal with payments to HMRC via the PAYE reference (DPNI scheme).

Like this, for example (with 15 per hour based on 37.5 hours per week):

UK Salary Tax Calculator 2018/2019/2020: Calculate my take home pay : gross salary of GBP29250 (2019)

Obviously, that is making some assumptions to extrapolate a monthly or annual amount, but it shows £1952 per month.

I highly doubt there's much to separate any of these options, financially. There is a bigger separation between options as you start to move up the income scale.

At the same time, there is quite a big difference in hassle between these options, with a Ltd being the most hassle, by far. At the same time, limited liability is a super important protection.

Anyway, at this point, I think you probably have the info you need - good luck!

Thanks James, i very much doubt the US company would go for the DPNI, as its a contract, but I can certainly broach the idea! If they could employ me would they get hit with tax US end on the payment to me? or is that IRS questioning material?

[jamesbrown]

Any idea on how this would compare with DPNI PAYE scheme? On the above figures how much tax and NI per month/year? what would the US company have to pay? All got very confusing when I was reading about!

I think you can basically plug that into any online tax calculator for PAYE + EeNI (most show ErNI too as an FYI, but you won't pay that). The US company won't pay anything - there's no ErNI. They just pay you into your personal bank account and you deal with payments to HMRC via the PAYE reference (DPNI scheme).

Like this, for example (with 15 per hour based on 37.5 hours per week):

UK Salary Tax Calculator 2018/2019/2020: Calculate my take home pay : gross salary of GBP29250 (2019)

Obviously, that is making some assumptions to extrapolate a monthly or annual amount, but it shows £1952 per month.

I highly doubt there's much to separate any of these options, financially. There is a bigger separation between options as you start to move up the income scale.

At the same time, there is quite a big difference in hassle between these options, with a Ltd being the most hassle, by far. At the same time, limited liability is a super important protection.

Anyway, at this point, I think you probably have the info you need - good luck!

[swissdt]

When considering Limited vs Self -Employed, it is not always just the tax incentives you need to consider. Having a limited company allows you to control your remuneration strategy so you could build up a war chest for periods when you may not have active contracts.

Many agents and end clients also prefer to deal with a limited company and this could help in establishing new contracts in the future. Limited companies are a separate legal entity under your control and can sometimes offer a level of protection for you as an individual should your business relationship with end clients break down.

You need to consider what is right for you, the small added responsibility of operating a limited company for the benefits that could be derived, or the perceived simplicity of running your business as a sole trader.

Happy to speak on the phone if you want to give us a call.

Thanks Jess, i'll take all the info on board

[swissdt]

Nice pitch, but it isn't a "small added responsibility". It's actually a significant responsibility that ultimately rests with the company director(s), including when accountants are incompetent. Many well-meaning people have been caught by that.

The primary consideration for the OP should be whether they're comfortable operating without limited liability, especially for a US client. All other considerations point to operating as a sole trader, IMHO.

Thanks, I also need to get some PI quotes which may prove useful, and get an idea of costings.

[swissdt]

If you don't feel the exposure is too great, sole trading is probably the way to go. It's much simpler.

In terms of a PAYE direct scheme, it basically applies when you have an overseas employer with no UK presence. For tax purposes, you can either register as self-employed and submit a SATR each year or you can ask HMRC to register a personal PAYE scheme (DPNI). Essentially, you will pay employee's NI and PAYE taxes (no employer's NI). However, you may struggle to find someone at HMRC that knows how to set this up, and they will probably tell you to register as self-employed because it saves them having the conversation or working it out .

PAYE20100 - PAYE Manual - HMRC internal manual - GOV.UK

Again, I think sole trading is the way to go, notwithstanding personal liability.

This post has proved super useful, and sole trading seems to have the edge I so far.


Here's some rough figures I got based on £15 an hour + 37.5 hours a week take home pay, including the accountancy fees and some basic expenses to get a ball park...

LTD = £1940 per month
Sole Trader = £1929 per month


Any idea on how this would compare with DPNI PAYE scheme? On the above figures how much tax and NI per month/year? what would the US company have to pay? All got very confusing when I was reading about!

[jamesbrown]

the small added responsibility

Nice pitch, but it isn't a "small added responsibility". It's actually a significant responsibility that ultimately rests with the company director(s), including when accountants are incompetent. Many well-meaning people have been caught by that.

The primary consideration for the OP should be whether they're comfortable operating without limited liability, especially for a US client. All other considerations point to operating as a sole trader, IMHO.

[Jess inniAccounts]

When considering Limited vs Self -Employed, it is not always just the tax incentives you need to consider. Having a limited company allows you to control your remuneration strategy so you could build up a war chest for periods when you may not have active contracts.

Many agents and end clients also prefer to deal with a limited company and this could help in establishing new contracts in the future. Limited companies are a separate legal entity under your control and can sometimes offer a level of protection for you as an individual should your business relationship with end clients break down.

You need to consider what is right for you, the small added responsibility of operating a limited company for the benefits that could be derived, or the perceived simplicity of running your business as a sole trader.

Happy to speak on the phone if you want to give us a call.