Reply to: newbie tax question

[THEPUMA]

Thank you! It turns out I can live on less than that, so this is something to investigate carefully.

No problem. Feel free to contact me if you want me to provide more detail on the various options available to you.

[acitizen]

Finally, assuming you are single but can live on £38,934 net plus expenses per annum, you will then eventually take home £84,681 net (assuming the accumulated reserves are eventually taken as a capital sum, subject to 10% CGT on the dissolution of the company).

Thank you! It turns out I can live on less than that, so this is something to investigate carefully.

[LisaContractorUmbrella]

At the end of the day - if you live in the UK, are registered for tax in the UK and work in the UK HMR&C expect you to pay tax either as an employee, through PAYE or as a business owner through corporation tax. Sole trader is an option for some industries but not for anyone hoping to work through a recruitment agency

[Alan @ BroomeAffinity]

Excellent post by THEPUMA there. Just about sums it up nicely.

[THEPUMA]

Has the original question been answered? If not, I'll have a go. Let's assume you have £100K of income and £10K of expenses (before salaries) and there are 3 options as to the vehicle through which you may operate. The first is as a sole-trader, the second is as a limited company and the third is through a tax scheme provider.

If you trade as a sole-trader, I reckon you should take home £71,941 after tax in year one. I have assumed that you are an IT contractor in your first year of trade on the VAT flat rate scheme. This assumes that the £10K expenses end up in your pocket (ie they are expenses you would have incurred irrespective of whether or not you were self-employed such as travel, phone, use of home etc). It disregards any accountancy fees.

Through a limited company, your take-home will depend substantially on your personal circumstances. In particular, whether or not you have such a convenient thing as a spouse or partner who is a non-higher rate taxpayer and whether or not you need all your post-tax income on an arising basis.

Assuming firstly that you are single and need every penny (ie worst case scenario). In this case, I reckon you will take home £77,074 per annum.

Assuming secondly that you are married to a non-earner and can justify paying her £7,068 in salary and are also happy to make her a 50% shareholder so that she can receive half of the dividends. In this case, you will take home £87,867 per annum.

Finally, assuming you are single but can live on £38,934 net plus expenses per annum, you will then eventually take home £84,681 net (assuming the accumulated reserves are eventually taken as a capital sum, subject to 10% CGT on the dissolution of the company).

Again, for each of these examples, I have disregarded accountancy fees (so that you can see the benefit and determine whether or not it is worth paying those fees. Bear in mind that you will get tax relief on the accountancy fees so if the difference were £1,500 and you paid £1,500 in fees, you would still be (albeit marginally) better off going limited company. I have also assumed that IR35 is not an issue.

Finally, if you go through a tax scheme provider, presumably you get £100K minus their fees which I imagine are in the range 10-15% so I guess you will end up with £85-90K. Whether or not this is worthwhile will depend in a number of factors but primarily, which of the alternative positions you are in, whether or not you feel IR35 is an issue and your attitude towards risk. You may also have an ethical standpoint.

Hope this helps.

PUMA

[ASB]

Correct. I think they may be willing to replace it with a contract with an ltd company if there was a sufficiently strong reason. But there does not seem to be.



I am sufficiently different from most of their employees, and they have no-one capable of understanding what I do in sufficient detail to manage me. I also don't work in their offices. They'll probably be fine (for all I care).

That's the spirit, it's an SEP!

fwiw, your description gives at best neutral points. Most businesses have differing employees which have substantially different terms and conditions. The average NHS surgical manager probable doesn't entirely understand what their neurosurgeons do.

However, if you stay "self employed".

- If you fail the s/e tests the consequences will fall on the client
- The cost of doing this is worse than dividends by the LTD co route by about 9% + 655 per year (Class 2/4 NI contributions)
- You do not get flexibility to retain funds and perhaps pay them in later years when you are in a lower tax bracket or perhaps out of work

If you are ltd

- Dividends only is cheaper, basically % of gross
- You can retain funds within the company for later use, potentially benefits in leaner years
- If you fail the S/e tests (i.e. IR35 does apply) the consequence fall on the company or you personally. Broadly this will remove the ability to retain funds and cost ER's and EE's NI on the amount billed.

Couple of links if you are interested.

HM Revenue & Customs: Employment status
Login to AccountingWEB | AccountingWEB

[geoff from contracta IOM]

They'll probably be fine (for all I care).[/QUOTE]

You are my friend a true contractor, you might want to save this post if HMRC do challenge your employment status !

[acitizen]

I assume the contract is between you personally and the company then? In which case the whole aspect of dividends etc becomes moot. This is just self employed income and assessed accordingly.

Correct. I think they may be willing to replace it with a contract with an ltd company if there was a sufficiently strong reason. But there does not seem to be.

However, just because the contract says you are not their employee doesn't mean a thing. IN the event of a status enquiry into you then the outcome of that will depend upon the facts, the working practices etc. The result of this may well be that you are in fact the end clients company. Of course this is not your problem, it's the clients. They obviously accept the risk.

I am sufficiently different from most of their employees, and they have no-one capable of understanding what I do in sufficient detail to manage me. I also don't work in their offices. They'll probably be fine (for all I care).

[acitizen]

If, for example, you failed the self employment tests in a subsequent enquiry then you would be found to be the actual employee of somebody else. This would have significant potential consequences on them.

The last thing I would object to, I suppose. I would expect them to turn me into a permanent employee if I am still with them in two years. Anyway, their lawyers have thought about it, and it's their preferred method. As I mentioned in a previous post, this is a big-name company with significant legal and HR resources.

However a number of people do operate through an LLP, this may be a more palatable alternative for some agents and clients.

If you want to be self employed there is a way, though you will need to take advice suitable for your specific situation.

1) Incorporate acitizen ltd. You are a shareholder and receive dividends etc from time to time.
2) acitizen ltd obtains some contracts etc
3) acitizen esq happens to be a self employed tradesman, he/she then invoices for the time spend on the subcontracted project work.
4) acitizen ltd files it's ltd accounts (including the related part transactions)
5) acitizen esq files their s/a form and s/e accounts as required

I don't know anybody who still does this, or even if it is still possible, it used to be. It does get a controlled amount of income into the s/e regime.

No, it's not something I deliberately want to do. But given what the contract says, self-employment provides a perfectly clean way of avoiding any problems (since HMRC would be utterly mad to object to someone paying class 4 NI of their own volition), and costs only about 3k a year more than solutions that risk falling foul of IR35.

However, if you are caught by IR35 then you are just as stuffed, 95% of income taxed as salary anyway. If you were investigated they could still decide that the subcontracted work you did as a s/e individual wasn't and charge accordingly.

Also, if you are outside IR35 you might as well just pay dividends, this is even more benign from an
NI point of view.

In terms of schemes my personal belief is that there is only any point considering them in an IR35 fail case. No Ni and use of pension contributions (or holding excess funds in the company and eventually using entrepreneurs relief) can prove nearly as effective with, in my view, far fewer issues to worry about.

That is what I thought (but explained a lot better), many thanks.

[ASB]

The contract says I am not their employee, and should send them a bill every month for an amount stated in the contract.

I assume the contract is between you personally and the company then? In which case the whole aspect of dividends etc becomes moot. This is just self employed income and assessed accordingly.

However, just because the contract says you are not their employee doesn't mean a thing. IN the event of a status enquiry into you then the outcome of that will depend upon the facts, the working practices etc. The result of this may well be that you are in fact the end clients company. Of course this is not your problem, it's the clients. They obviously accept the risk.

[geoff from contracta IOM]

This is not for me, I am afraid. Schemes that reliably work cannot generally be kept secret for long. There are 10s of companies busy advertising "we will save you a lot of tax, the only thing is that you are not allowed to know how". The limit of what I am looking for would be a scheme available from numerous high-street accountants/advisors and generally accepted to involve a low risk of HMRC retaliation (as setting up an ltd company was before IR35 came along). Many thanks for replying though.

Most of the reputable providers work with numerous CTA's and accountants clients, have you actually contacted any providers or is it just because they don't advertise the finer detail on a flash banner you have a problem ? No offence but any reputable professional can have access to all the fine print just not those who may rely on it in an unqualified capacity ( in other words know what you are looking at a how to treat that info ) If you have any doubts it is probably not for you so get a good accountant and go Ltd and if you can fill your pension coffers you will lose out very little in retained income. Good luck

[acitizen]

Unfortunately this option will not be available - it is not possible to work as self-employed in this business (it's a long story but basically noone is going to employ you as an individual on that basis).

Actually, I am pretty sure they have. The contract says I am not their employee, and should send them a bill every month for an amount stated in the contract. I have worked on a similar basis before, although the earnings were trivial there (no complaints from HMRC either). This is a big-name company, so I am sure they have thought about it with some care. I certainly don't doubt they pay their lawyers well.

[ASB]

Many thanks for the clear explanation. The question that remains is why would anyone bother to set up a company solely to avoid class 2 and class 4 NI when the cost of doing so is a sizeable proportion of the saving, and there is a risk of life-changing harassment by the HMRC?

Class 2/4 NI relate to self employment. Essentially this is not an option, no agency will deal with you (if fact the companies act I believe would prohibit this). You may get some direct clients who would deal with you, though this will probably be fairly infrequent. One of the practical issues is that there is no legal entity between you individually and the next entity in the chain. If, for example, you failed the self employment tests in a subsequent enquiry then you would be found to be the actual employee of somebody else. This would have significant potential consequences on them.

However a number of people do operate through an LLP, this may be a more palatable alternative for some agents and clients.

If you want to be self employed there is a way, though you will need to take advice suitable for your specific situation.

1) Incorporate acitizen ltd. You are a shareholder and receive dividends etc from time to time.
2) acitizen ltd obtains some contracts etc
3) acitizen esq happens to be a self employed tradesman, he/she then invoices for the time spend on the subcontracted project work.
4) acitizen ltd files it's ltd accounts (including the related part transactions)
5) acitizen esq files their s/a form and s/e accounts as required

I don't know anybody who still does this, or even if it is still possible, it used to be. It does get a controlled amount of income into the s/e regime.

However, if you are caught by IR35 then you are just as stuffed, 95% of income taxed as salary anyway. If you were investigated they could still decide that the subcontracted work you did as a s/e individual wasn't and charge accordingly.

Also, if you are outside IR35 you might as well just pay dividends, this is even more benign from an
NI point of view.

In terms of schemes my personal belief is that there is only any point considering them in an IR35 fail case. No Ni and use of pension contributions (or holding excess funds in the company and eventually using entrepreneurs relief) can prove nearly as effective with, in my view, far fewer issues to worry about.

[malvolio]

This is not for me, I am afraid. Schemes that reliably work cannot generally be kept secret for long. There are 10s of companies busy advertising "we will save you a lot of tax, the only thing is that you are not allowed to know how". The limit of what I am looking for would be a scheme available from numerous high-street accountants/advisors and generally accepted to involve a low risk of HMRC retaliation (as setting up an ltd company was before IR35 came along). Many thanks for replying though.

If you want total safety, take all your money as salasry. The optimum risk/reward ratio is to go with the Ltd Co plus PCG membership and do a bit of learning. End of. Everything else either costs money or is vulnerable to attack.

All IMVHO, of course. Others may disagree...

[acitizen]

The professionals carry PI insurance ! You can choose anyone you wish so long as they agree to our terms for providing them with sight of certain documents ( this is commercially sensitive after all ) you will pay a lot more for someone to audit it from scratch for you as opposed to paying for a copy of a report previously produced but we have no issues with CTA's or accountants examining our scheme in intricate detail subject to the conditions I have already mentioned. There seems to be some perception that scheme providers have something to hide for the reputable ones this is not the case only that we don't want sensitive info thrown out into the public domain we did pay tens of thousands for the IP in the first place and we have already seen a surge of copy cat providers enter the market, i'm not sure if they all work but I'm not going to give them our IP to tighten their solution with money we have outlaid.

This is not for me, I am afraid. Schemes that reliably work cannot generally be kept secret for long. There are 10s of companies busy advertising "we will save you a lot of tax, the only thing is that you are not allowed to know how". The limit of what I am looking for would be a scheme available from numerous high-street accountants/advisors and generally accepted to involve a low risk of HMRC retaliation (as setting up an ltd company was before IR35 came along). Many thanks for replying though.