Reply to: Self employment confusion

[Denny]

Know very little about self-employment but have read about this pay on account thing denny mentions. However, I believe there is a way to avoid that if basing on previous year would give an excessive bill. Also, if the client did not pay what is due, have a hazy recollection they can try and get it from you. Very vague I know, but worth a few more checks, accountingweb is good.

Very true. If your next year's turnover is likely to be far lower that the previous fully paid up one then you can contact the Revenue and request you pay less = based on what you think you can afford. Usually they are sympathetic but you must be get their agreement first, not just pay what you can without such permission - otherwise you will be stung for the surcharges and interest on the difference you thought you should pay and what you should ultimately pay.

[xoggoth]

Know very little about self-employment but have read about this pay on account thing denny mentions. However, I believe there is a way to avoid that if basing on previous year would give an excessive bill. Also, if the client did not pay what is due, have a hazy recollection they can try and get it from you. Very vague I know, but worth a few more checks, accountingweb is good.

[Denny]

Sorry, yes I am a sole trader. I invoice my client directly and my client pays me directly, there are no companies involved inbetween.

My winky wasn't meant to appear ominous! I have no intention of hiding anything from the tax office, that's why I posted my question, I want to make sure that I'm doing everything right.

I had a word with my client who says everything is above board and details have been checked by their accountant.

So far as the right to substitution, from my clients side I think it is for security reasons, the work I'm doing involves a lot of sensitive information so I can understand them not wanting me to give away passwords and information left, right and centre. Will the tax office take that as a legitimate reason?

My plan at the moment is to make sure I keep aside 25% of what I get paid for tax purposes (which doesn't take into account any deductibles or allowance) so I shouldn't find myself in a situation where April comes and I have a bill I can't pay. I'm not expecting to make vast sums of money from it so does this sound sensible?

Thanks for all the help guys. I've only ever worked as an employee before so I'm scared I'm not going to get all this stuff right!

One thing you do need to remember about being a sole trader is this:

If this is your first year of trading then you won't have to pay your tax bill in full until 31st January 07 or even 08 depending on when you started the business, which you will declare on your self-assessment tax return. After that you will have to pay 'on account' - that means that for subsequent tax years you will have to pay your tax in one-third stages - based on your previous year's income - one third of it at around the time of your previous tax payment and then another in July. You only pay the balance by 31st January. The Revenue Tax Assessment form they send out at the beginning of the tax year will still say tax payable by 31st January (which of course misleads you into thinking you don't pay any of it until the deadline). Don't for god sake make the mistake of thinking you only have to wait until the end of the following tax year to pay the full amount, as you did in your first full year of trading. If you do you will be charged interest and surcharges on the late payments from the previous January and July.


You should also get your own accountant who can help you out here and file your tax return if you fancy shelling out for their services. It does save a bit of time.

[Denny]

Not true. A genuinely self employed person, doing a job that pay a normal salary level can make significant NI savings over the direct employment option.

tim

"The only difference is that you don't have to pay employers NI and you have more control if you're acting as a real business"

You missed that bit.

[TheMonkey]

Yep here:

www.listentotaxman.com

[ASB]

Sorry, yes I am a sole trader. I invoice my client directly and my client pays me directly, there are no companies involved inbetween.

You are fine. If there is a status enquiry it's your client who gets stuffed if you fail. This might encourage them to answer the questions in the right way.

As for your dues, assume no expenses (i.e. your entire billings are profit) then tax and ni rates and some bumpf are here:-

http://www.hmrc.gov.uk/rates/it.htm
http://www.hmrc.gov.uk/rates/nic.htm
http://www.hmrc.gov.uk/pdfs/ir56.pdf

Your 25% is about right if you are making < 35k.

Tax: (profit - 5035) * 22% - 215 (for the 10% band). Over approx 38k there is an additional 18% tax.

NI: pay (profit - 5035) * 8% (class 4) + 110 pa (class 2)

Put 41% of anything over 38k profit and you won't be too far out.

I imagine theres a calculator on the web for you to put you estimated figures into.

[Bunnyh]

Sorry, yes I am a sole trader. I invoice my client directly and my client pays me directly, there are no companies involved inbetween.

My winky wasn't meant to appear ominous! I have no intention of hiding anything from the tax office, that's why I posted my question, I want to make sure that I'm doing everything right.

I had a word with my client who says everything is above board and details have been checked by their accountant.

So far as the right to substitution, from my clients side I think it is for security reasons, the work I'm doing involves a lot of sensitive information so I can understand them not wanting me to give away passwords and information left, right and centre. Will the tax office take that as a legitimate reason?

My plan at the moment is to make sure I keep aside 25% of what I get paid for tax purposes (which doesn't take into account any deductibles or allowance) so I shouldn't find myself in a situation where April comes and I have a bill I can't pay. I'm not expecting to make vast sums of money from it so does this sound sensible?

Thanks for all the help guys. I've only ever worked as an employee before so I'm scared I'm not going to get all this stuff right!

[Tex]

IR35 does not apply to the self employed. However there have always been very similar rules, if you appear to be an employee they may try to tax you as one. Think the problem is more for the company that took you on.

Quite right, xoggoth. The true state for the OP is "if you appear to be an employee they will tax your client as if you were one." If the OP's client is happy to take the risk, there's no need for to lie awake at night worrying about it.

[xoggoth]

IR35 does not apply to the self employed. However there have always been very similar rules, if you appear to be an employee they may try to tax you as one. Think the problem is more for the company that took you on.

[Tex]

The OP doesn't seem to have cleared up whether he is acting as a sole trader or not.

In the initial post the OP said he/she had registered with the local tax office as self-employed. Seems pretty cut and dried to me that the (not very large) risk falls entirely on the client.

[ASB]

There is no real reason for this restriction other than to make you a company employee and the IR are unlikely to accept any other status in this case.

tim

So, there are two possibilities.

If he is being treated as a sole trader by the client (i.e. he is invoicing them personally) then the risk falls entirely on the client. If the status check if failed the OP will be the clients actual employee and they get a big bill. He should then get a rebate.

If he is not engaged as a sole trader, ie his co is billing somebody then the risk is IR35.

The OP doesn't seem to have cleared up whether he is acting as a sole trader or not.

[tim123]

It seems to be a bit half and half with me.

I have one main client, I'll be doing odd jobs for a couple of others but primarily just for them.

I am working from home on an 'on request time and materials basis'. I can work up to 40 hours a hour a week and then invoice them for that. I can't sub contract anyone. I have set duties as it's admin work and I also have a notice period.

This "can't subcontract" restriction is going to ring alarm bells with the revenue. If you are working at home, doing general admin that requires easy to find skills why can't you subcontract the work to someone else and then deliver it to the client as if you had done it. Obviously the risk of the work not being done right remains with you in this scenario, but that's what being self employed is all about - taking risk!

There is no real reason for this restriction other than to make you a company employee and the IR are unlikely to accept any other status in this case.

tim

[tim123]

As a sole trader, irrespective of whether you are under client control or not, you will still be taxed on your full income anyway, minus allowable dispensations. That's pretty much the same as you'd be taxed on IR35 minus the allowable 5%.

Not true. A genuinely self employed person, doing a job that pay a normal salary level can make significant NI savings over the direct employment option.

tim

[Denny]

Hi all,

I've recently taken on a job that specifies me as a 'self employed independent contractor' and as such I've registered myself self employed with the tax office. Perhaps naively, I assumed it was that simple and I would just fill in a self assessment on my income but a number of people have mentioned IR35 to me and created visions of massive tax bills appearing out of nowhere. I've trawled the internet and this forum but can't seem to come up with a definitive answer.

Will this possibly apply to me or does the fact I am contracted directly to my client on a self employed basis mean I can stop worrying about it? Basically I am expecting to pay tax at a rate similar to that which I'd have with any regular employment, am I right? I'm not looking to lower my tax bill, just want to keep my nose clean

I'm really confused Thanks for any help and apologies if the query sounds silly to you.

I think you're confusing self employment (sole tradership) with limited company owner management that allows a small salary plus dividends provided your contracts are reflected in the terms and you operate as a 'real business' with the end client rather than a personal services contractor (pseudo client controlled temp operating the same way as their employees would with set hours, client control and so on).

As a sole trader, irrespective of whether you are under client control or not, you will still be taxed on your full income anyway, minus allowable dispensations. That's pretty much the same as you'd be taxed on IR35 minus the allowable 5%. Therefore, you're no better off than if you went through a reputable brollie (as a employee of a limited company payroll service). The only difference is that you don't have to pay employers NI and you have more control if you're acting as a real business and you'd have paperwork with the IR (a preferable option to brollie unless you really do someone else to do all the paperwork).

By the way, that winky looked ominous. Don't ever be tempted not to disclose some of your income on your tax return. That is blatent tax evasion and the IR are always poking into sole traders bookkeeping and accounting set ups, so it's really not worth the risk if there is a papertrail to be found. The only time you could get away with it is if you trusted your client who paid you strictly in cash.

[nobody here but us chicke]

Oh, ir35

Yes IR35 just means that you get taxed in the normal way. Many people who run businesses take some of their profit as dividends which do not attract national insurance, hence their total payments to the revenue are lower than they would be if they took that money as salsry.

If you really are self employed then tax / ni is slightly different to normal employee tax/ni. Sorry but I am not up on the details. I only know company stuff.