Contract work and Limited company

mgp1000 · 16 October 2017 at 6:08PM

Hi,
My wife was recently offered a job which involves her contracting herself out to a company. She has contacted In Touch Accounting to handle her accounts, and she has been advised to set up a limited company for this purpose. They have also advised her that it would save me some tax if I become a partner in her limited company, since I earn less than £40k (i think).
The contract is for 3 months, with a possibility of extension since the whole project is a long term one.
Does anyone have an idea about setting up a limited company for the purpose of contracting yourself out?
If she decides, in th future, to stop contract work and takes on a permanent role , how does this affect her (and me)? Can she simply shut down the company?

If anyone has any guidance regarding this, it would be a great help!

Thanks in advance

phill99 · 16 October 2017 at 7:47PM

I think there is an element of untruth in what they are saying. I would take advice of a second accountancy firm. Setting up a Ltd Co for just a three month project is extremely excessive. This in its own right has costs, compliance issues and then if the project doesn't continue, the company will need to be dissolved.

I would only set it up after the three months if there was a long term contract offered.

Self employment may be the most cost effective (ie £0 cost) and the tax position in a three month contract will be identical.

tacpot12 · 16 October 2017 at 7:59PM

Hi, I've contracted in this way on two previous occasions. You wouldn't be a partner in her company, you would be a shareholder.

Setting up a limited company for this purpose is very easy, and costs very little; £10 with quickformations.co.uk, who I've used in the past.

Your wife needs to read up on IR35, and decide whether the contract being offered will be caught by the IR35 rules, to make sure she knows how much she needs to pay herself. (What isn't paid out of the company as expenses is paid out as dividends to the shareholders.)

If the contract is caught by IR35, she will need to pay out her income mostly as PAYE and NI, which will mean that there will be minimal dividends to pay to you and very limited savings in tax.

If the contact is outside the IR35 rules, she can pay herself a minimal salary, just enough to pay enough NI to count towards the State Pension, and take the rest as dividends, split with yourself to save tax.

If in the future she wants to stop contracting and take a permanent job, she just winds the company up. You then cease to be a shareholder. You might also consider becoming a director or company secretary depending on whether you want to take responsibility for the operation of the company. I would avoid becoming a director or company secretary if you can.

From your point of view, the biggest impact is that you will have to complete a Self-Assessment for Income Tax (unless the dividends you receive are below the personal dividend allowance).

tacpot12 · 16 October 2017 at 8:07PM

Setting up a Ltd Co for just a three month project is extremely excessive.

While I agree with the point being made, it is very unlikely that your wife will have the option to be self-employed (i.e. working as a sole trader); it is very common for agencies to insist that the contract can only be agreed with a limited company, not sole traders.

It is very unlikely that your wife will not be renewed, and if she isn't she should keep the company going until she has secured a permanent role.

00ec25 · 16 October 2017 at 10:38PM

a company only makes sense where it will be her sole source of income and her income is close (or over) the higher rate tax threshold.

if she is caught by IR35 and has to pay herself via PAYE through her own company then the company exists purely to safeguard the agency and is of little benefit to her

if she is not caught by IR35 and thus has the option to take most of her income via dividends, the company has to pay corporation tax (@ 19%) on its profits before it can work out how much money remains to be paid out as a dividend. Dividends are taxed at 7.5% so that means "her" income has already "lost" more than the basic rate of tax anyway as it will be reduced by >20% in net terms

as another poster says, get a second opinion from a different accountants (and preferably a quick calculation using her expected figures to confirm her position)

Pennywise · 17 October 2017 at 7:52AM

As an accountant specialising in limited company "contractors", if you were consulting me, I'd say to go via an umbrella company instead if there's little certainty of it extending past 3 months. There's not really much tax reduction by using a ltd for just 3 months after you've factored in the accountancy fees, insurances, IR35 contract review fees and other costs and the time/effort to learn about limited company accounting, etc. Umbrella fees are virtually the same as accountancy fees too. Trouble with the bigger accountancy firms is that they'll offer what seem to be reasonable monthly fees, but most have a minimum 12 month contract, so you could end up paying 12 months of fees for just 3 months contracting - check their T&Cs. I'd say that you should only go down the limited route if you are more than 50% certain that you'll be contracting long term. I've seen far too many limiteds close down after just 3 or 6 months after a lot of time and money has been spent, who'd have been better off just doing the umbrella route. It's easy enough to leave the umbrella and form your own limited once you have more certainty it's long term. Another aspect is her hourly/daily rate - I've also seen too many companies set up for pretty low rates, some as low as £20 per hour which just makes the tax differentials far too small to warrant it.

motorguy · 19 October 2017 at 4:25PM

tacpot12 wrote: »

While I agree with the point being made, it is very unlikely that your wife will have the option to be self-employed (i.e. working as a sole trader); it is very common for agencies to insist that the contract can only be agreed with a limited company, not sole traders.

It is very unlikely that your wife will not be renewed, and if she isn't she should keep the company going until she has secured a permanent role.

Correct in the sense she wouldnt be "self employed", however she would go through an umbrella company if she wasnt using a limited company.

motorguy · 19 October 2017 at 4:26PM

If i were being cynical i would be thinking that the accountancy firm are recommending the option that allows them to generate accountancy charges...

antrobus · 19 October 2017 at 7:40PM

mgp1000 wrote: »

Hi,
My wife was recently offered a job which involves her contracting herself out to a company. She has contacted In Touch Accounting to handle her accounts, and she has been advised to set up a limited company for this purpose....

A quick look at their website reveals that they charge 105 pounds per month plus VAT. What the ....

1260 quid a year for ltd co for a contractor! Go find a local accountant and halve that price.

antrobus · 19 October 2017 at 7:42PM

Pennywise wrote: »

As an accountant specialising in limited company "contractors", if you were consulting me, I'd say to go via an umbrella company instead if there's little certainty of it extending past 3 months. ...

Good point.

I bet you'd be happy with 1,260 a year.:)

happyandcontented · 19 October 2017 at 7:48PM

antrobus wrote: »

A quick look at their website reveals that they charge 105 pounds per month plus VAT. What the ....

1260 quid a year for ltd co for a contractor! Go find a local accountant and halve that price.

Many companies who employ contractors insist that only certain agents are used. They have a list that you have to choose from as they are "approved" and vetted by the companies, so using a local Accountant is often not an option. The figure above is actually quite low for such companies.

Contract work and Limited company

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