Limited company or self employed.

capstain411

Hi,

I work as a community pharmacist. I am planning to become a locum( free lancer) from next year. As a pharmacist I can expect a income of £23-£25 a hour.

I am not sure whether I should opt for self-employed or limited company for taxation.

I am considering to become a locum as I want to study further. Will I be able to offset roughly £2000 a year which I want to invest in my studies for next 2 years.

Please do suggest what might be the best option. My accountant corresponded me the following in terms of charges...

1. We would be pleased to deal with your self-employment accounts as a locum pharmacist and the related personal tax return for a fee of £395 plus VAT for the year ended 5th April 2008 and onwards.
Please note that you can have tax savings of £3,490 in the first year and each year thereafter.
These savings are based on taxable profits of £40,000, once you have converted to a Limited company and on the assumption that all profits are drawn out from the company (see workings inside our brochure). 2. If you are interested in trading through a limited company then, our fees for the work will be as follows:
To convert to Limited company - £495 + VAT (one off charge) for forming the company and general advice including going through 16-point guide. This fee will be payable once the company has been set up.
Then annual company accounts, corporation tax return and your personal tax return - £1,200 + VAT per annum (£100 + VAT per month) thereafter, i.e. from when the company is set up.

Please share your views.

Chutzpah

Hi Capstain411,

Firstly, I have to say I think that the fees that your accountant wants to charge are very high for the limited company solution.

Secondly, no-one can legitimately inflate your pay, so essentially the only difference between accountants will be the price you pay and the service you receive.

Thirdly, I would be interested to see if you would be truly 'self-employed'. This would depend on the contracts you will be undertaking and the nature of your work. I won't pretend to be an expert in the field of pharmacy, so either yourself or others would have to help guide you here.

This page from the HMRC could help you http://www.hmrc.gov.uk/working/work-out-emp-self-emp.htm

The reason I say this is because if your contracts of work basically make you an employee (even though you would class yourself as working for yourself), going through a limited company will not benefit you much, as you will not be able to draw dividends (the main benefit of this approach). Is this the way they have suggested that you will receive £3,490 benefit in their brochure?

The government have targeted limited companies for several years now and the people that can benefit from them are becoming few and far between. If you do draw dividends and are classed as an employee of your clients the government won't be happy!

Just today there was a rather landmark ruling on this subject http://www.computerweekly.com/Articles/2008/09/04/232133/it-contractor-liable-for-99000-tax-after-losing-ir35.htm

If you would be classed as employed, the other option instead of going through a limited company (that your accountant sure as hell won't suggest!) is going through an umbrella company. These basically make you an employee and deal with invoicing, tax and national insurance for you for a small weekly fee. You would be able to claim expenses such as mileage that would help reduce your tax bill.

I'm not by any means saying that this is the best solution, merely making you slightly more aware of it in case you have never heard of this solution. I do know that a fair few people in the medical profession do use them.

Visit http://www.umbrellasupermarket.com/ for some more information.

I hope some of these ramblings help, if you need me to explain a bit more let me know and I'll try to clarify!

capstain411

Thanks for your input. As a pharmacist, I get booked by say for eg. Tesco pharmacy for a 10 hr shift. They pay me £24 pounds/hr. The money comes into my account. I am responsible of payment of tax and NI. Surely this is self-employed basis of taxation isn't it. I know many of my mates who have legitimately be operating limited companies and being self-employed. There is definitely a way to get this done legally.

Chutzpah

More importantly is: are they drawing dividends from their limited companies? (Rather than pay themselves a large salary) Based on that I would be amazed if they were, as I'm sure that they would be classed by the HMRC as 'disguised employees', i.e. they do all the things that a normal employee would do.

You can definitely be classed as self-employed, and you could even operate as a limited company, but I would find it hard to believe that you could draw dividends given the type of work you've described there. If you can't do this, then I really can't see the benefit in operating as a limited company, especially for the cost you've been quoted. The costs and administration will be higher for not much more benefit.

At the very least, I would recommend you get another quote - some of the companies that offer umbrella services also offer limited company formation and will also take care of the company setup and statutory returns for you for much less - just make sure you get the right advice on your contracts too.

(I should also note that whether you can draw dividends should be taken on a contract-by-contract basis)

capstain411

To incorporate or not?
Self Employed
Method of profit extraction
Profit £40,000.00
Salary 0
Dividend 0
Taxable £40,000
tax& NI £10,137.00
Cash in hand £29,863.00

Limited company

Method of profit extraction
Profit £40,000.00
Salary £5,035.00
Dividend £28,321.65

tax& NI £6,643.35
Cash in hand £33,356.65

Saving through incorporation £3,493.65

this is the comparison published in the brochure. The accountancy firm is very popular with locum pharmacists. They are the market leaders in this sector for sure...which reflects in their fees. To be frank, I did not know that ppl in my situation in limited company could not draw dividends.

Richard019

On a similar theme, I managed to post this in the wrong section yesterday. If the SNP go ahead with replacing council tax with an additional 3% income tax I'm trying to work out if I'm better off changing from a sole trader to a Ltd company or not? (It's a 2nd income I've started to fund hobbies so leaving profits in the company isn't really a problem for me)

Assuming I can do my own book keeping for both (if I don't know how to now I'll soon find out from other people I know) what are differences financially? I know about the liability for debts (that's not an issue) but what are the differences in running costs?

Pennywise

Chutzpah wrote: »

More importantly is: are they drawing dividends from their limited companies? (Rather than pay themselves a large salary) Based on that I would be amazed if they were, as I'm sure that they would be classed by the HMRC as 'disguised employees', i.e. they do all the things that a normal employee would do.

Presumably you are referring to IR35 which applies to a very small percentage of limited companies. HMRC are losing over 95% of the IR35 cases they take on and it is highly likely that IR35 will be quietly forgotten about due to the immense costs of pursuing companies and the remoteness of them winning in court. It is impossible to say whether or not IR35 applies from the information given. There are some very important deciding factors which havn't been mentioned, i.e. a valid substitution clause which would allow the OP to subcontract his "shifts" to another pharmacist - if this is allowed, then IR35 won't stand up and the client is able to pay dividends.

As to fees, then I personally think the fees quoted are very reasonable, given that the accountancy firm seem to be specialising in pharmacists. Some more general accountants may well charge less, but they may also fall into the trap of assuming that dividends couldn't be paid in this situation - i.e. potentially costing the OP £3.5k in tax he didn't need to pay, just to save a few hundred pounds in accountancy fees. By all means, the OP should shop around, and will probably find other accountants willing to do it cheaper, but he needs to make sure they are as knowledgeable and he'll get the same level of service.

Chutzpah

Pennywise wrote: »

HMRC are losing over 95% of the IR35 cases they take on

You'd best tell Jon Bessell that.

Pennywise wrote: »

and it is highly likely that IR35 will be quietly forgotten about due to the immense costs of pursuing companies and the remoteness of them winning in court.

I find that exceptionally hard to believe.

Pennywise wrote: »

i.e. a valid substitution clause which would allow the OP to subcontract his "shifts" to another pharmacist - if this is allowed, then IR35 won't stand up and the client is able to pay dividends.

Substitution alone won't be the only deciding factor, and you have to consider IF the original poster would be actually able to provide a substitute at short notice - it just being written in the contract for the hell of it is not enough.

Pennywise

Chutzpah wrote: »

Substitution alone won't be the only deciding factor, and you have to consider IF the original poster would be actually able to provide a substitute at short notice - it just being written in the contract for the hell of it is not enough.

A client of mine works at several supermarket pharmacies and does indeed have a substitution clause in his contract. Furthermore, the supermarkets are more than happy for him to subcontract to other pharmacists when he is ill, on holiday, etc. The supermarkets don't give a toss who is manning their pharmacy as long as they have the right certificate to display above the counter when they're there. And yes, of course, substitution isn't the only clause that matters - in the case of supermarket pharmacists, the contracts tend to include an obligation to provide a substitute (i.e. they could sue for breach if no-one turned up), and of course, no rights to sick pay, holiday pay etc. I have taken a similar contract through HMRC and got the "outside IR35" confirmation from their status unit. So, like I say, paying an accountant who is experienced in a particular field may well pay dividends compared with choosing a cheaper accountant who doesn't know the ins and outs of a particular trade/profession.

Cricri

Thanks guys, useful thread, it looks like I'm going to subscribe to an umbrella company too!
Originally, I wanted to go for a limited company, and offer a job to my wife (who's studying a BA) to do my accountancy (that way I could have split my income into low tax ranges, and give her work experience).

ceeforcat

capstain411 wrote: »

To incorporate or not?
Self Employed
Method of profit extraction
Profit £40,000.00
Salary 0
Dividend 0
Taxable £40,000
tax& NI £10,137.00
Cash in hand £29,863.00

Limited company

Method of profit extraction
Profit £40,000.00
Salary £5,035.00
Dividend £28,321.65

tax& NI £6,643.35
Cash in hand £33,356.65

Saving through incorporation £3,493.65

this is the comparison published in the brochure. The accountancy firm is very popular with locum pharmacists. They are the market leaders in this sector for sure...which reflects in their fees. To be frank, I did not know that ppl in my situation in limited company could not draw dividends.

Accountants, accountants! Are you going to only work 17.5 hours per week? £5035 per annum is £96 per week - this is equivalent to 17.5 hours at the minimum wage. Unlikely!

If you work more than that for that salary you will fall foul of minimum wage regulations and will be breaking the law.