Second job / IR35 question

Steelo

Hi, I wonder if anyone can advise me please. Sorry for the long post.

I am currently employed (PAYE) and have just started doing a second job, providing expertise on a couple of projects for a consultancy firm. I would like advice on the best way to set myself up from a tax perspective and with respect to IR35.

The consultancy firm tender for business to clients and my services are quoted as part of the tender. In terms of doing the actual work, I do this at home or at my primary place of work (the consultancy firm also pays my primary employer for use of their facilities) - never on site at the consultancy or at client sites. I have no set hours - I just do the work quoted in the tender, having occasional meetings with other consultants and the client.

In terms of my personal tax sitaution: I am just over the 40% income tax threshold on my primary job, so all further salary will be taxed at 40%. As I understand it, I can either work as a sole trader, use an umbrella company or set myself up as a limited company.

1. If I set myself up as a sole trader, I have to pay tax on the earnings at 40% plus NI at 8% (over £5715). Works out at near 48% tax.

2. If I set myself up as a limited company inside IR35 and pay everything to myself as salary (or go via an umbrella company), then I have to pay tax at 40% and employee NI (11% above LEL) and employer NI (12.8%). This seems quite
expensive.

3. If I set myself up as a limited company outside IR35 and pay myself no salary and everything in dividends, then I pay 22% corporation tax followed by 22.5% on the dividends (i.e. approx 40% tax in total).

In any of the three cases, I can claim business expenses.

The two questions I have are:
i) Is my understanding of my options correct?
ii) Given my working arrangements, can I reasonably claim to be outside IR35?

Any advice much appreciated.

prowla

So basically you are moonlighting from your full-time job?
IMHO, I would go for the non-IR35 route.
As far as I can tell, IR35 has cost more to implement than it has made in tax, so it's all been a stupid waste of time anyway.

Steelo

Certainly not - i work my contracted hours (and more) for my primary employer. My employer knows that i do this extra work (my boss also consults for them) and they benefit too - the firm pays for the use of some of their equipment at a time when it would otherwise be unused.

Pumpkinface_2

prowla wrote: »

So basically you are moonlighting from your full-time job?
IMHO, I would go for the non-IR35 route.
As far as I can tell, IR35 has cost more to implement than it has made in tax, so it's all been a stupid waste of time anyway.

Unfortunately it is not as easy as making a selection.

To OP, I think your understanding of the scenarios is correct, but I would not know if you can avoid the IR 35 or not. I don't think your physical place of work is the only issue, many employees work at home some or all of the time too.

From top of my head, a few other factors would be: can you get someone else to do the work (or are YOU supposed to do it)? can you turn down work? are you performing work that has previously been performed by an employee?

I think that some professional advice would be a good idea in this situation.

slipp_digby

one for a professional i think rather than these boards, as getting the IR35 implications wrong could lesad to the viability of the venture being effected.

good luck anyway!

Pennywise

Your sole trader scenario isn't quite right. You probably won't have to pay as much NIC as you think. There is an upper limit for NICs which I think you will already have reached through your main employment. If that's the case, you'll only be liable to the 1% extra NIC on earnings above the threshold. So your combined tax/NIC on the sole trader route may only be 41%. You'd need to apply for both class 2 and class 4 NIC exceptions to avoid paying the weekly class 2 and the yearly 8% class 4 (usually paid via your self assessment return). After the year end, you'd tell the NIC office your earnings and NIC paid via employment and they'd send you a bill for any extra NIC due. You'd still pay the 1% class 4 via your self assessment tax return though.

In the Ltd Co scenarios you need to factor in the costs of running a limited company. You could easily be paying £500 - £1,000 p.a. for the accountant to prepare the statutory accounts and corporation tax returns compared with £250-£500 p.a. for an accountant to do sole trader accounts and tax return.

IR35 isn't really a big deal if you and your customer can be flexible and agree a working relationship that is IR35 friendly. There's loads of information on IR35 available on the internet and you can buy IR35 friendly contracts which you can then "tailor" between yourself and customer to suit your circumstances. Just remember that the contract must exactly mirror the real life working relationship - it's no good having an IR35 friendly contract if one or other party doesn't stick to it to the letter! There are several specialist firms who help draft contracts and perform contract reviews - I'd suggest www.qdosconsulting.co.uk who do contract reviews for under £100, but there are other good firms such as Bouer & Cotterill, Accountax, etc., or for even more peace of mind you could join the www.pcg.org.uk which is aimed at IT consultants but is suitable for all kinds of freelancers.

Emanef

I thought it was possible to be both inside and outside of IR35 if you had varying situations with multiple jobs, as it's the contract that's looked at. The main role would be deemed within IR35 as it's effectively employment (regular hours, hourly rate, work under instruction and report to a manager, etc), and then the earnings from that would need to be treated as within IR35, but then the other would more likely to be outside IR35. If you went outside IR35 you could be liable to having the earnings from the regular work being taxed as inside IR35, but if set up properly (and perhaps have the contract for that job checked by an expert) you should be OK going outside.

Well worth getting better advice, and even worth contacting the IR for advice.

Steelo

Pennywise wrote: »

Your sole trader scenario isn't quite right. You probably won't have to pay as much NIC as you think. There is an upper limit for NICs which I think you will already have reached through your main employment. If that's the case, you'll only be liable to the 1% extra NIC on earnings above the threshold. So your combined tax/NIC on the sole trader route may only be 41%. You'd need to apply for both class 2 and class 4 NIC exceptions to avoid paying the weekly class 2 and the yearly 8% class 4 (usually paid via your self assessment return). After the year end, you'd tell the NIC office your earnings and NIC paid via employment and they'd send you a bill for any extra NIC due. You'd still pay the 1% class 4 via your self assessment tax return though.

Thanks. I had clearly misunderstood - i thought national insurance was completely separate for each job. Yes, looking on the HMRC website, you are correct.

Given the costs of incorporating or using an umbrella company, and given that this is likely to be a one-off (or maybe a two-off), it probably is best to be a sole trader.

I will take professional advice though. Thanks.

TM1976

I agree it's best to take professional advice.

I think you have some of the figures slightly wrong, it's right that you can't choose to be in IR35 or not. You can have some contracts that are IR35 and some that aren't within the same Ltd co. So presumably when you talk about your primary job you mean the job you are currently doing, this would probably be IR35 if you started doing it through a company instead of trading The secondary job I don't think would be IR35 though.

Your Ltd co estimations are incorrect because both are more like (3.). You have included NIC at employee rates, however IR35 rates are actually lower than this, you can also set off some expenses against your NI'able total.

My opinion is although you would pay more professional fees for going the Ltd co route this would be better beacause you can control how you release the profits, ie you don't have to pay it all out to yourself in one go so if you work less hours further down the line you can pay yourself in future years and then pay the tax. Sole traders are assessed on the their tax liabilities as soon as they make the profits.

Here is the link to the IR35 page: http://www.hmrc.gov.uk/ir35/