Setting up my own company to avoid tax

Sillychuckie

I will shortly be starting full time employment, but I am under a contract for the first year.
I don't know whether that officially makes me a 'contractor' or not, but will ask the company when I go back on Monday for one final chat before sealing the deal.

Anyway, If I am a 'contractor' (whatever that means), I understand that I can avoid tax by setting up my own company and asking them to pay the company as opposed to myself directly. What are the steps to go about doing this?
I hear the government are trying to crack down on people doing this, so what form as that taken?
I assume it is more complex than just opening a business bank account, so any information or suggestions from anyone would be much appreciated.

Thanks.

WHA

Being "under contract" doesn't automatically make you a contractor. To be a contractor you must be self employed, not employed. However the following may be useful:-

1, You can't "avoid" tax by setting up a company. You "may be able" to reduce your tax.
2, You would need to form a private limited company, in which you would be the shareholder and director. There are formalities and costs involved with forming and operating a private limited company.
3, Do you have to be a "contractor"? And if so, do you have to have your own limited company or would they allow you to be a self employed sole trader instead?
4, There is a rule known as IR35 which basically removes the tax reduction benefits of having your own limited company - you need to take professional advice as to whether your contract would be caught by this rule.
5, If you are either a self employed sole trader or trade through your own limited company, you should be on a far higher "wage" than if you were employed to compensate you for having virtually no "employment" benefits such as sick pay, paid holidays, right to notice & redundancy, and other employment benefits and rights. Being self employed either way reduces your "employers" costs and obligations and you must be compensated adequately.

I would seek proper professional advice before your sign your contract - becomming self employed is not something to do lightly - you need to know all the pros and cons. There have been many previous threads dealing with these issues on the tax and the small business forums on this website, and you can also look at the UK contractors website https://www.contractoruk.com for more information. Whatever you do, educate yourself about self employment and limited companies before you sign.

PoorDave

I set up my own limited company for less than £30 online, which took about a 3 hour wait from submitting the info. PM me and i'll tell you who i used if you're interested.

I am currently an aerospace contractor.

I currently pay about 14% tax + NI in total, rather than the up to 30% you will be forced to pay in total in full time employment for basic rate income tax and NI.

The word on the street is that IR35 is dead, and i still don't think they ever caught anyone through it. Might be wrong

reddevilled

I would be very wary about doing anything without taking proper advice from a professional. This is a decision which is not to be taken lightly. There are a lot of implications to consider as well as the potential tax saving.

A large proportion of people find that the administrative burden and costs of setting up a limited company and making sure it is administered correctly means any potential saving is severely mitigated.

The government is cracking down on these sorts of companies, most recently and notably by removing the advantage of paying divis out of a small company. You would have to ensure that either you pay to be kept informed by a professional or make sure you do it yourself.

greyster

Tax evasion is illegal.

Tax avoidance is not, if done properly with professional advice taken when needed.

[Thanks to the locals for the correction]

I did a four month contract knowing that I would be offered full time permanent work afterwards. Phoned a tax specialist (ran by two ex-inland revenue inspectors), paid them £80 to review my contract and negotiate a couple of modifications to some contract clauses with the "client" on my behalf. I'm now doing this contract outside IR35 and earning approximately 23% more than if I was not to have taken this route.

I can give you the name of the tax specialists if your interested. They will tell you whether you can or can not ... they are also suppliers to the PCG and do defend cases vs inland revenue. They are legends and its the best £80/advice I've spent.

It should be £160 but they have special rates if you use their preferred payroll companies. The one I use charge £20 a week and completely manage my money under a personalised umbrella aka my own ltd business. They only set up my company once my contract had been read by the tax specialists.

greyster

PoorDave wrote:

The word on the street is that IR35 is dead, and i still don't think they ever caught anyone through it. Might be wrong

From our perspective it is .... but if you talk to these tax specialists they are defending people caught my the IR on a daily basis. However from talking to my one she has said these are people earning triple figures for years.

Just to point out that if caught by any inspection by the IR, it will cost thousands to defend yourself against them, whether you win or lose. These cases go on for months and even years. If you lose you will pay all the tax you evaded back and a possible fine. If you are going to set your own biz up for a year or more YOU SHOULD take out "IR35 insurance." This will cover defence costs and even any tax you will owe to the IR, if you lose. Costs about £300 a year. Only insurance company I know that does it is - http://www.qdosconsulting.com/

Again, my tax specialist people do defence work for people who took out this insurance.

Cook_County

The acid test for tax specialists is not what they used to do but what qualifications they have.

Generally speaking I would only recommend using advisers who are Chartered Tax Advisers (there are many exceptions if other specialities are required).

I do not know what qualifications Greyster's advisers have...I expect s/he knows, because checking out the precise credentials of a professional adviser is always a good thing to do.

To return to the original question, running a company requires you to comply with company law as well as adding extra sets of tax rules.

Umbrellas have become extremely fashionable (which must be why someone just paid £2,000 for 3 of Princess Margaret's plastic umbrellas in the last few days). However Gordon Brown has indicated a willingness to close these down. The umbrella provider usually takes little risk, just requiring you to pay over commission. The tax return risk remains with the contractor, which does make insurance sound a good idea.

ctm_2

greyster wrote:

Tax is avoidance is illegal.

Tax evasion is not,...

You got that the wrong way round.

Avoidance is using loopholes in the legislation and other means to reduce your tax liability by using methods that mean you pay less tax than if you were receiving the income in other ways.


Evasion is illegal and is basically hiding income in such a way so as to not pay tax that is actually due on it.

Robert_Sterling

greyster wrote:

Tax is avoidance is illegal. Tax evasion is not.

Faux Pas of the year.

greyster

bearing in mind i wrote it at past 1 in the morning, it was a typo sorry.

but thanks for pointing it out.

Sillychuckie

Ok.
Thanks all for the tips and advice. I think it will turn out that I'm not actually deemed a contractor and am just 'under contract'. I got the job via an agency where I specifically searched for 'full time' permanent work as opposed to 'contract' work...
No doubt this will become entirely clear when I see any contract they might offer me.
I assume I should look for things like:
- Paid holiday
- Pension
which I imagine a typical contractor doesn't get. If it turns out I am a contractor then I'll get further advice from people that know what they are doing. There is clearly much more to it than I had initially imagined.
Greyster, I'll pm you for those peoples details if necessary.
Thanks again.