Short-term contract - what should I do?

CountryBath

Hi

I was made redundant at the end of March and have been living off redundancy insurance since then. My only income this tax year was a £15k share payment from my old employer. Tax was deducted at the lower rate.

I have been offered a 7 week contract starting on November 1st. The payment will be £12000.

I do not yet know what my income will be from January to March (if any), but I am looking for a permanent role and don't expect to remain contracting. My previous monthly gross salary was £5k.

What I need to establish is what is the most tax efficient way for me to handle this £12k payment. I have had a call via the job agency from a company called liberty bishop who have offered to pay me as an employee under an umbrella company for £26+VAT (deductible) per week. They take care of all paperwork. They said they can deduct my mileage at 40p per mile which would equate to a deduction of £1800, plus £5 per day for food (presumably this is the same for the self-employed options).

Alternatively could I earn more net, operating as either a sole trader or ltd company? If so is a local accountant the best option to proceed?

If relevant my wife works part time (21 hours pw) and earns £24k pa.

Any advice gratefully received. Thank you for taking the time to read this.

HappyMJ

It's up to you. Umbrella Company is the easiest but pays the least. You most probably won't be able to be a sole trader agencies prefer to deal with Limited Companies. There is a lot of paperwork but can be quite lucrative to do. You'd need to get a company set up ASAP. This can be done online. Then you register with hmrc as an employer for tax purposes and also register for vat. Then you need to get a company bank account there are plenty of free ones around. You also need insurance as well. Public liability, employers liability and maybe professional imdemnity.

GRM

I'm pretty sure the most tax efficient method would be to set up your own limited company, pay yourself a minimal wage and then have the company profits taxed at corporation rates.

Whether you can get all of that set up before 1st November and have the contract signed by your limited company may be a key point.

If you don't intend to continue contracting then the one-off costs associated with a Ltd may mean that your bottom line income may be the same or even less than going down the brolly route.

I was in a very similar position last year. I decided to go with a brolly company it worked very well IME. I used http://www.parasolgroup.co.uk and had no problems with them. They have some good guides to what is and isn't claimable to reduce the tax burden - IIRC the £5/day can be increased to £20/day if you leave the house before 7am and get home late.

The Contractor UK forums were also very helpful.

HTH.

CountryBath

Thanks, I forgot to mention that the plan is that I am employed via the agency and they will invoice the end client. The agency don't care what I do. They will simply pay me two monthly payments of £6k.

Does this change anything?

GRM

I would expect the agency to insist that they deal with a limited company; either your own or an unbrella company. I would be very surprised if they agreed to pay you directly as a non-VAT registered sole trader.

chrismac1

It would be ideal NOT to be a limited company, these become tax-efficient at net PROFITS of £12k and only then if you can find an accountant to sort out everything for £500 or less. If it was me, I'd very much want to be a sole trader on this one and claim all relevant expenses including business mileage. Registering for VAT is optional until you hit £70k sales - but if you're confident all future clients will be VAT-registered then it allows you to reclaim input tax back on expenses, for example the fuel element of the 40 pence per mile

CountryBath

Thank you. The agency don't have a problem dealing with a sole trader. They are a small company and have confirmed that I can handle however I wish.

As I haven't earned much this year I wondered if the umbrella company option might work out as I would only pay lower rate tax this year and they also advised they can deduct travel expenses.

I don't know how this stacks up v tax/NI for sole traders.

GRM

If the agency are happy to accept an invoice that you've knocked up in Word then I would DIY and avoid the brolly fees. Complete a self assessment at the end of the 2010/11 tax year and claim for all the available allowances. You'll get to bank the twelve grand gross now and not have to pay the tax liability until late 2011.

CountryBath

Thanks GRM. However what I don't understand is what my status is then i.e. by simply sending an invoice am I employed and if so is it just by the agency? Don't they therefore have obligations?

Also what would happen with my p45? It is currently with the job centre. Thanks again.

GRM

For the seven week period you are self employed, providing a service to the agency who pay you just like any normal trade supplier. You will not be their employee.

You should tell the job centre that you are signing off for those 7 weeks.

CountryBath

Ok thanks. I have already told the job centre and my insurance providers. So by simply sending an invoice and being self-employed is there anything I need to do apart from complete a tax return next year? Don't I need to do something to become a sole trader?