Redundant and re-employed as a consultant

Madryn

Earlier this year I was informed by my employer's HR department that my job was under threat of redundancy if I did not agree to transfer with my position to my employer's overseas subsidiary. My decision not to transfer has meant that I will be made redundant next week.

As I have some specialist skills I have proposed to provide consultancy services to my employer on an on-going part-time basis (2 days per week on average) after they have made my position in the UK redundant next week. My department manager and business head are willing to accept this proposal in principle and has proposed making payments for my future services through the UK subsidiary that currently employs me (both the UK and overseas subsidiaries will benefit from the services I will provide). However, the UK subsidiary have advised me that the £30K portion of the redundancy payment they will make to me tax free under UK revenue rules could be subject to taxation if I am immediately re-employed by them, even on a freelance basis.

1. Is this true? I have looked at the hmrc website and this appears to contradict the advice I have been given by my current employer (see references below).

2. If it is true, would I be better setting up as a limited liability company rather than a sole trader to avoid hmrc claiming tax on the tax free portion of my redundancy payment.

3. If it is true, would I be better waiting for a period - if so how long - before providing consultancy services to my current employer to avoid hmrc claiming tax on the tax free portion of my redundancy payment.

My business plan is to obtain other sources of revenue for my to-be-created consultancy services business in the forthcoming months. I need all my redundancy payment to set-up and run my new business.

See notes from the hmrc site below

hmrc.gov.uk/manuals/eimanual/EIM13810

"Provided that a redundancy is genuine (see EIM13800), subsequent re-engagement by the same employer or an associated employer does not normally affect the treatment of a redundancy payment."

hmrc.gov.uk/manuals/eimanual/EIM13800

"... an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is attributable wholly or mainly to:

the fact that his employer has ceased, or intends to cease, to carry on the business for the purposes of which the employee was employed by him, or has ceased, or intends to cease, to carry on that business in the place where the employee was employed .....

If anyone could point me towards other legitimate references that confirm or refute my current employer's claims I would be very grateful.

Madryn

princessdon

Another option is a brolly co. that is what my oh did. Redundant - 2 days later consultant via a brolly.

Cavemanu

Yes - but only >3 months after redundacy

hi there,
My former employers company policy official line was that you could not work for them (in any capacity, either as an employee or contractor) until after 12 months had elapsed after the redundancy.

Having said that, I think it did depend on who was hiring and "business need", as there were a couple of cases of people leaving on the friday (as an employee) and starting on the monday but going through a third party umbrella company in order to maintain "arms length" relationship.

Umbrella companies are quite good if you are not sure whether to take the initial plunge of becoming a Limited company/sole trader but they typically do cost upwards of £100 a month for their services, so you would need to factor that in against potential earnings and whether they were your sole clients/whether you can build more of a client base quickly in your particular skillset/skills marketplace. Also some large companies prefer to engage with a limited company rather than a sole trader if you are not sure which route to go and an umbrella also sorts that out. So it might be a temporary solution until you know what type and volume of revenue/work you will be bringing in

Hope this helps

getmore4less

It is done all the time,

Companies mess up and have people back as "consultants".

The company are trying to cover their backs with the warning they don't want you claiming it's an unfare redundacy.

If HMRC say it is contrived and tax/NI the £30k then that helps you with a case.

Remember if you get hit for tax/NI good chance they get hit for NI as well.

lr1277

Yes - but only as a limited company

I was made redundant from the NHS last year. The talk at the time was:

1) I could not rejoin any part of the NHS for 1 month after the redundancy or my redundancy pay would be taxed.
2) I could come back the next day either with an umbrella company or if your employer is willing to consider it, as a director of a limited company. As long as I wasn't working directly for the NHS it would be ok.
The reason it may not be available to you is the basis on which your employer takes on sub-contractor, of which you would be one. Some firms want a trading history, insurance etc. If you go in as part of an umbrella company, they would cover that for you. Also if your company is employed directly, then your company would have to submit invoices, wait for payment etc.
Sorry I can't help on the sole trader question.

HTH.

Madryn

Cavemanu wrote: »

..... I think it did depend on who was hiring and "business need", as there were a couple of cases of people leaving on the friday (as an employee) and starting on the monday but going through a third party umbrella company in order to maintain "arms length" relationship.

Umbrella companies are quite good if you are not sure whether to take the initial plunge of becoming a Limited company/sole trader but they typically do cost upwards of £100 a month for their services, so you would need to factor that in against potential earnings and whether they were your sole clients/whether you can build more of a client base quickly in your particular skillset/skills marketplace. Also some large companies prefer to engage with a limited company rather than a sole trader if you are not sure which route to go and an umbrella also sorts that out. So it might be a temporary solution until you know what type and volume of revenue/work you will be bringing in

Hope this helps

Thank you. princessdon also suggested an umbrella company and I'll certainly look into it. If engagement of an umbrella company is a good way of maintaining an "arms length relationship" as you suggest, why is there a need for an arms length relationship? Is it because the tax situation is vague (and my question wasn't as naive as I first thought) or is it to protect the employer from claims for unfair dismissal as suggested by getmore4less ?

Madryn

lr1277 wrote: »

I was made redundant from the NHS last year. The talk at the time was:

1) I could not rejoin any part of the NHS for 1 month after the redundancy or my redundancy pay would be taxed.
2) I could come back the next day either with an umbrella company or if your employer is willing to consider it, as a director of a limited company. As long as I wasn't working directly for the NHS it would be ok.
The reason it may not be available to you is the basis on which your employer takes on sub-contractor, of which you would be one. Some firms want a trading history, insurance etc. If you go in as part of an umbrella company, they would cover that for you. Also if your company is employed directly, then your company would have to submit invoices, wait for payment etc.
Sorry I can't help on the sole trader question.

HTH.

That's a very helpful second source that reinforces the UK subsidiaries position. But it would appear from what you were told that coming back as an employee of a limited company of which I was a owner/part-owner would allow me to avoid payment of tax personally on the first £30K of my redundancy payment. I understand this is more complex than an umbrella company, so I'll look into the umbrella company option as well. Thanks.

princessdon

Madryn wrote: »

Thank you. princessdon also suggested an umbrella company and I'll certainly look into it. If engagement of an umbrella company is a good way of maintaining an "arms length relationship" as you suggest, why is there a need for an arms length relationship? Is it because the tax situation is vague (and my question wasn't as naive as I first thought) or is it to protect the employer from claims for unfair dismissal as suggested by getmore4less ?

In my oh case unfair dismissal wasn't a factor due to a compromise agreement. It was a combination of Hmrc looking closely and his contract of employment that prohibited return within 60 days. Plus accounts is neither of our strongest points so for us was the best solution. Are you working for others? He wasn't and so inside ir35 therefore strengthened the brolly choice. If outside of ir35 and 2 days a week may give cause to this then brolly may not be best. It was our solicitor who advised the route we took

Cavemanu

Yes - but only >3 months after redundacy

Madryn wrote: »

Thank you. princessdon also suggested an umbrella company and I'll certainly look into it. If engagement of an umbrella company is a good way of maintaining an "arms length relationship" as you suggest, why is there a need for an arms length relationship? Is it because the tax situation is vague (and my question wasn't as naive as I first thought) or is it to protect the employer from claims for unfair dismissal as suggested by getmore4less ?

"Arms length" = that the company is not directly hiring YOU (as an employee) so effectively there is a layer/buffer (either by contracting with Umbrella company or Ltd Company) between you and in this case your previous employer. I don't think this is to do with the redundancy payment taxation treatment issue as such. I don't know what line of work you are offering consultancy services in, but with IT consultants, IR35 is frequently cited (the need to prove at least 2 clients to show you are not effectively an employee). Sure someone with an answer and more knowledge than I will be able to clarify.
HTH

princessdon

Logic tells you that Hmrc won't like a 30k tax free sum then return to work. What their trigger is to look at the figure I have no idea. As my oh payment was way over the 30k most but not all were pure exgratia. Some were not, the chance of looking closely was something we wanted to avoid.

lr1277

Yes - but only as a limited company

I was under the impression that umbrella companies were just that. An umbrella for your company. So you may still have to set up a limited company, but they would handle the invoicing and make account production easier for you.

There is another way forward which is to work for an agency, if your employer is agreeable. See if there are any agencies they use.
Otherwise agencies would bite your arm off if you say you will work with them as you have a definite contract. This gets over the problem of setting up your own company and producing accounts etc. Also gets over the IR35 problem, which I understands affects a broad range of industries, not just IT consultancy.

HTH