Employed and self-employed; sole-trader or ltd company for self-employed work?

chrismac1

There were a whopping 59 IR35 investigations in the 2011/12 tax year, this was double that from 2010-11. Granted more staff are now in this area, but my guess is they won't be up to much. My advice to clients on IR35 issues is:

1. Look at the three main tests - ongoing relationship, direction and control and substitution. Make sure you are operating in such a way that you have a strong argument on at least 2 of them, and document such things as the contract progresses. By all means word the contract carefully but it's how you operate that counts not what's on the paper.

2. Ignore the latest drivel on the HMRC website, it's a joke. I could go in to lots of detail on this, or you could just read up on it on accountingweb.com.

3. As long as you have a case for the defence, set up your limited company and get going.

4. Buy good quality tax investigation insurance for around £100 per year.

Relax and get down to work!

Pennywise

chrismac1 wrote: »

There were a whopping 59 IR35 investigations in the 2011/12 tax year, this was double that from 2010-11. Granted more staff are now in this area, but my guess is they won't be up to much.

We've just concluded a tax enquiry into a freelancer working via an agency where the tax inspector was arguing that IR35 should apply.

I thought the client was at risk because he worked for the same agency at the same site for over 2 years and the contract wasn't particularly good. He didn't provide his own equipment and didn't even have PI insurance which was stipulated in his contract.

Anyway, we went back to the inspector hard, emphasising all the good bits of his contract and working relationship and playing down the not-so-good aspects.

Inspector came back as expected with various points which he claimed made IR35 applicable, but they were fairly poor points and he seemed to miss the factors that really swung against the client as per recent court cases. He was very weak generally and didn't seem to have much grasp of the history of IR35 and the decided court cases - the points of many of which actually went against the client!!

We responded hard again, demolishing his points and re-iterating ours.

After that he backed down and accepted that IR35 didn't apply.

To say we were surprised at such an easy win was an understatement! Moreso regarding points of the accounts that he didn't notice and didn't ask about, but which could have been rich pickings for him, such as very high travel, accommodation & subsistence claims (well into grey area as to whether allowed or not), and also training and exam costs (again grey area).

Client was very grateful that they'd paid for our tax enquiry insurance (£75 p.a.) which covered all our costs which ran into several hundred pounds.

So, to echo Chris, my advice is to make yourself aware of IR35 and make sure that you have grounds for belief that you're not caught by it, and back it all up with your accountant's tax enquiry insurance.

cb4fwh

Is there a suggested/advised level of earnings then at which it would be considered worth setting up a company? I've been trying to find an answer to this but have not done so yet.

Accountancy fees will probably cost you £1500 per year, with one of the specialist accountants. I use Brookson, and can recommend them.

cb4fwh

I'm assuming my tax code would still be 810L (although would this be affected by claiming expenses for self-employed work??)

Correct, and no.

I probably wouldn't draw a salary from the self-employed work as my tax-free allowance would be used up in job 1. Or is it just a case of me needing to make a personal decision?!

Taking the £23,460, and the higher rate tax limit of £42,475 you could pay yourself additional dividends

For ease, I've left the expenses out of the equation but assuming income of £26,400 for the self employed work, after 20% corporation tax you will have £21,120 remaining in the business.

Therefore, you could pay yourself gross dividends of £42,475-£23,460 out of the business without incurring any higher rate tax liability / personal taxes. Essentially, £17k or £1416 per month on top of your PAYE salary.

The remaining circa 4k could stay in the business account.

I suggest that you speak to an accountant for further information.

VC76

Thanks all.

pleasedelete - I have looked at prices for contract reviews and found some for a lot less than that, around the £200 mark (e.g. QDOS, Bauer & Cottrell). And like you say, I know that it is just as much about the working practices as it is about the paper contract. Re my expenses, within that I included travel as well as the cost of purchasing a new laptop, my own CPD/training costs, PI insurance, professional membership fees, accountancy fees etc. 4k was a rough estimate but will likely be not too far off this.

chrismac - I think I have scared myself slightly with the IR35 issue; I know it's one to take seriously but when I think about the the current contract and the amendments I want to be made as well as way in which I will be working, I do feel pretty confident that I would fall outside IR35. Thanks for the pointer to tax investigation insurance - I did have a brief look at that but will do so in more detail. Have done a lot of thinking about this and am certainly feeling more 'relaxed and ready to get down to work'

pennywise - thanks for that, it is reassuring (although maybe highlights the shortcomings of this particular inspector more than anything else??!!) I wonder if you would mind maybe sending me a PM with your details so that I can look into what you offer? (if that's allowed!)

cb4fwh - Thanks for the recommendation - I have looked at Brookson. My dilemma in this area is trying to find an accountant I feel happy with but balancing this against fees I feel are reasonable given the income levels I am talking about. Of course I don't want to compromise on the quality of the service I'd receive and am still in the process of searching; reading reviews/getting recommendations from others and speaking to different accountants myself. And thanks for the calculations, that's pretty much what I worked out but yes, will definitely be going over the figures with whichever accountant I choose to go with!

Thanks so much to you all for your replies, am really grateful.

VC

chrismac1

Re. Brookson - pile 'em high sell 'em cheap. I won a client from them and to say the handover was rubbish was generous. Off the record, an HMRC guy who was very helpful at sorting out a few issues - yes they do exist, you just need to look hard to find them! - implied that Brookson are not in a good place.

Simply the worst handover from another accountant I've ever had, out of roughly 70 handovers. A twenty foot barge pole is nowhere near long enough.

PlutoinCapricorn

It seems that the Limited Company is the winner.

I much prefer being a sole trader myself, and doing my own tax returns but the income is not high and my affairs are very simple.

As for IR35, I think it was introduced by the old Inland Revenue many many years ago when people in my then profession of computer programming abused the limited company option. They were full employees, then they created limited companies just to reduce their tax liability and carried on working for the same company 9-5 as employees in all but name. They had the benefits of a limited company without any of the risks: there was so much demand for their services from the 'employer' that they did not have to look for clients or have any time between assignments.

VC76

This is another concern I have. I'm finding that prices don't necessarily reflect service - I looked at and spoke to one yesterday who was charging £150+VAT per month. Then had a look at reviews from other contractors, needless to say I won't be taking up their service!

Conversely there are a couple I've seen whose fees are as low as £30+VAT for the annual turnover I'm currently looking at. Granted, their 'packages' include less than some of the larger more expensive accountants but from what I can see their clients seem happy with their service.

I guess the only way I'll really know is to pick one and give them a go...

VC76

PlutoinCapricorn wrote: »

It seems that the Limited Company is the winner.

I think you might be right!

Agreed re the inception of IR35. It's a shame though that those who genuinely incorporate can be pursued and penalised for doing so. From what I can see, during any investigations the director(s) are from the outset presumed to be 'disguised employees' - basically they are guilty until proven innocent. It seems to me that the current approach taken by HMRC to this issue is a bit nonsensical; I just know that I need to do enough to protect myself should I ever have the misfortune to be caught up in the nonsense!

cb4fwh

chrismac1 wrote: »

Re. Brookson - pile 'em high sell 'em cheap.

Ok, obviously I'm only talking from my own experience! Just to be clear, I've worked with alot of contractors who all use different accountants e.g. Brookson, SJD, local accountants etc.

In the most part, everyone has something negative to say about their accountant. Has my experience with Brookson been 100% perfect? No. Am I happy with the service relative to the cost? Yes.

At the end of the day, it comes down to personal choice.