Self-employed - ltd Company or no ltd Company

nicsonian

Hi,

I am newly self-employed. I expect to earn around £60000 this year from a couple of consultancy contracts. I invoice my hours and am paid within 30 days of the invoice.

Currently my customers pay me as an individual. However, I have been advised that setting up a ltd company and having my customers pay me through that will be more tax efficient. Is this true?

I know how to set the ltd company up in terms of registration, but how would I need to organise the finances within it and what paperwork is involved?

Thanks
Ian

HappyMJ

Yes it is true. Lots of paperwork. You are best speaking to a tax accountant who can help with the tax side of things. You can pay yourself dividends which are free from national insurance contributions. Most companies will not deal with sole trader's for some consultancy work especially when they are the only client ... they may be deemed by HMRC to be employing you ... but if you have a company it is a bit further proof that you are doing this as a business and they can pay you gross without tax being deducted.

Nicola_Ed

Hi

You may have an IR35 problem if you trade through a company - if you google IR35 you will find plenty written about this issue but it is a complicated area of tax law. Basically you may not be able to gain the tax benefits of paying dividends if your contract is deemed to be inside IR35. The link below may help:-

http://www.clearskyaccounting.co.uk/guides-and-faqs/ir35/

pjclar02

I would first of all make sure you are comfortable with the IR35 risk, by going through the test in this and scoring your situation:

http://www.hmrc.gov.uk/ir35/guidance.pdf

If you are high risk, then you are within IR35 and run the risk of detection. If HMRC successfully challenge the position, then you may well end up being worse off tax wise than you would have been if you were self employed.

If IR35 doesn't apply then you will be better off as a limited company from a tax perspective.

I would recommend that you register for PAYE and pay yourself a small salary of £624 per month, and then top this up with dividends.

You probably want to look at registering for VAT and getting yourself onto the flat rate scheme, where you will probably make a small profit.

Hope this helps

nicsonian

Thanks - yes, I've been looking into the IR35 situation and will certainly give it some more consideration. Thank you all for your advice. I think that the Ltd company and registration for flat rate VAT is the way forward.

Thanks again.

chrismac1

It's worth noting that:

1. The HMRC stuff has no legal standing and has been widely ridiculed.
2. Sensibly set up you have nothing to fear from running a limited company. You pay tax investigation insurance for £90 per year, you mitigate your risks in various ways and you are ready to respond to any HMRC enquiry within 48 hours, so they go off and hassle an easier mark.

There are 3 key tests which have been endlessly through the Courts:

1. Substitution - practically no-one passes this, so can be ignored though your contracts will probably have this clause in them they usually fall apart in Court as most contracting organisations would not allow them to be operated.

2. Direction and control - hopefully you have a lot of this, in that at your level of pay most people get set specific goals and have a lot of say in how those goals are achieved, where and when the work is carried out, that sort of thing.

3. No ongoing relationship - as you have more than one customer, you ought to be able to set things up in such a way that you pass this test. i.e. have at least one period of say 3 or 4 weeks every year when each customer is not requiring your services. Then not only does your contract specify there is no ongoing relationship - which I am confident it will - you can demonstrate that in practice there has been none.

So in the key tests you should confidently score 2 out of 3 if you do your stuff. You have the insurance so if HMRC choose to waste public money pursuing you, you can waste insurer's money defending yourself.

Job done. Tax efficient and you can sleep at nights.

nicsonian

Thank you for such a comprehensive reply. I'm sure that I would pass on all of those. As for the Tax Investigation Insurance, I'd never previously heard of it, great advice.

Thanks again!

wizzer

chrismac1 wrote: »

It's worth noting that:

1. The HMRC stuff has no legal standing and has been widely ridiculed.
2. Sensibly set up you have nothing to fear from running a limited company. You pay tax investigation insurance for £90 per year, you mitigate your risks in various ways and you are ready to respond to any HMRC enquiry within 48 hours, so they go off and hassle an easier mark.

There are 3 key tests which have been endlessly through the Courts:

1. Substitution - practically no-one passes this, so can be ignored though your contracts will probably have this clause in them they usually fall apart in Court as most contracting organisations would not allow them to be operated.

2. Direction and control - hopefully you have a lot of this, in that at your level of pay most people get set specific goals and have a lot of say in how those goals are achieved, where and when the work is carried out, that sort of thing.

3. No ongoing relationship - as you have more than one customer, you ought to be able to set things up in such a way that you pass this test. i.e. have at least one period of say 3 or 4 weeks every year when each customer is not requiring your services. Then not only does your contract specify there is no ongoing relationship - which I am confident it will - you can demonstrate that in practice there has been none.

So in the key tests you should confidently score 2 out of 3 if you do your stuff. You have the insurance so if HMRC choose to waste public money pursuing you, you can waste insurer's money defending yourself.

Job done. Tax efficient and you can sleep at nights.

I started contracting about 3 years ago. It was only going to be short term(!) so I went with an Umbrella Company. I'm still contracting though and I've got more and more fed up with the service of the UC and the additional costs/reductions in income that I seem to bear through this route.

Trouble is, I pretty much just do work for one client organisation. I am very independent in the way I work (pretty much my own boss) and because the director I work for has no knowledge/expertise of what I do I really recommend what's to be done etc and he accepts the advice etc. Whilst some of the work is project based I also undertake much of their day to day work like an employee would.

I would like to go down the Ltd Co route but worry about the IR35 implications. Should I or is the risk quite small particularly if backed up by tax investigation insurance?

Thanks

chrismac1

I will give you the standard accountant's answer "That depends"! In this case it very much depends on how the contract is drafted and, more importantly, how it is being operated.

It's worth saying that HMRC in my view - and that of many accountants - are in a right mess over the whole issue of self-employment and so-called "false self-employment."

T Coffey (TC) / Dr. Selvarajan (S) and HMRC

In this case HMRC were arguing that the person was self-employed, and they won that Tribunal Case. Great short term result for HMRC. However, you can only wonder what the IR35 department thought of the numpties who brought this case, because in essence HMRC were arguing against their own regulations on self-employment in order to convince the Court that the guy was self-employed. You can't make this stuff up!

My advice to clients on a practical level is:

1. Get a well drafted contract.
2. Run things with IR35 in mind at all times.
3. Keep a diary record of all specific instances when you were clearly treated as self-employed, and share this with your accountant.
4. Pay for the insurance.
5. Sleep well! (safe in the knowledge you've got less to fear from IR35 than most contractors).