Helping a friend's business, tax implications?

Technosaurus

Hi - help needed please !

I am currently on a career break. A friend of mine, who has their own sole trader business, has asked if I would be able to help them with a few 'admin' tasks - chasing debtors, help at trade conferences, keeping track of leads etc.

I said I'd be more than happy to do this for free. However things have gone unexpectedly well and we are starting to generate some sales and the other night were talking about me taking a "commission" on sales - essentially voluntary work but taking a cut if/when there is success.

What are the tax implications of this? I assume I would have to declare these on a tax return and pay income tax accordingly (I was paying income tax/NI via PAYE until late August when I finished paid employment)?

Also, under this arrangement, would I technically count as an employee, in which case would my friend have to set up a workplace pension etc?

Are there any more efficient ways of doing this arrangement, eg setting myself up as a consultancy - not necessarily to avoid tax but to avoid the pension stuff?

Thanks for any help,
Technosaurus

Savvy_Sue

I think you and your friend would benefit from talking to an accountant, but

Technosaurus wrote: »

However things have gone unexpectedly well and we are starting to generate some sales and the other night were talking about me taking a "commission" on sales - essentially voluntary work but taking a cut if/when there is success.

What are the tax implications of this? I assume I would have to declare these on a tax return and pay income tax accordingly (I was paying income tax/NI via PAYE until late August when I finished paid employment)?

Yes, in the simplest model you'd register as self-employed and complete a tax return.

Technosaurus wrote: »

Also, under this arrangement, would I technically count as an employee, in which case would my friend have to set up a workplace pension etc?

Potentially you'd count as an employee, but not necessarily. Check the HMRC pages for the test of whether you're self-employed or not (sorry, too tired to google for them for you). However you might not earn enough to qualify for a workplace pension, and your 'employer' doesn't have to contribute if you opt out.

Technosaurus wrote: »

Are there any more efficient ways of doing this arrangement, eg setting myself up as a consultancy - not necessarily to avoid tax but to avoid the pension stuff?

Well, if it's going to be a long term arrangement, then a partnership might benefit both of you, or if you think you might take on other similar roles then you being self-employed etc.

That's why I'm suggesting talking to an accountant. but whatever you do, please get a proper agreement drawn up, BEFORE you fall out over anything ...

Technosaurus

Thanks Savvy_Sue, much appreciated. What started out as a bit of an excuse to get out of the house and helping send a few emails has turned into a potential genuine income so I want to do things properly from the outset: I appreciate your advice.

PasturesNew

In the olden days you'd have just registered as self-employed and generated an invoice at the end of each month (from yourself, or produced on the company headed paper) that showed your commission due/paid based on the sales volume. Then you'd have done a tax return at the end of the tax year and paid what was owed.

However, working in this way, for one "employer" is something that many rogue employers did in the past - said people were self-employed in order to avoid their obligations as an employer. That's why you need to double check your status and how to pay any tax due.

However it ends up, tax would be calculated on the income - but the income needs to be high enough to reach the thresholds before tax was actually due to be paid.

e.g. if you earnt £20/week there's probably no tax to pay (it's total income/year that you work it out on, from all jobs done in that tax year).... but if you earnt £1000/week then there's definitely tax to pay.

Technosaurus

Thanks PasturesNew.

Because I was in paid employment within this tax year I'm through the tax-free threshold already so even if I take a small cut on a small sale I'll have to 'fess up to HMRC somehow!

looknohands

The HMRC test points out a few things, I have a friend working for me who does exactly the same work, he looks for leads.

Commission based, 20% of profit from each successful lead.
high financial risk for worker

Can work where he likes (office or home), when he likes, how he likes, finds all his own leads, isn't instructed what type of clients to look for etc.. works in his own time.
low level of control from myself.

The only thing that leans towards employee for us is that I wouldn't allow him to substitute himself as the worker, he's a specialist, he's good at what he does, I want him doing the work.

Our working relationship seems similar to yourself, I want him to work full-time on the company eventually as a business partner, the 20% for each lead is very generous.

We have a great product but at the moment we just don't have enough clients to sell for him to have a full-time contract, which would actually be a more vulnerable situation for him currently if he leaves his job.

Technosaurus

@looknohands , that is almost exactly our situation!

My friend's business isn't big enough to 'employ' me full time in the traditional sense, and nor would I want that either as there were various reasons for me taking a career break. I work when I want, if I can get him some customers with a bit of social media or chase down his outstanding debts with old-fashioned hassling then great, if not then I don't take a salary so zero risk to both of us.

The only risk is inadvertently breaking employment laws or accidentally evading tax!

What was the outcome for you and your friend's situation?

looknohands

We did the check on the HMRC website just to be sure if we are investigated we are not breaking any employment rules. Just be clear as you can on all statements, you then receive a PDF stating this.

Your engager won't need to declare anything, just keep the PDF as evidence I believe.
In terms of evading taxes, you need to just make sure you're registered and paying taxes through self-assessment.

I think the key is to make sure the engager and worker are both in agreement and happy with what they're getting from this. My workers are happy with how we are working together, if they can complete a project quickly they get renumerated very well, better than if they were salaried.

It would be cheaper for me to salary someone and likely it will turn this way for your friend. But at the moment the low-risk of self-employed workers is easier.

I guess when the company is successful enough that it can employ someone to do what you're doing you want to be first in-line. Do you trust that he won't just go and hire someone else on a low salary?

Technosaurus

Thanks again @looknohands

My friend himself says that his business only has a certain shelf-life as he deals with a specialist area of IT which probably won't exist in 2/3 years time as technology moves on so it's very much a case of 'make hay while we can' which was why I got involved as wanted to help him out and I genuinely had nothing better to do at the time having quit a 'proper job' a few weeks before.

If it does go differently and grows into something where other salaried staff are involved, do I trust him? Yes absolutely. But even if this is misplaced my other option for the next 6-12 months was to do "sweet FA" so the entire arrangement suits us all down to the ground (including, importantly, my wife who wasn't overly happy with my zero income plan!!!).