Tax question with a small group of freelancers

BobRoberts

I have been freelancing for a while, and recently joined a little group of freelancers. So not an agency or anything, just a little collective. We look like we might be about to land our first client for a reasonable sized project that should take a few months. So all good.
The little collective was started by a guy who has been contracting for a while, has the most experience etc. So he has been the main contact with the client. The plan (which I guess in many ways makes sense for simplicity sake) is that the client will pay him, he will pay the tax, and then share out the rest amongst us.
However, I am unsure on two fronts. Firstly, if I receive my share after he has already deducted tax due, would I be liable for further tax again on that income coming in to me? Obviously it doesn't sound right, as that money would be taxed twice, but on the other hand I am not sure how HMRC would deal with it. I could just not declare it, but that doesn't seem entirely right either. And secondly, the proposed deduction before distribution would be one third. But based on what I typically earn, my tax / NI deductions usually work out at around just 15% of my total income. So whilst its still a good gig, it seems a bit harsh that I would be paying more than double the tax / NI I would if I was being paid directly.
So I guess its an unusual set up, but any suggestions would be good. Basically I'm a bit torn, because all of this is still a great opportunity, but at the same time I don't really want to come unstuck with HMRC, or lose out unnecessarily.

Savvy_Sue

The bit that makes no sense is him paying the tax before distribution, IF you are talking about income tax. There are other forms of tax which might be relevant, of course. 

You need to formalise this 'collective', or at least its arrangements for making payments for this contract, and then re-examine for any future payments. I'm sure the lead contact will want to avoid putting any of you on payroll, but I think you all need to be absolutely clear about your relationship to the collective, and that would include answering a fair few 'what if' questions: what if you get a better offer mid contract, can you just drop out?

Sandtree

What legal structures are you all operating as/under? Sole Traders? Ltds?

Assuming you are all sole traders he will take the income pay you guys your monies and the net will be his profits on which he pays his taxes.  He should be exempt from IR35 considerations in relation to you guys potentially being off payroll employees of his.

You guys then declare that as your revenue, net off expenses and the bottom line is what you pay your taxes on.

There are plenty of other ways this could work but you need to explain the proposal a lot better.

Mistral001

It does not sound right because it is not right.  You need to ask him what tax he plans to pay.  If it is income tax then he cannot pay that for you unless he is your employer and you are an employee.  In that case you would no-longer be freelancers and he would have to do everything that an employer has to do such as pay for a pension, give annual leave etc.  Ask him to explain it and if it still does not make sense ask him if he could explain it to your accountant!

BobRoberts

Thanks for the replies. I am a sole trader, the others a mix of freelance and contractors. So might be a bit more involved with IR35 etc, which I've never really had to worry about as a sole trader. I guess this doesn't sound completely thought through - its totally just because we are all finding our way with this, there is no ill intent or anything. Being as formal as us being his employees is definitely overkill, as the whole point is that we are all equal stakeholders. If it was possible for him to be paid, then distribute, and us all pay our own tax as required that would be the obvious solution to me, assuming there are no practical reasons why that can't happen.

MalMonroe

As someone who is a self-employed freelancer, I really don't like the sound of this at all. What are the benefits for you? 

With this 'collective' it all seems to be operating in the dark with one guy at the helm. Who is he? Is he legitimate? Have you checked him out? No no no! Is what I say. And I totally agree with others who are saying that if you do decide to go with this, it should be with formal and legitimate agreements.

This paragraph rang bells and raised red flags all at once for me - "The little collective was started by a guy who has been contracting for a while, has the most experience etc. So he has been the main contact with the client. The plan (which I guess in many ways makes sense for simplicity sake) is that the client will pay him, he will pay the tax, and then share out the rest amongst us."

If 'experienced guy' isn't a conman I'll eat my hat. Who says he has the most experience? Him? 

I'd get out as soon as possible. Ditch this collective. You're going to end up with lots of work all right but no money - so it really won't matter about tax because you'll have nothing to declare. 

I've come across chancers like this before, they tend to trawl the internet for prey sorry freelancers who are sole traders, sadly. And coronavirus has not helped because they are getting desperate to make money now. I was even approached by someone I didn't know on Linked In! The very nerve.

I advise joining a collective that's there purely for support because working for yourself can be lonely. My support group, even though only online, is fabulous but we continue to work independently, passing on contacts for work to each other and it all works really well. But as for working together, no - never.

J_B

My take ....

Mr Experienced sends the bill and takes the payment which he has to pay tax on.

But, he passes on the funds to all the group which is all tax deductible, so, it shouldn't matter

Is that too simplistic?

Sandtree

BobRoberts said:

the whole point is that we are all equal stakeholders. If it was possible for him to be paid, then distribute, and us all pay our own tax as required that would be the obvious solution to me, assuming there are no practical reasons why that can't happen.

Then that starts sounding like a partnership but that too may be more formal than you want.

He can be the lead contractor and you sub-contractors if thats how you want to play it but what benefit does it bring to you? I am not suggesting he'd do anything bad but if he runs off with the money, goes bust etc you have no recourse against the end client. Similarly he will be taking on the initial liability for the quality of your work to the end client. You will also be in the dark as to what he is billing your time out at to the end client so you could be charging him £50 an hour but he's billing the client £75/hr which isnt a problem if your happy with the £50 but may leave a sour taste.

Its a solution that can work, many consultancies etc use contractors to do work for their end clients, but you need to be clear on the WIIFM and consider it worth the risks.

bris

He takes the money so it's his money, he has to pay tax on this. 

He then pays the individuals in the group, this is not tax free, the two are not related. The individuals need to do their own tax return and pay any tax due. They are sub contractors so they may even need to be on a CIS system.

P.s I forgot to mention anything that he pays the group would be an expense to the contractor it would be a deductable expense to him.

The group needs an accountant who can sort out the best way forward.

BobRoberts

MalMonroe said:

As someone who is a self-employed freelancer, I really don't like the sound of this at all. What are the benefits for you? 

With this 'collective' it all seems to be operating in the dark with one guy at the helm. Who is he? Is he legitimate? Have you checked him out? No no no! Is what I say. And I totally agree with others who are saying that if you do decide to go with this, it should be with formal and legitimate agreements.

This paragraph rang bells and raised red flags all at once for me - "The little collective was started by a guy who has been contracting for a while, has the most experience etc. So he has been the main contact with the client. The plan (which I guess in many ways makes sense for simplicity sake) is that the client will pay him, he will pay the tax, and then share out the rest amongst us."

If 'experienced guy' isn't a conman I'll eat my hat. Who says he has the most experience? Him? 

I'd get out as soon as possible. Ditch this collective. You're going to end up with lots of work all right but no money - so it really won't matter about tax because you'll have nothing to declare. 

I've come across chancers like this before, they tend to trawl the internet for prey sorry freelancers who are sole traders, sadly. And coronavirus has not helped because they are getting desperate to make money now. I was even approached by someone I didn't know on Linked In! The very nerve.

I advise joining a collective that's there purely for support because working for yourself can be lonely. My support group, even though only online, is fabulous but we continue to work independently, passing on contacts for work to each other and it all works really well. But as for working together, no - never.

I know what you mean, but I can honestly say that there are no red flags - he is well established, known, respected and active in the industry, with a bona fide professional profile, experience, mutual contacts, and portfolio. Which I realise perhaps sounds naive, but I genuinely think all of this is more about him just being a straight up decent guy, who wants to keep things as simple as possible, but just hasn't thought this through well enough. 

BobRoberts

MalMonroe said:

As someone who is a self-employed freelancer, I really don't like the sound of this at all. What are the benefits for you? 

With this 'collective' it all seems to be operating in the dark with one guy at the helm. Who is he? Is he legitimate? Have you checked him out? No no no! Is what I say. And I totally agree with others who are saying that if you do decide to go with this, it should be with formal and legitimate agreements.

This paragraph rang bells and raised red flags all at once for me - "The little collective was started by a guy who has been contracting for a while, has the most experience etc. So he has been the main contact with the client. The plan (which I guess in many ways makes sense for simplicity sake) is that the client will pay him, he will pay the tax, and then share out the rest amongst us."

If 'experienced guy' isn't a conman I'll eat my hat. Who says he has the most experience? Him? 

I'd get out as soon as possible. Ditch this collective. You're going to end up with lots of work all right but no money - so it really won't matter about tax because you'll have nothing to declare. 

I've come across chancers like this before, they tend to trawl the internet for prey sorry freelancers who are sole traders, sadly. And coronavirus has not helped because they are getting desperate to make money now. I was even approached by someone I didn't know on Linked In! The very nerve.

I advise joining a collective that's there purely for support because working for yourself can be lonely. My support group, even though only online, is fabulous but we continue to work independently, passing on contacts for work to each other and it all works really well. But as for working together, no - never.

I know what you mean, but I can honestly say that there are no red flags - he is well established, known, respected and active in the industry, with a bona fide professional profile, experience, mutual contacts, and portfolio. Which I realise perhaps sounds naive, but I genuinely think all of this is more about him just being a straight up decent guy, who wants to keep things as simple as possible, but just hasn't thought this through well enough.