Advice needed regarding setting up side job as a sole trader + paying a friend for consultancy work

joecmorgan21

Hi all,

I'm a software developer earning around £40k in my full time employment. I make some money on the side making websites every now and again, but never over £1000 a year. I've recently taken on a larger project (for company 'X') which looks like it's going to be paying around £8k over 2 months or so, with potential for an additional £200 or so each month for support work, once the project is compete.

Myself and a friend have agreed to split the work and money made 50/50, however in his employment contract it states he's not allowed to take on any work outside his full time employment. Our plan was for me to register as a sole trader (using the company I use to make websites), have company 'X' pay me each time we invoice them (so roughly £8k lump sum for the initial build, plus £200 a month for 12 months), then send half of the money to my friend once I've been paid. We'd then file our individual self assessment forms on half of the earnings (so around £5k for the year maybe).

I have the following questions: 

1. Is the above the best way to go about it? 

2. As the side job money is going directly to me, and has potentially to be over £10k for the year, will this push me into the higher tax bracket (£40k full time + £10k side job)? I'm assuming this won't be the case, as I'd only be telling HMRC about half of that amount on my self assessment form? 

3. Will either/both of us be eligible for the £1000 self-employment trading tax allowance? If so, how do we receive it? 

4. Is there anything else I need to be aware of/look into?

Thanks in advance for any help - we're both complete novices when it comes to self employment so any advice is appreciated.

Sandtree

1) its an ok way about it but doesn't get round his employment contract issue

2) Its profits that matter, not revenue, as 50% goes to your subcontractor then it'd be £5k profit declared

3) Fill in your self assessment forms and it will be automatically calculated. The issue with self assessment is claiming for things you aren't entitled to or failing to claim for things you are entitled to but any allowances etc are automatically calculated so no concerns there. Whilst you dont have to do self assessment if your revenue is under £1k that doesn't mean there is a £1k allowance... remember tax is on profits whereas the exception on self assessment is on revenue not profits

4) As per 1... he is still in breach of his contract of employment. Clearly you are both running various risks... he that you dont pay up... you that he does a duff job and you exclusively get landed with the bill of fixing it 

DE_612183

surely your friend can just be paid dividends - then the employment thing is not an issue - just sell him some shares?

Sandtree

DE_612183 said:

surely your friend can just be paid dividends - then the employment thing is not an issue - just sell him some shares?

OP is a sole trader so no shares to issue dividends

A shareholder doesn't work for their dividends if the OP decided to incorporate and give the friend 50% of the shares

DE_612183

Sandtree said:

DE_612183 said:

surely your friend can just be paid dividends - then the employment thing is not an issue - just sell him some shares?

OP is a sole trader so no shares to issue dividends

A shareholder doesn't work for their dividends if the OP decided to incorporate and give the friend 50% of the shares

ah, yes sorry - I was thinking about Ltd Co set up.

joecmorgan21

Thanks for the replies, very informative. 

The relationship between myself, my friend and company X is very informal/friendly. The company has reached out to us (through a mutual friend) to help code a new project, and we have agreed to split the work and money 50/50. Seeing as the company won't be paying us 50% each (they just want to pay a person/company to do the work), we did some research and found that one of us (me) would need to register as a sole trader, and invoice the company for the work. Then I'd send half of the money to my friend. We just need to make sure that we're above board with regards to paying tax, but need the solution to be as simple as possible. 

My friends employment contract issue isn't major, he's actually moving jobs and his new contract is much more lenient, it's just that if one of us had to set up as a sole trader it made more sense for it to be me.

Thanks again for the feedback, this is all new to us.

Sandtree

Informal is great to start with but many people have become unstuck when either informal has become much looser (so payments aren't made) or all of a sudden its not so informal when things go wrong... just remember a lack of a written contract doesn't mean one doesn't exist.

If you dont care about your friend's employment contract, it seemed as if you did in the original post, then your proposal is fine as long as you accept that if X charges you £Z because the website wasn't secure and they've suffered a major data breach that you alone are liable for it and have to do the rectification work at your own cost without the aid of your friend. 

You can try and formalise the relationship with contracts but even if the issue with the code is 100% their fault its may not be possible for you to pass all the costs on to them

joecmorgan21

Completely take that on board, thanks so much.

We've written up a contact with the company regarding the service/product we'll be providing, the price per hour, the service/support period, what we define as a bug/improvement etc. so I think we've taken the correct steps there.

It sounds like we might be on the right track - I'll register as a sole trader, invoice the company for the work, pay my friend half and both of us file a self assessment form individually.  Thanks for your help 🙂.

Jeremy535897

The problem I foresee is that if you contract with the company to provide the service, and you pay your friend half the money you receive as a sole trader, you are employing your friend and need to operate PAYE. That will also cost you the employer's NIC on the wage paid to your friend.

You may also find that you are treated as an employee by the company (if IR35 applies for example).

joecmorgan21

Can I not pay me friend as a consultant, and not an employee? I appreciate there may not be a massive (or any) difference, but surely self-employed regularly people pay other people for help without operating PAYE? In what case would be be treated as an employee of the company we're working for?

Jeremy535897

It depends on what the facts are. See:
https://www.gov.uk/employment-status/employee

Your friend will only be working for you (ignoring his other employment), and presumably you will require him to do the work rather than a substitute. IR35 is discussed here:
https://www.gov.uk/guidance/understanding-off-payroll-working-ir35