New Ltd Firm and IR35
Discussion
I have just landed a contracting job and have been advised by several sources that starting a Ltd firm is the best way to maximise my "take home" income.
I have done a reasonable amount of research into this but still haven't found a source that explains IR35 in layman's terms, hence my posting here....
Quick question to begin..
If I am working on one contract through an agency for fairly regular hours do I fall into the IR35 category?
I have done a reasonable amount of research into this but still haven't found a source that explains IR35 in layman's terms, hence my posting here....
Quick question to begin..
If I am working on one contract through an agency for fairly regular hours do I fall into the IR35 category?
It may be easier to use an umbrella company to manage this for you.
At least then someone takes care of it until you are sure you want to go ltd and it gives you more time to plan - it turned out i was taken on by my company 2 months into the contract so I was glad I didn't set up a ltd.
The company I used was Parasol IT who I found to be pretty efficient.
At least then someone takes care of it until you are sure you want to go ltd and it gives you more time to plan - it turned out i was taken on by my company 2 months into the contract so I was glad I didn't set up a ltd.
The company I used was Parasol IT who I found to be pretty efficient.
I am thinking it may be worth doing that, but having been quoted by one firm who shall remain large but very nameless 
, they quoted me £35 / week. Thats nearly £2000 a year!
I discussed this with an accountant relative who said fees for setting up the firm are around £100-£200 followed by around £300 for annual accounts checking. When we're talking about saving £1500 a year, I am thinking I may make the effort and do the paperwork. Other aspects that are affecting my decision include running my own pension fund and the fact that I also do some part time race instructing for which I could invoice from the same company?
You do raise an interesting point with regards to employment though, it may well become a "permy" job.
, they quoted me £35 / week. Thats nearly £2000 a year! I discussed this with an accountant relative who said fees for setting up the firm are around £100-£200 followed by around £300 for annual accounts checking. When we're talking about saving £1500 a year, I am thinking I may make the effort and do the paperwork. Other aspects that are affecting my decision include running my own pension fund and the fact that I also do some part time race instructing for which I could invoice from the same company?
You do raise an interesting point with regards to employment though, it may well become a "permy" job.
I think mine was costing me £20 or so a week.
I think you could certainly bill you race instruction through your company if you were to set one up so it would be convenient in that respect. You could probably sort this through an umbrella comapny too, but I'm not sure how hard it is. One thing to consider is that an umbrella will provide insurance cover that you would otherwise take out if you set up a ltd (can't remember the details but its certainly mentioned on the Parasol IT site.)
I can also tell you someone I wasn't too impressed with in terms of umbrella co services but thats probably best done offline! Drop me an email if you want a bit more info.
I think you could certainly bill you race instruction through your company if you were to set one up so it would be convenient in that respect. You could probably sort this through an umbrella comapny too, but I'm not sure how hard it is. One thing to consider is that an umbrella will provide insurance cover that you would otherwise take out if you set up a ltd (can't remember the details but its certainly mentioned on the Parasol IT site.)
I can also tell you someone I wasn't too impressed with in terms of umbrella co services but thats probably best done offline! Drop me an email if you want a bit more info.
I can assure you that no lay person or even a non-practising accountant can successfully complete a fully compliant set of limited company accounts. They are that detailed and technical.
I would suggest that the annual fee for the completion of a ltd co set of accounts (in full statutory and abbreviated formats), submission of same to Companies House and HM Revenue and Customs, completion of the company's Corporation Tax return form, registration of the company for PAYE and VAT and submission of the annual PAYE returns to the Revenue with all the attendant compliance and tax calculations and checks) etc normally would cost in the region of £600 to £1,000 per annum (depending on the size of the company and how much involvement the outside accountant has in the day to day running and planning of the business).
The original thread asked about IR35. Here goes.
If an individual (as a person) works for an organisation there is a good chance that they should be treated as a normal employee for tax and NI purposes i.e. be under the PAYE system. In other words, the circumstances under which they work would prevent them from being paid as if they were "Self Employed" individuals.
In the past, and especially in the IT industry, a common "trick" was to have the individual set up his own ltd co. and have his "employer" pay the company instead of him personally. This nicely sidestepped the PAYE issue and allowed the individual the further tax "break" of paying himself from his own company by means of dividends rather than salary, wiping out much if not all of any NI liabilities (and saving some tax as well).
Naturally, the Chancellor was not very happy about this form of Tax Avoidance so, in 1998. the notion of IR35 was introduced.
Under IR35, the individual is not prevented from setting up his own ltd co but he is prevented from manipulating the way in which he extracts his income from this company. Basically, dividends cannot be used to avoid tax and NI. Essentially, the company is forced to calculate PAYE and NI on all its income derived from the work it does no matter how or when the individual directors/shareholders take their income.
One of the tricky aspects of IR35 is that it doesn't strictly apply to the company itself but to the contract or contracts it operates under each financial year. If it carries out contracts for a number of customers in any given year, it might find that IR35 applies to some of the contracts but not to all of them. This can make the IR35 tax and NI calculations pretty tricky.
Since IR35 was introduced, the wording of most contracts has been altered where necessary to reduce their exposure to the application of IR35 and, in my view, it is now less of an issue than it was three or four years ago. However, it is important to be aware of the implications of IR35 when negotiating the terms of a new contract. The Revenue will even review a contract for you to check its IR35 status. This is a bit like walking into the lions den and asking the lions not to eat you but, to be fair, they are usually quite reasonable to deal with on IR35 matters.
>> Edited by Eric Mc on Saturday 4th February 09:18
I would suggest that the annual fee for the completion of a ltd co set of accounts (in full statutory and abbreviated formats), submission of same to Companies House and HM Revenue and Customs, completion of the company's Corporation Tax return form, registration of the company for PAYE and VAT and submission of the annual PAYE returns to the Revenue with all the attendant compliance and tax calculations and checks) etc normally would cost in the region of £600 to £1,000 per annum (depending on the size of the company and how much involvement the outside accountant has in the day to day running and planning of the business).
The original thread asked about IR35. Here goes.
If an individual (as a person) works for an organisation there is a good chance that they should be treated as a normal employee for tax and NI purposes i.e. be under the PAYE system. In other words, the circumstances under which they work would prevent them from being paid as if they were "Self Employed" individuals.
In the past, and especially in the IT industry, a common "trick" was to have the individual set up his own ltd co. and have his "employer" pay the company instead of him personally. This nicely sidestepped the PAYE issue and allowed the individual the further tax "break" of paying himself from his own company by means of dividends rather than salary, wiping out much if not all of any NI liabilities (and saving some tax as well).
Naturally, the Chancellor was not very happy about this form of Tax Avoidance so, in 1998. the notion of IR35 was introduced.
Under IR35, the individual is not prevented from setting up his own ltd co but he is prevented from manipulating the way in which he extracts his income from this company. Basically, dividends cannot be used to avoid tax and NI. Essentially, the company is forced to calculate PAYE and NI on all its income derived from the work it does no matter how or when the individual directors/shareholders take their income.
One of the tricky aspects of IR35 is that it doesn't strictly apply to the company itself but to the contract or contracts it operates under each financial year. If it carries out contracts for a number of customers in any given year, it might find that IR35 applies to some of the contracts but not to all of them. This can make the IR35 tax and NI calculations pretty tricky.
Since IR35 was introduced, the wording of most contracts has been altered where necessary to reduce their exposure to the application of IR35 and, in my view, it is now less of an issue than it was three or four years ago. However, it is important to be aware of the implications of IR35 when negotiating the terms of a new contract. The Revenue will even review a contract for you to check its IR35 status. This is a bit like walking into the lions den and asking the lions not to eat you but, to be fair, they are usually quite reasonable to deal with on IR35 matters.
>> Edited by Eric Mc on Saturday 4th February 09:18
Contact Duncan Strike @ Quay Accounting, tell him Jim Hearnden
sent you. NO connection other than as a satisfied customer.
He has a document that describes IR35 & the processes.
Be VERY wary of umbrella Co's I know far to many who've been burned.
Jim (contractor since 91!)now permie.
sent you. NO connection other than as a satisfied customer.
He has a document that describes IR35 & the processes.
Be VERY wary of umbrella Co's I know far to many who've been burned.
Jim (contractor since 91!)now permie.
Just to add I would be very wary of the IR35 situation if you are having your accounts prepared by a Chartered/Certified Accountant. The accountant preparing these accounts needs to see a contract that at the very least means it can be argued that the contract should not be subject to IR35. If they believe the accounts should be prepared on the basis that the income is subject to IR35 they will either have to prepare the accounts on this basis or, if you do not wish that to happen, they will prepare them on a non-IR35 basis and then submit a report to NCIS.
Due to new money laundering legislation if your accountant knows you are evading taxes so does the inland revenue.
Due to new money laundering legislation if your accountant knows you are evading taxes so does the inland revenue.
JagwireXKR
Don't forget to consider VAT, if your ltd Co, will be registered for VAT then you will have to charge VAT on the part-time race instruction if you book that through the company. This may mean that either your prices go up or your margins go down. Obviously you could also claim any input VAT from the part-time race instruction, but it may be better to keep them seperate (XYZ Ltd as a VAT registered entity and JagwireXKR race intruction as a non-VAT registered person)
Just a thought
davidy
Don't forget to consider VAT, if your ltd Co, will be registered for VAT then you will have to charge VAT on the part-time race instruction if you book that through the company. This may mean that either your prices go up or your margins go down. Obviously you could also claim any input VAT from the part-time race instruction, but it may be better to keep them seperate (XYZ Ltd as a VAT registered entity and JagwireXKR race intruction as a non-VAT registered person)
Just a thought
davidy
jaglover - that is a valid point but only if the accountant is suspicious that "evasion" (which is illegal - and therefore criminal) is taking place. Avoidance is not criminal and does not need to be reported.
Also, if the accountant, using his professional judgement (which, after all, he is expected to utilise) decides that there are no suspicions, than NCIS can be ignored. Obviously, if he had to stand up in court a a future date to justify any decision NOT to notify NCIS he had better have sufficient documnetary evidence in his files to support the judgement he made.
As I said earlier, if there really is any doubt over the IR35 status of a particular contract (not the company itself), the matter can be settled for once and for all by submitting the contract to HM Revenue and Customs for a decision from them.
I certainly would not use fear of NCIS as a deterrence to using a suitably qualified Chartered or Certified Accountant. In my opinion, a good accountant is worth ten umbrella companies (who often are staffed by individuals who know virtually nothing about some of the legal intricacies of IR35).
>> Edited by Eric Mc on Sunday 5th February 10:46
Also, if the accountant, using his professional judgement (which, after all, he is expected to utilise) decides that there are no suspicions, than NCIS can be ignored. Obviously, if he had to stand up in court a a future date to justify any decision NOT to notify NCIS he had better have sufficient documnetary evidence in his files to support the judgement he made.
As I said earlier, if there really is any doubt over the IR35 status of a particular contract (not the company itself), the matter can be settled for once and for all by submitting the contract to HM Revenue and Customs for a decision from them.
I certainly would not use fear of NCIS as a deterrence to using a suitably qualified Chartered or Certified Accountant. In my opinion, a good accountant is worth ten umbrella companies (who often are staffed by individuals who know virtually nothing about some of the legal intricacies of IR35).
>> Edited by Eric Mc on Sunday 5th February 10:46
Very interesting point about the requirement for a qualified accountant, Eric.
I agree totally.
The mire that is Company Accounts and the onerous duty that is staying on the right side of the law is complex, difficult and time consuming. Anyone running a business should not be spending the time trying to do it - they should be trying to make more money!
Its hard enough keeping high quality records to give to the professionals so they can make sure you're legal!
Add to that the fact that a decent accountant/auditor will be on your side when it comes to minimising tax burderns and wants to prove that their fee is worth it...and its a no brainer.
In general I have found that a good accountant will save the fees they charge in tax - or better.
I agree totally.
The mire that is Company Accounts and the onerous duty that is staying on the right side of the law is complex, difficult and time consuming. Anyone running a business should not be spending the time trying to do it - they should be trying to make more money!
Its hard enough keeping high quality records to give to the professionals so they can make sure you're legal!
Add to that the fact that a decent accountant/auditor will be on your side when it comes to minimising tax burderns and wants to prove that their fee is worth it...and its a no brainer.
In general I have found that a good accountant will save the fees they charge in tax - or better.
TSS said:
The company I used was Parasol IT who I found to be pretty efficient.
I have to say I've had a different experience with that company. I wouldn't touch them again if avoidable.
Would you mind letting me know what problems you had (probably best done off forum) in case I go back to contract work in the future?
Thanks for all the advice chaps and it has been duly noted. For the time being I have signed up under an umbrella firm since I have run out of time to get the company business up and running.
You raise some interesting points...
My contract is clearly agency based and temporary and open to replacement by someone else - hence I believe it does not need to conform to IR35 conditions. I am thinking that in a few weeks when I can sort it out I shall go through the motions or f setting it up and use the "feeding the lion bait" method of getting my contract assessed by the IR first to be on the safe side.
With regards to VAT, I think I will probably avoid registering to begin with a) because of increased papaerowkr and accountancy fees and b) because I think I will buy my car privately and other expenses won't be worth bothering with???
Thanks again to the PH forum for all the advice.
You raise some interesting points...
My contract is clearly agency based and temporary and open to replacement by someone else - hence I believe it does not need to conform to IR35 conditions. I am thinking that in a few weeks when I can sort it out I shall go through the motions or f setting it up and use the "feeding the lion bait" method of getting my contract assessed by the IR first to be on the safe side.
With regards to VAT, I think I will probably avoid registering to begin with a) because of increased papaerowkr and accountancy fees and b) because I think I will buy my car privately and other expenses won't be worth bothering with???
Thanks again to the PH forum for all the advice.
If you remain with the "umbrella" company then you are effectively an "employee" of the umbrella company and such things as VAT or IR35 have no bearing on your circumstances.
If you eventually set up your own business (whether company or sole trader)you MUST register for VAT once your turnover (i.e. fees billed PLUS expenses claims - if you claim for them separately) exceeds the compulsory VAT Registration turnover threshold - currently £60,000 per annum.
>> Edited by Eric Mc on Wednesday 8th February 08:12
If you eventually set up your own business (whether company or sole trader)you MUST register for VAT once your turnover (i.e. fees billed PLUS expenses claims - if you claim for them separately) exceeds the compulsory VAT Registration turnover threshold - currently £60,000 per annum.
>> Edited by Eric Mc on Wednesday 8th February 08:12
Eric Mc said:Yes - but invariably "settled for once and for all" in HMRC's favour.
As I said earlier, if there really is any doubt over the IR35 status of a particular contract (not the company itself), the matter can be settled for once and for all by submitting the contract to HM Revenue and Customs for a decision from them.
Most IR35 experts strongly advise against submitting contracts to HMRC for review. To quote BlackAdder, it's somewhat akin to "spend[ing] an evening on top of a ladder in No Man's Land smoking endless cigarettes through a luminous balaclava".
All it usually achieves is to bring down an IR35 investigation on yourself.
>> Edited by JonRB on Wednesday 8th February 09:38
From what I have heard, the success rate for HMRC in IR35 challenges currently stands at well below 1%. The rules themselves are that complex (and woolly) that aren't easy to argue in favour of. It's so much down to interpretation of the text within the contract that anyone who can dig up a few relevant historical cases which also slipped through can likely win a challenge.
There are four main clauses you want to make sure are in any contract, IIRC....sadly I can only remember two at the moment (oops!) which are Right Of Subsitution and Mutuality Of Obilgation. Anyone who can remember the other two biggies, jump in!
There are four main clauses you want to make sure are in any contract, IIRC....sadly I can only remember two at the moment (oops!) which are Right Of Subsitution and Mutuality Of Obilgation. Anyone who can remember the other two biggies, jump in!
The main problem the IR have to face is that they are forced to interpreting the words in the contracts but unable totally to see what goes on in reality. They simply do not have the resources to check every situation properly (thank goodness) and are almost totally dependent on the tax payer "shopping" themselves. That is the real legal background to the whole ethos of "Self Assessment".
In many cases where IR35 may be an issue, the wording in the contract may not accurately reflect the reality of what is actually happening - particularly in regard to "substitution".
In many cases where IR35 may be an issue, the wording in the contract may not accurately reflect the reality of what is actually happening - particularly in regard to "substitution".
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