Two redundant employees going contracting - options?
Discussion
Hi there,
A colleague and myself have recently been made redundant.
We are ERP consultants / Project Managers and our ex-employers have indicated that they would be interested in contracting our services.
We had already decided that we would like to go-it-alone, and many ex-customers want to use us directly.
Question is this - what is best structure for our business.
A limited company (call it XYZ Ltd) to be customer facing seems the logical route, as our skills are in different areas we can offer a consolidated service from a single point of contact to both our ex-employer and our own customers.
If we do this, then we have the choice (I assume) of either being "employed" by the company and paying PAYE etc (with or without IR35 considerations etc) or by contracting individually to the company (XYZ Ltd).
Presumebly, there is no reason why we couldn't be a Sole Trader in our own rights, invoicing XYZ Ltd, who in turn invoices the customers?
In the same light, am I right in assuming that we could set up individual companies or use an umbrella company to deal with XYZ Ltd as an intermediary.
Any comments would be most useful.
Thanks
Simon
A colleague and myself have recently been made redundant.
We are ERP consultants / Project Managers and our ex-employers have indicated that they would be interested in contracting our services.
We had already decided that we would like to go-it-alone, and many ex-customers want to use us directly.
Question is this - what is best structure for our business.
A limited company (call it XYZ Ltd) to be customer facing seems the logical route, as our skills are in different areas we can offer a consolidated service from a single point of contact to both our ex-employer and our own customers.
If we do this, then we have the choice (I assume) of either being "employed" by the company and paying PAYE etc (with or without IR35 considerations etc) or by contracting individually to the company (XYZ Ltd).
Presumebly, there is no reason why we couldn't be a Sole Trader in our own rights, invoicing XYZ Ltd, who in turn invoices the customers?
In the same light, am I right in assuming that we could set up individual companies or use an umbrella company to deal with XYZ Ltd as an intermediary.
Any comments would be most useful.
Thanks
Simon
Sounds like very dubious practice to me.
If you were genuinely "redundant" (in the correct legal meaning of the word), why does your ex-employer think that he still needs your services. Youl'd have to doubt that it was correct to make you redundant in the first place.
If he takes you on as self-employed individuals, he is immediately exposing himself to the danger of being ordered by the Revenue to put you back on the payroll - and to pay any arrears of PAYE and NI that he may have failed to deduct from the point he hired you as "Self Employed" individuals.
If you go down the limited company route, YOU are immediately exposed to the wonders and dangers of IR35 and its implications.
You should seek some professional advice on this situation.
If you were genuinely "redundant" (in the correct legal meaning of the word), why does your ex-employer think that he still needs your services. Youl'd have to doubt that it was correct to make you redundant in the first place.
If he takes you on as self-employed individuals, he is immediately exposing himself to the danger of being ordered by the Revenue to put you back on the payroll - and to pay any arrears of PAYE and NI that he may have failed to deduct from the point he hired you as "Self Employed" individuals.
If you go down the limited company route, YOU are immediately exposed to the wonders and dangers of IR35 and its implications.
You should seek some professional advice on this situation.
Edited by Eric Mc on Monday 26th February 12:13
Hi Eric,
As with most things, it isn't that straighforward. I was employed as the Professional Services Manager, my colleague as a Principal Consultant.
My actual job consisted of management 20%, consulting (Financials) 80%.
The company has limited future work.
It suits both myself and my colleague to be made redundant at this time.
The company does however have two potential contracts, which if they come in they may struggle to resource. Hence the possibility of approaching us.
I think the leave (redundant), only to return as a consultant is quite common in this industry. Think of it as "outsourcing".
Simon
As with most things, it isn't that straighforward. I was employed as the Professional Services Manager, my colleague as a Principal Consultant.
My actual job consisted of management 20%, consulting (Financials) 80%.
The company has limited future work.
It suits both myself and my colleague to be made redundant at this time.
The company does however have two potential contracts, which if they come in they may struggle to resource. Hence the possibility of approaching us.
I think the leave (redundant), only to return as a consultant is quite common in this industry. Think of it as "outsourcing".
Simon
There is nothing to stop them re-hiring you as part-time consultants - but paid under the PAYE system as part-time employees.
In reality, could you claim that you or your colleague are "in business on your own account" i.e. "trading" - because that is the definition used for determining "self employed" status.
The Revenue will tell you that whether you are Self Employed (a stupid term, in my opinion as it doesn't highlight the key word - "trading" )or an Employee, is a matter of fact, not choice.
In reality, could you claim that you or your colleague are "in business on your own account" i.e. "trading" - because that is the definition used for determining "self employed" status.
The Revenue will tell you that whether you are Self Employed (a stupid term, in my opinion as it doesn't highlight the key word - "trading" )or an Employee, is a matter of fact, not choice.
Following your statement then, there are no self employed IT Consultants (or any other service provider your wish to mention) in the country, as they should all be considered to be Part-Time, Full-Time, Permanent or Temporary Employees - pick which two terms you need.
Edited by sgrimshaw on Monday 26th February 16:48
Simon,
If you are going to provide services back to your former employer using your own Ltd Co as the vehicle for doing this then you need to ensure that you are approaching this as a business in your own right - i.e. that your engagements are structured as they would be if you were A.N. Other third party consultancy.
Eric (as a professional in this arena) is perhaps getting one step ahead and pointing out the pitfalls of IR35, disguised employment etc etc.
If you are able to structure the contracts AND the actual working practices appropriately then there is no reason for IR35 to apply.
If you are going to provide services back to your former employer using your own Ltd Co as the vehicle for doing this then you need to ensure that you are approaching this as a business in your own right - i.e. that your engagements are structured as they would be if you were A.N. Other third party consultancy.
Eric (as a professional in this arena) is perhaps getting one step ahead and pointing out the pitfalls of IR35, disguised employment etc etc.
If you are able to structure the contracts AND the actual working practices appropriately then there is no reason for IR35 to apply.
And that is the big "If".
The Revenue are very wary of former employees being re-hired immediately by the their ex-employers on a Self Employed basis.
If businesses do this, they are taking a risk in that THEY are the ones who will have to stump up the underpaid PAYE and NI.
Operating as a "Personal Service Company" is absolutely allowed, but there is a strong liklehood that the provisions of IR35 will be applied - unless you are very, very careful in setting up the contract and ensuring that the terms and conditions set out in the contract are adhered to in actuality.
The Revenue are very wary of former employees being re-hired immediately by the their ex-employers on a Self Employed basis.
If businesses do this, they are taking a risk in that THEY are the ones who will have to stump up the underpaid PAYE and NI.
Operating as a "Personal Service Company" is absolutely allowed, but there is a strong liklehood that the provisions of IR35 will be applied - unless you are very, very careful in setting up the contract and ensuring that the terms and conditions set out in the contract are adhered to in actuality.
Edited by Eric Mc on Monday 26th February 17:46
Just to be clear.
I am not looking to avoid the implications of IR35 whatsoever. Quite happy to pay my dues.
If it was just me, then Ltd Co with Salary/Dividend might have been attractive, but as there is two of us it becomes more complex. We won't be sharing the work / profits equally for starters and I assume that dividends have to be distributed equally based on shareholding?
We don't intend working solely for the ex-company on their projects, it might start there but we are already exploring other avenues.
What is the best source of professional help, Accountant or Solicitor?
I am not looking to avoid the implications of IR35 whatsoever. Quite happy to pay my dues.
If it was just me, then Ltd Co with Salary/Dividend might have been attractive, but as there is two of us it becomes more complex. We won't be sharing the work / profits equally for starters and I assume that dividends have to be distributed equally based on shareholding?
We don't intend working solely for the ex-company on their projects, it might start there but we are already exploring other avenues.
What is the best source of professional help, Accountant or Solicitor?
Accountant - like he said.
When I left my last job I was doing some consultancy work for a couple of companies and went the Ltd Co, VAT regsitered route. I think it looks more prfessional when sending in invloices and approaching companies for work/networking, but that's just my opinion - I'm sure others will disagree.
18 months on I'm now up to 10 clients and it worked well - small salary plus dividends was my route.
Good luck.
When I left my last job I was doing some consultancy work for a couple of companies and went the Ltd Co, VAT regsitered route. I think it looks more prfessional when sending in invloices and approaching companies for work/networking, but that's just my opinion - I'm sure others will disagree.
18 months on I'm now up to 10 clients and it worked well - small salary plus dividends was my route.
Good luck.
Do get good professional advice. There are many pitfalls regarding status and what is/is not self employed/contractor etc. Also, you may have trouble setting up XYZ Ltd and then 'Sub-contracting' in as self employed people. XYZ would be exposed to all sorts of problems. Even going small salary/dividend route has hidden issues.
Speak to a good recommended accountant be fore you set up any trading agreements.
Paul.B
Speak to a good recommended accountant be fore you set up any trading agreements.
Paul.B
Eric Mc said:
Don't forget that IR35 applies to partnerships too.
Edited by Eric Mc on Tuesday 27th February 00:08
Pretty sure this will fall outside of IR35.
Multiple customers for starters, and the work is of a short term nature - couple days here and there, extremely unlikely to work more than 3 days consecutively on one project.
Sounds like it should be outside the IR35 provisions, as you say.
The main thing is that the whole operation runs like a bona fide trade and that the operation can be seen to be "trading of its own account" and not a substituition for "employment".
I would strongly suggest that you seek out the Professional Contractors Group (PCG) which is an orgnaistaion which provides services, information and technical support for those in the contracting industry. Their web address is www.pcg.org.uk.
The main thing is that the whole operation runs like a bona fide trade and that the operation can be seen to be "trading of its own account" and not a substituition for "employment".
I would strongly suggest that you seek out the Professional Contractors Group (PCG) which is an orgnaistaion which provides services, information and technical support for those in the contracting industry. Their web address is www.pcg.org.uk.
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