Advice on self-employment

[Chris Knight]

I have been asked by a friend to provide assistance and advice to the management of an ailing company which he owns. The task - if I accept it, is likely to be pretty intensive for three months or so. He is happy to pay me very reasonably for my input. This is all very nice: however, I am like a babe in the woods when it comes to knowing anything about employment status, tax and NIC stuff etc. in respect of what seems to be effectively a part time consultancy job. I retired from full-time employment 5 years ago with a company pension and have never had any personal exposure to this sort of thing (I had HR departments to work out what happened with consultants I employed :lol: )

I have had a quick look at the mountain of advice stuff on the web and it seems likely I shall have to register as a sole trader or set up a limited company. However, I very much wish to avoid bureaucracy and paperwork - almost to the point of working for fun and friendship rather than money. In any event, I am reconciled to paying a full whack of tax on what I earn, my desire is to minimise hassle - I'll get enough of that in the work I shall be doing!

Given the number of folk here who seem to be self employed in some way, I should be grateful for any advice..

 

[Terry Smart]

Hi Chris

One of the important factors here will be where you do the work and whose equipment you use.
If you do it in an office at your friend's place of work using his equipment, HMRC will deem you to be an employee. (See here) This could possibly be an easier way to go.
The only way to avoid this is to be a limited company and sub-contract yourself to him. This route is somewhat more difficult and has lots of implications to HMRC.

Alternatively, just keep a note of income and expenditure related to this venture and declare it on your tax form at the end of the year and the nice people at HMRC will tell you how much they want from you!

You would need to declare yourself as a sole trader though. Perhaps your friend might like to consider payment in kind... the donation of some machinery you need perhaps...?

 

[wizer]

I can't really help Chris, only to say that a lot of the 'contractors' who work for me use agencies to deal with their tax, NI, etc. This saves them the hassle of setting up LTD companies and the hassle that goes with. If this is the sort of thing you are after then I could ask around for the companies they use.

Sounds like an interesting project for you and I guess you must be looking forward to it or you wouldn't be taking it on. Good Luck! :wink:

 

[Scrit]

The dreaded term "IR35" comes up when one speaks about consultancy, from what I've been told.

Scrit

 

[Steve Maskery]

Hi Chris

First of all you do not need to form a limited company (although you may wish to do so).

If this is a one-off, you can just tell the IR that you have received this one payment of £x, the gross profit was £x-y (and have the paperwork to justify it), and then they will just send you a bill. You will almost certainly have to fill in a self-assessment tax form, and once you have done so, they will probably send them to you every year for the rest of your life.

My own experience of the local tax office is that they are reasonable people to deal with at a human level, just completely incompetent. During the first decade we were married, there was not a single year when the IR got both my tax and my wife's tax right first time; always one or the other, and some years both, were incorrectly handled.

You may be better doing the work for free and getting him to pay you in kind. How about a few CNC 5-axis machines?

Edit - If this is not a one-off, then that is a rather different matter, becoming officially S/E is then not optional, so you'll have to pay NI2&4 as well, unless the earnings are below a certain limit (can't remember what it is, but it is reasonable - my journalism work is below that limit).

 

[Adam]

Cannot you just become an employee for three months? Then they will sort out tax/NI etc?

Adam

 

[RogerS]

Steve beat me to it...his reply is spot-on IMHO.

 

[Chris Knight]

Thanks very much for the input everybody. I think I shall try Steve's approach - at present I certainly intend it to be a one-off and have no desire to re-complicate my life unnecessarily.

 

[mudman]

If this is a one-off then you needn't bother with setting up a ltd company. Look into umbrella companies. A lot of IT contractors use these as a way of avoiding IR35 and the hassle of running a company.
They will handle all the PAYE and NI contributions and there are other benefits as they will have an arrangement with the IR that will allow you to claim sizable expenses.
You can easily set up a ltd company though, it doesn't cost much. Then get yourself a contract between the two companies that you can ensure is IR35 friendly. Then you just invoice the company at an agreed interval. If you go this route and your projected annual turnover would exceed the VAT limits, then you will need to register for VAT. If you do, then go for the flat rate VAT route which is quite beneficial.
There's a lot of information on all this on http://www.contractoruk.com with stuff on umbrellas here
Oh, I almost forgot the Professional Contractors Group where you'll also find a lot of info.

 

[engineer one]

ok guys you are looking at this the wrong way.
unless you are a subby in the construction industry,
there are at this time no things like 719's in other industries.

two questions are you over 60,? this affects your NIC payments, and
do you have any professional qualifications if there are things
like financial advice to be given.?

i sub contract to a number of clients as a consultant, my computer is
at home, and i own the software etc, so i call in pick up
the work, then finish it at home. butif your intended role is
managerial, then you can work there about 17 hours a week,
and be out and about for the rest, that way you should not be deemed
to be employed.

the revenue will tell you you should be employed, but that just makes your
job easier. what you can arrange with the company is that they
give you a payslip with the gross, withhold 30%, and remit that to the
inland revenue when they pay their monthly tax, as long as it has
your NI references attached when they first send it, then it will be
credited to your benefit,a nd at the end of the year when you fill
out the self assessment form, you can put the nett and gross in,
and deduct expenses as usual to get your taxable position.

try to avoid buying companies, or becoming employed, if this is to
be a short, less than one year deal.

pm me if i can help more
paul :wink:

 

[mudman]

Chris if you are happy to be stung for huge amounts of tax and NI and be an employee again, then that would probably be the minimal hassle for you. However, does the company in question want to employee you in that way? If they take you on as a management consultant, then there are tax advantages there for them and none of the obligations of being your employer such as having to pay holidays and sick leave.

If this is to be a short term thing, then I would agree that buying a limited company would not be the way to go. But, these things do have a habit of extending beyond the initial three months.

A lot of IT contractors I work with use the umbrella company method as this means no need for accounts, accountants, VAT returns company returns etc. They are suitable for short or long term assignments. If I was in your position, then this is probably what I would do.

Oh, and if the Revenue try to tell you that you are an employee, then it is very unlikely in this situation that they could make it stick.
Check out the PCG website I posted above, they have info on this as well as IR35 proof contracts (although I think you need to be a member) to download.

HTH

 

[the_g_ster]

Hi,

Sounds like you have an interesting task ahead of you. I agree with the post that simply says notify the revenue of your income and costs associated with this one off period of trade, it would be absurd to look into incorporation for this. One thing you should also consider is the relationship with your pal if anything goes wrong, any insurance if you are not an employee and some advice given gives rise to an issue, and also if you are a member of a professional finance body if you are in line with the professional ethics guidance in doing this. For example chartered accountants have to be very careful of what advice they give and of what nature, especially for investments and pension issues.

To make make your life most simple I would go on as an employee and it avoids issues with professional idemnity insurance.

 

[Chris Knight]

Thanks for the addtional ideas and the handy links - I can see I am going to have to think this one through! Good practice for going back to work I guess :wink:

 

[Newbie_Neil]

To make make your life most simple I would go on as an employee and it avoids issues with professional idemnity insurance.

And also the possibility of being classified as a shadow director?

Cheers

Neil

 

[RogerS]

To make make your life most simple I would go on as an employee and it avoids issues with professional idemnity insurance.

And also the possibility of being classified as a shadow director?

Cheers

Neil

Avoid any reference on official documentation as a 'director'. Directors pay HUGE NI/tax cf other employees. Also, your Self Assessment forms get to be a nightmare..

 

[mudman]

Avoid any reference on official documentation as a 'director'. Directors pay HUGE NI/tax cf other employees. Also, your Self Assessment forms get to be a nightmare..

Sorry Roger, but where do you get that from? The tax and NI rates for directors are the same as for an ordinary employee. If you earn a wage then you pay the same tax. There's no special 'director's' tax band.
There is company NI to pay which effectively doubles the amount of NI to pay. But, you arrange your affairs so that you minimise the amount of PAYE and NI that you pay anyway. Any good accountant should be able to advise on this.

 

[RogerS]

If directors were treated the same then why does the Inland Revenue have a special leaflet...National Insurance for Company Directors (CA44) -

Perhaps this is the reason..taken from the clearly business website.

Also self assessment returns have separate pages for directors.



There are also special rules for directors when it comes to National Insurance contributions.

What is a director?

For NI purposes, a company director is defined as:

A member of a board or similar body which manages a company

* Single person where the company is managed by an individual

* Someone giving instructions to an individual acting in one of those two roles, unless those instructions are limited to professional advice, eg a solicitor.

Like all employees, company directors are liable to pay Class 1 NICs on all payments that are liable to Schedule E income tax - the PAYE form of tax. The difference is the earnings period used to calculate the liability.

What is an annual earnings period?



Employees are liable for NICs every time they complete an earnings period. Or in other words every time they get paid. This will usually be weekly or monthly. Their employers also have to pay NICS on the behalf at the same time.

Even if directors are paid weekly or monthly they are deemed to have an annual or pro-rata annual earnings period, depending on when in the tax year they became a director.

If you are a director at the beginning of the tax year (6 April), you will have an annual earnings period for that tax year even if you cease to be a director before it ends.

If you become a director during the tax year, you will have a pro-rata annual earnings period for the rest of that tax year. You will need to work out the number of weeks in the pro-rata period (ie till the year end) and calculate the following:

* The pro-rata annual lower earnings limit

* The pro-rata annual earnings threshold

* The pro-rata annual upper earnings limit

You can find this information in leaflet CA44 - National Insurance for Company Directors.

What difference does it make?

It matters because it affects which earnings and thresholds you use.

Until an employee or director has surpassed the lower earnings limit (LEL), you do not have record earnings information for NI purposes.

Until an employee or director has surpassed the earnings threshold (ET), and his employer are not liable for NICs.

And as NI is currently a capped tax, once earnings have hit the upper earnings limit (UEL) no more NI is due from the employee. Only the employer continues to pay.

There are weekly, monthly and annual ETs, LELS and UELs.

Because directors are assessed annually, you do not have to record NI information until their earnings have hit the annual - or pro-rata annual - LEL or make NICs until their earnings have hit the LEL.

 

[mudman]

But that isn't saying that a director pays more tax just because he is a director, it is saying that you don't have to record his NI contributions until the end of a year.

I am a director of a limited company, only a small company. One with a director, a company secretary and one employee. I happen to be both employee and director. I don't pretend to understand tax and all its ramifications and implementations, that's why I have an accountant. What I can say is that I don't pay any more tax than somebody that is paid as an employee of another company.

 

[Bodgit]

Directors pay the same NI as others but its worked out differently. Before the rules were changed to accommodate this, everyone had a weekly NI free amount of pay and, more importantly, a weekly maximum NI-able pay. Suppose the employed were allowed £5200 per annum without NI and paid NI on everything above that up to £10,400 (the annual maximum for that year). If you were paid £100 in a week, you'd pay no NI (because the weekly amount is 5200/52). If you were paid £150, you'd pay on the £50 excess over the weekly free amount. If you were paid £200 you'd pay on £100 and if you were paid £300, you'd still pay NI on £100. Clever accountants (yes I am one for which sincere apologies) spotted that if directors running their own companies and able to manipulate their pay amounts and timing paid the whole of their salary, say £10,400, in week one of the tax year, they'd pay NI at nil on the first £100, at the usual rate on the next hundred (the equivalent of £10,400 pa) and at nil on the remaining £10,200. The IR (now strictly HMRC) spotted this cunning plan and changed the rules for directors. They have their NI dealt with on a "cumulative basis" so they pay nil on their earnings (whenever they get paid) up to £5200, the standard rate on the next tranche of pay (whenever it is paid) up to £10,400 and nil thereafter. The effect is that they pay the same NI as any other employee would on the same pay, but they pay it under a system that stops them avoiding NI by paying their whole year's salary in week one of the tax year.
The PAYE system tries to spread the tax and NI payments evenly and proportionately during the year so that most employees earning broadly evenly during the year get the same net pay each week/month. The system works well for those people but less well for those with very variable earnings and it left some opportunities for manipulating the system by those who were able to control how much they got paid and when. Now, most owner managed companies (IR35 aside and its probably dead in the water anyway because of the Cable and Wireless case) pay most of their directors earnings out as dividends which are NI free anyway.