Contractors’ Questions: How best to supply a Danish company post-covid?

Contractor’s Question: I'm going to be working for a Danish company once coronavirus lockdown eases and was wondering how it works when an overseas client ‘determines your IR35 status’? How do they do this?

Some background -- I know the company well as I've worked for them as a permanent staff member in Denmark, but am shortly moving to the UK and will be billing them a day rate instead. I am in doubt whether I should become a sole trader or start a limited company. Any advice appreciated.

Expert’s Answer: A foreign client is not responsible for determining the status of a UK taxpayer, as the writ of the UK law extends only to the UK's territorial boundaries.

You say that you were formerly working with them in Denmark and so I will assume that you are going to be contracting with them with no intermediary or recruitment business between you and your client.

What you must establish is the basis on which your client is willing to contract with you. Are they willing to pay you gross as an independent supplier working remotely, or do they consider that you are their employee, albeit with you working remotely in the UK? Unfortunately, this is not a question that I can answer.

Three choices

If your client is prepared to pay you as an independent party, then you must decide how you wish to set yourself up for tax purposes, and there are three choices open to you:

1. Form a limited company - but do be prepared for HMRC to ask you to satisfy them that you are not an employee in disguise (caught by or ‘inside’ IR35). If they come to that conclusion, they will restrict the expenses you can claim and demand NICs on any dividends that you draw. This conclusion is made more likely by your previous working for the company as one of its employees.
2. Act as a self-employed individual paying your NICs which, as a self-employed person, are lower than an employed person, and pay your taxes under Self-Assessment, where you pay your taxes in two chunks in a year.
3. Be employed through your company registering as an overseas company in the UK and running payroll for you. Alternatively, you could engage an umbrella company to employ you, but you would have to meet the cost of the Employer NICs unless the end-client (Danish) company agrees to meet these for you.

There are ‘pros’ and ‘cons’ to each of these and considerations you may want to bear in mind might include:

• Is it necessary to have limited liability or not? If not, then the limited company option has a reduced attraction.
• Do you want the security of being employed, rather than being the director of your own company? If you do prefer the more secure option, you will want to explore a variant of the third option (above), whether you want to be on your client's Danish payroll in the UK.

On the question of the cost of NICs in the UK, you should know that self-employed people pay:

• Class 2 if your profits are £6,475 or more a year
• Class 4 if your profits are £9,501 or more a year

Next, you work out your profits by deducting your expenses from your self-employed income.

How much you pay

Class Rate for tax year 2020 to 2021

Class 2 -- £3.05 a week

Class 4 -- 9% on profits between £9,501 and £50,000

(falling to just 2% on profits over £50,000)

By contrast, employed workers have Employer NICS and Employee NICs to consider and pay:

Contribution rates

An employee’s Class 1  National Insurance is made up of contributions:

• deducted from their pay (employee’s National Insurance)
• paid by their employer (employer’s National Insurance)

The amounts deducted and paid depend on:

• the employee’s National Insurance category letter
• how much of the employee’s earnings falls within each band

Employee National Insurance rates

This table shows how much employers deduct from employees’ pay for the 2020 to 2021 tax year.

As an example, if you are in category A and you earn £1,000 in a week you will pay:

• nothing on the first £183
• 12% (£93.48) on your earnings between £183.01 and £962
• 2% (£0.76) on the remaining earnings above £962

This means your National Insurance payment will be £94.24 for the week.

Employer National Insurance rates

This table shows how much employers pay towards employees’ National Insurance for the 2020 to 2021 tax year.

Final thoughts

The most remunerative arrangement would be for you to be a sole trader or a limited company. In the latter case you want to make sure that the clients exercises no control over you in the manner in which the work is carried out. You will need this to cement your independent status.

If you want the most secure outcome, then ask your Danish client to register in the UK as an overseas company and employ you on a UK payroll with them meeting your employer NICs. Good luck!