A few loose ends

[themistry]

Hi everyone,

I have been doing alot of reading in regards to running a limited company for the purposes of contracting, while I intend to have an accountant do the grunt work, I do have a few questions im still a little unsure of and could use some advice. Any that may be simple or restated elsewhere, a gentle pointer would be most appreciated.

The following is based on a contract falling outside IR35.

1) What is the standard practice when paying yourself. Do you go month to month seeing how much you earn and paying yourself accordingly, or do you set a salary and pay yourself that regardless?

EDIT: Also in terms of PAYE tax, do you keep this in an investment account until it is time to pay or is it paid monthly? Is this something the ltd company does or will I need to fill out a self assessment?

2) Following on from q1, what happens when you aren't entirely sure what you will be earning from month to month over the life of a contract. I.e. lets say within a given month you work 2 weekends that offer double time, what do you pay yourself at the end of the month.

3) Is the 5% Expense Allowance taken out of pre-tax earnings of the business (ltd) and added into the pay on a monthly/weekly basis?

4) I'd be interested to hear about how people do pay themselves. Do you take out everything you can, alternatively invest a certain amount in a pension for tax purposes, anything else perhaps?

5) VAT. This is the issue im still very confused about. Lets say my rate is £350 a day, if I was VAT registered, would this then become £411.25 when billing the client, or would it remain at £350 and my actual earnings be £288.75? Any general advice or useful links where I can read up on the basics of VAT for a business would be most helpful, i.e. i'm not entirely sure on claming back VAT, what this "flat rate" I have seen mentioned is about etc.

Thanks for your help, again if something is a simple stupid question, please let me know.

TM

[boxman]

Check this out with your accountant but:


1) Set a salary and pay yourself that regardless. This is a genuine reason (if asked by HMRC) to keep salary low in relation to turnover.

EDIT: You need to get your ltd co registered for paye. You'll get a book to pay tax and ni monthly or you can pay online.

2) Salary you can realistically project to be able to pay even when you're on the bench with the balance being left in the company or taken as dividends. I assume corporation tax at 19% payable on 90% of company turnover and put money aside to pay this tax each month (deposit account). Same with VAT if you register (optional for lower turnover).

3) Not applicable as you say you're outside IR35

4) Salary monthly plus 2 dividends (interim plus final). Most contractors reckon taking monthly dividends is riskly as HMRC may class this as salary due to its regularity. I aim for an interim dividend in month 6 of my company year. I declare this and then draw down on the dividend account within the company's books each month. At month 1 I take a final dividend and repeat until retirement!

5) Most contractors register their companies for VAT. Clients generally expect this and can claim back the VAT on your company's services. You can also claim the VAT back on company expenditure (with some exceptions). Contractor rates will be quoted ex VAT and as you are operating business to business B2B then no problem quoting any service/supply ex VAT. Personally I wouldn't go for flat rate VAT but perhaps that's just me.

I take no responsibility for the above so please double-check with appropriately qualified advisers before deciding on any course of action. Some of this is a little more complex in practice but the nuts and bolts are in this answer.

There's no substitute for a good accountant in my experience. I pay mine to do VAT returns, paye and dividend vouchers etc but DIY is fine provided you know what you're doing!

best of luck

Rob

[Waldorf]

1. fixed monthly salary, paye/nic is paid quarterly, if you have a decent account you will get interest on this.

2. I take a fixed salary and dividend, the dividend varies depending on the profits, my accountant (nixon williams) calculates this each month.

3. only applicable if you are caught by ir35

4. I take everything I can and leave funds for the taxes in the accounts until they are due, my accountant advises on this.

5. If your rate is £350/day you add VAT on top of this, you then pay over this vat each quarter. Join the flat rate scheme and you can save money.

Get an accountant, mine set everything up and charges £60 per month.

[themistry]

Hi guys, thanks so much fo the replies, however I think there may be some confusion a foot in regards to IR35.

My contract fails IR35, I was under the impression this meant I fell outside IR35, im sorry for the misunderstanding.

Would it be possible to ammend the given answers to reflect the error on my part? Again, your help is very much apprecaited.

Thanks again,
TM

[boxman]

No problem...

This is a good resource for all things IR35 and will answer most of your questions:

http://calculator.contractoruk.com/

If you're inside IR35 then take money as you wish. You're going to be subject to PAYE and Employer/Employee NICs on 95% of turnover net of any allowable Schedule E expenses. Timing on payment is up to you but with interest rates low personally I'd pay it monthly and just forget about it.

You might find a look around the PCG website (www.pcg.org.uk) and Shout99 (www.shout99.com) for some more info on IR35 and relevant strategies. IMHO you can't better Bauer and Cottrell for reviewing your next (or current!) contract to advise on IR35 pass/fail status. For £200 or so you can get PCG IR35 investigation insurance. Again, personally this is my strategy. The question perhaps is are you running a business or a freelance employee??

[fridge]

No problem...

This is a good resource for all things IR35 and will answer most of your questions:

http://calculator.contractoruk.com/

If you're inside IR35 then take money as you wish. You're going to be subject to PAYE and Employer/Employee NICs on 95% of turnover net of any allowable Schedule E expenses. Timing on payment is up to you but with interest rates low personally I'd pay it monthly and just forget about it.

You might find a look around the PCG website (www.pcg.org.uk) and Shout99 (www.shout99.com) for some more info on IR35 and relevant strategies. IMHO you can't better Bauer and Cottrell for reviewing your next (or current!) contract to advise on IR35 pass/fail status. For £200 or so you can get PCG IR35 investigation insurance. Again, personally this is my strategy. The question perhaps is are you running a business or a freelance employee??

I concur with Boxma on this.You should get your contract checked out by professionals such as Bauer & Cottrell who are well known negotiators as well as experts in all matters IR 35. Join the PCG which has a membership fee and check out shout99 which is free.Both these organisations give good out advise and have info on IR 35 insurance.

[themistry]

Excellent,

thats fantastic advice. I will follow up as recommended. Thank you.

One this I am wondering, for a contract that falls outside IR35 (i.e. the opposite of what I originally thought this meant), what would the typical working conditions be like for the contractor?

Assuming that the said contract was for a government project, would anyone be able to point out some differences in working conditions for the contract depending on if it was deemed to fall within IR35 and outside IR35?

Thanks again,
TM

[themistry]

The question perhaps is are you running a business or a freelance employee??

Hi Boxman, thanks for your help here. I would classify myself as a freelance employee, thus pretty certain to fall within IR35.

TM

[malvolio]

Hi Boxman, thanks for your help here. I would classify myself as a freelance employee, thus pretty certain to fall within IR35.

TM

So you need to do a bit more research and reading then. Consider that of the known challenges to IR35 investigations, the failure rate (i.e. those found to be liable to pay tax under IR35) is currently around 0.2%...