What are your clients doing with IR35 reform?

[BABABlackSheep]

I was referring to time to go it alone and setup a true consultancy with a few others. We would all be directors, with some salary, some bonus depending on billing rate and some dividends is my initial thought.

I've been thinking about this as an option..however..

Commonly known as a clusterf**k

Would appreciate if you could explain the downside?

[northernladuk]

Would appreciate if you could explain the downside?

Work on the upsides first. If you can find one that makes it work I'll come up with few downsides. The assumption is you are talking about a group of contractors here BTW...

Have you seen any of these actually work? The Public Sector changes have been in place for quite awhile now and the same setup should have worked for them.. but hasn't. Speaks volumes.

[Paralytic]

Have you seen any of these actually work? The Public Sector changes have been in place for quite awhile now and the same setup should have worked for them.. but hasn't. Speaks volumes.

It can work, but needs a commitment and has some risk. A former colleague and I set up a company after the client (software house) we worked for went bust. We picked up some of their clients and grew the company slowly. We were perhaps fortunate that we focussed around what was, at the time, a niche technology, and were eventually bought out by the technology provider to form their in-house professional services arm.

What made it work was that we had some capital behind us, so accepted minimal wages as we grew, and we hired other consultants on low-wages and a, on their side, trust that things would get better. This was just after the .com bust too, and times are different now...

It would be a lot more difficult to get, say, 5 contractors each expecting £500/day together working on different clients to get together and form a "true" consultancy.

[BABABlackSheep]

Work on the upsides first. If you can find one that makes it work I'll come up with few downsides. The assumption is you are talking about a group of contractors here BTW...

Have you seen any of these actually work? The Public Sector changes have been in place for quite awhile now and the same setup should have worked for them.. but hasn't. Speaks volumes.

So hypothetically, a group of long standing contractor friends with complementary skill sets deciding to get together to form a company who will then bid and pitch for contracts both as team and also as individuals where necessary won't work?

It would be a lot more difficult to get, say, 5 contractors each expecting £500/day together working on different clients to get together and form a "true" consultancy.

Yes, agreed, you posted this whilst I was typing.

[northernladuk]

So hypothetically, a group of long standing contractor friends with complementary skill sets deciding to get together to form a company who will then bid and pitch for contracts both as team and also as individuals where necessary won't work?

Paralytic nailed it really. So you are all going to earn nothing while setting this up? What happens when someone goes mercenary and leaves to do another gig? It takes a long time to get on PSLs, particularly in the public sector. If GCloud isn't open you could be waiting a very long time. You could also be up against much more established companies. Who is going to lead this? Will they earn more than the rest that weren't that involved? The infighting is likely to start very quickly. Business and friendship rarely mix, let alone with a set of money grabbing contractors.

The whole model is fraught with problems. It needs clear direction and dedication from the team, which is hard from a team of equals who could be earning £500 ea day.

Vast numbers of contractors have had the same thought, club together and nick a bit of business off their client as a managed service and its very difficult, particularly with contractors. It can be done, some on here have, but generally it's an extremely difficult model to pull off.

I have to say, if you can't see this I'd say you haven't really got the business head on you need to get it going.

[BABABlackSheep]

Paralytic nailed it really. So you are all going to earn nothing while setting this up? What happens when someone goes mercenary and leaves to do another gig? It takes a long time to get on PSLs, particularly in the public sector. If GCloud isn't open you could be waiting a very long time. You could also be up against much more established companies. Who is going to lead this? Will they earn more than the rest that weren't that involved? The infighting is likely to start very quickly. Business and friendship rarely mix, let alone with a set of money grabbing contractors.

The whole model is fraught with problems. It needs clear direction and dedication from the team, which is hard from a team of equals who could be earning £500 ea day.

Vast numbers of contractors have had the same thought, club together and nick a bit of business off their client as a managed service and its very difficult, particularly with contractors. It can be done, some on here have, but generally it's an extremely difficult model to pull off.

I have to say, if you can't see this I'd say you haven't really got the business head on you need to get it going.

So in conclusion, you don’t have a reason. I’ll see what others say, but thank you for your opinion.

[northernladuk]

So in conclusion, you don’t have a reason. I’ll see what others say, but thank you for your opinion.

Er... What??

[BABABlackSheep]

Er... What??

Didn't mean to be rude, but you gave your opinion but not un-surmountable reasons why its not a good idea. In-fact if it works its a great idea I believe. Granted "if it works" are 3 important words.

What I was after was governance, tax implications and so on. My fault for not being explicit, but I was after nuggets I didn't already know. Even if I don't have a business head

Thanks again..anyone got any thoughts on this?

[webberg]

A lot of the practical issues raised by Mr NorthernladUK are valid.

Setting up a company of 5 equals on day one is easy. You all take 20% of the shares and have equal say in matters of business etc. This is Five Co.

Let's say you are all earning the same (unlikely?) and therefore all contributing the same amount each payday (also the same day) to the company. Perhaps your relationship is such that you trust each other to measure contributions over longer periods. All well and good.

The company enters into a service agreement with an end client. Preferably that has a right to substitute the named contractor with one of the other four shareholders. Let's assume that the end client accepts that.

A short while later, one of the original 5 has their role designated as inside IR35. Remember that the claim that Five Co is supplying a service is fine, but the end client has the decision making powers and for reasons of their own, say "inside". To compensate, they increase the day rate a bit or perhaps even enough to cover the tax/employee NIC.

Five Co now has income from 4 contractors - gross and income from 1 contractor - post tax/NIC.

Further the tax and NIC deducted relates ONLY to the individual designated inside.

Further, that income can be essentially ignored for CT purposes.

What happens to the balance sheet?

4 of you are contributing £500 a day which after minimal salary and expenses is say £100k a year.

1 of you is not.

How do you divide the distributable reserves when it comes to dividend time?

Let's now say that alphabet shares are the answer. Possible but HMRC will view with some suspicion and may even now claim that Five Co is some form of intermediary.

What happens about VAT? (I don't know the answer here and it may be that VAT rules ignore the net of tax payments?)

Then one of the original 5 is offered a permie role and takes it. He wants to leave Five Co with "his" share of the company.

The remaining 4 have a choice of cancelling his shares (becoming 25% shareholders), buying his shares - same result assuming all have enough money to acquire the shares - or requiring the leaver to sell his shares to a new shareholder(s) who is "approved" by the others.

How much are those shares worth?

The cash in the leavers "pot"? 20% of the total value of the company? More than 20% as after all that shareholding is enough to block special resolutions. Less than 20% because it's not enough to pass resolutions? What is the value of the company at that time? Just the cash? The cash plus the value of ALL future contracts?

There are many and varied tax implications here. IN some, the remaining 4 may be regarded by HMRC as having made a disposal (i.e. 1 leaves and the 4 have 25% each. Another joins and the 4 go back to 20% each. This is a disposal of 5% of the company - for no money perhaps, but attracting a tax bill).

Some of the management devices around this scenario also have the potential to fall foul of corporate law.

It's not an impossible conundrum to solve but it is difficult. It also means that everybody has to agree all the time and that is difficult. It also means that everybody has to understand the tax and financial implications of every move, all the time. That is difficult.

If you think that the answer is to have a professional management company who can supply all the services required - banking, invoicing, accounting, tax, company secretarial - then you run very close to Managed Service Company rules. HMRC won an important case on this recently (Christainuyi) and whilst we have not yet seen this applied in serious anger, it's just a matter of time.

The above can be "solved" and I'm sure we will see many "solutions" arise in the next couple of years. HMRC know this as well. All of them will be tested.

There are however certain "givens" that need to be present in order to achieve the above whilst taking what I would say is an acceptable degree of risk. (nothing here will be risk free). One of those opening conditions is to have a minimum number of shareholders involved at the start and throughout. For tax reasons, that is 21 people.

I suggest therefore that 5 is not enough. I also suggest that handling the variations produced by 21 people in contracts, out of work, inside IR35 etc, are a lot more than 4 x more difficult that handling 5 people. That means essentially a full time director/COO of the company and that brings more complication.

As I said, can be done, will be suggested, will be done badly, will result in tax enquiry, will test friendships to the limit.

Tread carefully.

[Maslins]

What NLUK and webberg said.

Setting up a business with someone else is like a marriage. Sure, it can work, but there will be arguments, needs to be give and take, and it's a massive commitment. Yes you can go your separate ways, but doing so is messy and costly.

A marriage is also just with one other person (quirky religions ignored for this purpose). Imagine having a similar commitment, risk of being let down, diverging life plans etc with maybe 4 separate people (or even 20+ others following webberg's comments)? Each one has their own lives, dreams/goals, non-work situations etc.

Yes, in theory, it could work beautifully. But the reality rarely goes with that.