A client has asked me to calculate the difference in tax to him if he extracts the profits from his limited company as employment, as dividends and if he charged the company as a self employed consultant.
The self employed option has worked out the best for him but I wondered if HMRC could challenge that method of extracting the profits, deciding he is actually employed?
Is there anything you have come across that would cause this not to work?
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It is possible in some circumstances that a director can invoice the company that they are a director / shareholder of.
I find it bizarre that you would go to the trouble of calculating something that might not be feasible.
Thank you, the director asked me to but hadn't thought of any other potential issues.
The scenario he gave me made the calculations not onerous
Perhaps if you tell members what the company does, and what the director would be invoicing the company for, you might get an answer whether it is feasible or not.
Apologies, the company does construction work and he wants to invoice for his management and consultancy services which i don't think will work but I would need to give him better reasons than my gut feeling
I don't understand - what's the difference between taking a salary and being a self employed consultant? Are you basically trying to get around NIC? I'm assuming he wouldn't have a new company for the consulting.
No he's talking about self employed, the director just asked about the various scenarios but didn't consider what may be allowed! I am not trying to get round anything, just trying to let him know why this option isn't feasible.
Given what is described here, as a self employed consultant the client would surely come into the remit of IR35; i.e. not worth the effort.
Given what is described here, as a self employed consultant the client would surely come into the remit of IR35; i.e. not worth the effort.
IR35 would be irrelevant for the circumstances described.
As I see it the way forward would be for the guy to be paid a salary (with a proper contract) for his director duties say around £9000. He could then supply his consultancy services as a contractor again with a proper contract.
Now that's an interesting idea. This is exactly what I use this site for, thank you. I'll do some more research, have you done this in practice?
If you've worked out that taking the money out as self-employed is best then your figures are wrong.
Unless the profits are very low (£10K - £12K) or very high (£144K or more) then you should find the low salary and dividend route more tax-efficient than self-employment.
If he hasn't reached the higher tax rates then surely paying dividend tax at 6% on the profit before tax is more beneficial than paying class 4 national insurance at 9%
Yes it's just that there are less profits available to extract as dividends after the CT has been taken into account.
It depends on what type of work he is billing the company for. Management and consultancy is fine if it is not the work he is already paying himself to do as an employee, or part of his duties as director, for which he must be taxed under PAYE. However, to qualify for a corporation tax deduction, the fees must be no higher than he would be prepared to pay someone else for the same work, plus of course he must actually do some work, not just pretend there is to invoice the company. Tax wise it always was beneficial to do this as it helped to use up PA without incurring NI, but with the advent of the dividend tax, it is a good way of taking cash out of the company other than as dividend and thus save 7.5% or 32.5%. The net tax saving on NI free income (be it interest, rent or consultancy fees) is 6%, so well worth doing if you can justify it.
two more things to take into account. If the director is acting in such away that IR35 will apply. The route above I mentioned means that most of the ioncome is not subject to that regime (IR35 does not apply to self-employment), Another reason may be if the director has an expensive car an. As an employee/director he is only going to receive 45p/mile or 25p/mile as appropriate. As self-employed he can use prota option.
Was looking for the detailed article taxation magazine cover over the last few months but see below.
http://www.greenaccountancy.com/resources/tax-faqs/employee
Also http://www.bdo.co.uk/services/tax/business-edge-2014/business-edge/tax-a...