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Pay a consultant in shares-how will they be taxed

Most tax efficient way for a consultant to be paid in shares - through company or personally.

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Hi - Im hoping someone can please give me some guidance.

I currently work for a startup and as we are cash tight we want to pay one of our consultants with shares. Should we issue shares or share options and should they invoice us personally or through their company? Reason being as if they invoice us through their company and we settle with shares, they will get taxed on that income but they themselves do not have the money to then pay over to HMRC for the tax element as they have not received any cash. Therefore if we issued them share options what would the accounting treatment be on their side, would it still have to go through their P&L and therefore be treated as taxable income? Their company is set up for vat on the cash accounting method, could this be applied to the treatment of that income move it to the balance sheet untill the shares have been paid out and then recogonise the income in the P&L (this does not seem right but I thought i ask )?

Also instead of them invoicing us through their company but them doing it personally this would then fall under IR35 and Ive have a whole lot of other issues to contend with on my side or is there another suggestion I am missing. 

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By David Ex
06th Dec 2021 17:10

Hopefully you aren’t a startup with no accountant as the best time to get a business venture established to best effect is at the outset.

Your question is one asked on this site every month or so. Have a search of the site.

PS Assuming you aren’t a start up accounting practice, don’t offer tax advice to your contractors.

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By AndyC555
06th Dec 2021 17:13

In all honesty this is far beyond a question where you can expect a simple answer.

I do this sort of planning for clients, it takes a few hours and I charge them for it.

If you have an accountant I'm sure they will do the same.

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By Leywood
06th Dec 2021 17:41

Cash and tax are not the same.

Why are you trying to give the consultant tax and accounting advice as well as dealing with your own?

You seriously need an Accountant (and a separate one for him if he hasnt got one already)

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By ruth_staff
06th Dec 2021 18:11

Fully aware tax and cash are not the same thing.

I am trying to do the research myself so am looking for the guidance on where to look for the answer/suggestions. As for providing advice to the consultant, they are a friend and I am trying to point them in the right direction, it would not be advice. Again we are a start up and don't have the cash, just looking for some guidance.

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Replying to ruth_staff:
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By paulhammett
06th Dec 2021 18:34

Three experienced members have advised us to get an accountant. Let me be the fourth.

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Replying to paulhammett:
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By David Ex
06th Dec 2021 20:28

paulhammett wrote:

Three experienced members have advised us to get an accountant. Let me be the fourth.

And a solicitor to draft the shareholder agreement your consultant friend will need if he/she has any sense.

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Replying to ruth_staff:
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By WhichTyler
07th Dec 2021 06:34

Just coming here to say 'eeek' at the information that the OP and the consultant are friends.

I hope it stays that way, but getting the paperwork clear (with professional advice as everyone else has said) at the outset might be the second best way of ensuring that.

The best way is following the age-old advice; never do business with friends...

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Replying to ruth_staff:
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By Bobbo
07th Dec 2021 08:18

just come to an agreement to pay them the full cash amount later and steer well clear of shares and share options.

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Replying to ruth_staff:
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By gillybean04
07th Dec 2021 16:58

Limited companies don't have friends. They have suppliers, clients, employees etc.

If you're a current director, you have a duty to act in the interests of your company. These are entirely separate from your interests. Friends do not always remain so. Especially when business and pleasure mix, there's more ground you can fall out over. Which is why it's important to document what was agreed when both parties were still agreeable.

If you truly want to "point them in the right direction", tell him to ask his accountant. Or is he also a startup?

When you started your business, I presume you made provision for stock, incorporation, your wages etc
Did legal, tax or accounting advice not cross your mind? Did you think you wouldn't need an accountant? As you're now asking accountants for advice, do you still think you don't need an accountant?

I'm not trying to lecture you, just trying to give your perspective a little nudge.

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By Paul Crowley
06th Dec 2021 23:46

I am always surprised at the idea of giving away shares that the giver thinks will increase in value
More amazed that a worker would value a thing that there is no market for

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By Duggimon
07th Dec 2021 11:15

If your start up can't afford the cash for the advice you need to do what you want to do then you've started up too early and need to get a bit more investment in first.

You will massively delay the growth of your business if you launch into it without the necessary funds to pay your workers and to get the professional advice you need to cover the areas in which you lack knowledge.

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Jason Croke
By Jason Croke
07th Dec 2021 11:34

VAT is payable where a taxable supply has been made in return for consideration.
Consideration is not just monetary/cash, it can be in the form of other ways to reward the supplier, we call these barter transactions.

As others have posted, get proper advice, it is not as expensive as you think it is and if the start-up is cash strapped, its no excuse for not getting good advice, the last thing you want is to DIY your tax planning and find that current or potential investors will pull out once the due diligence shows poor compliance and DIY planning such as giving away share value to third party consultants/friends.

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