Can we invoice our own LTD company?

[paule]

Hi there,

A group of us currently all self-employed with not other links to any companies are looking to set up a LTD company to enable us to provide a procured solution to another company - i.e. they currently use us all individually as self-employed consultants, but they would rather deal with us through one company.

This makes sense to us, as it would mean that we are potentially more attractive to other companies who may prefer to deal with us on a 'company basis', so effectively, we could grow and diversify.

We all however, also have our own work that we do outside of this customer.

We all complete our own invoicing and accountancy, tax returns etc.

If we set up as a LTD company, can we continue doing this, whilst being directors of the new company?

Also, instead of drawing a salary from the company for any work that we do for customers, can we simply invoice 'our' company for the work that we've done. Basically, we'd be acting as sub-contractors for our own company I think?

Then, any profits that the company makes (we're planning to increase the charge for our fees to ensure some money goes back into the company) can stay in the company to fund growth - but then should the profits get to a certain level, we could then profit share through dividends?

Simply put:

We form Company A. Company A is formed of 5 directors - all consultants who also work as freelance self-employed consultants.

Company A undertakes work for Company B and subcontracts this to Director 1.

Director 1 invoices Company A, Company A invoices Company B with an 'admin fee' included.

Company B pays Company A, Company A pays the invoice of Director 1.

We want to avoid 'employing' people if we can. We have identified someone who could undertake all of the invoicing for us, they too would invoice Company A for their work.

Hope that makes sense? I appreciate your time and responses.

Paul

[Maslins]

The directors would probably find themselves employees of company A. Sure, you can try to argue they're self employed subcontractors, but I think if HMRC knew what you were doing, they'd think otherwise.

Why don't you all simply become shareholders of the company and take your funds out through dividends? The only potential issue with this is you will need to pay divis in respect of your shareholdings (ie director 1 does nothing for 2 months whilst directors 2-5 do lots of work...dividends should be paid evenly).

Or, you could setup A shares, B shares, C shares etc, each entitled to their own dividends. Not an expert on this, but I think provided there's no IR35/MSC issues (ie if you took company A out of the picture, would director 1 be considered an employee of company B...if company B is actually a wide variety of different companies you'd probably be fine).

[paule]

Thanks for your response Chris. I understand what you're saying, however this might be quite difficult for us to achieve - although we may be forced to do this by HMRC.

Would setting up as an LLP potentially remove/reduce these issues, I'm not so familiar with LLPs as I am with LTDs - but then I'm not overly familiar with these either!

Alternatively, following the shares route that you suggested (shares A, B, C etc), would the following example be right?

Company A undertakes 10 hours of consulting for Company B, this work is undertaken by Director 1. Director 1 needs to be paid pretty quickly for this work - can't necessarily wait until the end of the year (mortgages to pay etc!!)...

So, Company A charge £100 per hour for the consulting, therefore £1000 of consulting provided. Of this, the company pays Director 1 £900 in shares, leaving £100 in Company A for 'profit and growth'?

How would the tax work on this, would this go on Director 1's SA? What about company tax?

Not sure I'm very good at explaining what I'm thinking!?

Thanks again Chris,

Paul

[KM-Tiger]

I think you would need expert help with this. You can set up a company with many different classes of share, with corresponding different dividend entitlements. But it's definitely non-standard, and the paperwork would need to be right. And with a largish number of shareholders you would need a Shareholders Agreement to deal with eventualities of shareholders leaving, death, incapacity etc.

Dividends can be paid from retained profits. Different accountants seem to me to take slightly different views of what that means. The cautious approach is to wait until the year end and then pay dividends, but it can be done on a monthly basis, provided the profit is there, and the year end accounts can be drawn up accordingly. The risk to the shareholder is that if there is not sufficient profit come the year end, a wrongly declared dividend will have to be paid back.

Tax: the company will pay Corporation Tax on its profit. The carries through as a tax credit to the dividend recipient, who will have no further tax to pay unless they are liable for the higher rate of income tax. The CT tax relates to dividends insofar as the retained profit is the profit after CT is paid, so you would need to allow for that in your calculations.

If it was me I would be talking to an accountant with experience in this sort of set up.

[paule]

Thanks for your response.

OK, so now with finding someone to give expert advice... does anyone have any recommendations/can anyone help?

Just thought, would the other way around this be for the Directors to give timesheets to Company A, instead of invoicing? But I'm guessing that we'd have to set up PAYE and pay NI etc. I'm not sure if the others would be 100% happy with this idea though information would be useful to go back to them with.

[FreelanceSoftwareDeveloper]

Have you contacted HMRC and asked their advice?

I have found them helpful in the past, when I first started as a sole trader I didn't know if/how it would affect my employment and I didn't want to disclose my own business to my employer. They were very helpful explaining how it worked.

It seems to me that your not looking to do this for any kind of tax reduction or clever accounting reasons so no reason not to discuss your options with them and explain your scenario?

Regards,

Matt

[Maslins]

LLP might be a viable option. Then you're effectively all still self employed, just under 1 umbrella. It's much like a regular partnership, except (obviously) you have Limited Liability...but also you have several extra compliance hurdles, but nothing too onerous.

Re: A/B/C etc shares, as KM Tiger says, it's certainly non-standard, so you'd probably want to get a lawyer involved in the drafting of the shareholders' agreement, and a reasonable sized accountancy practice on board to deal with it. I know these things exist, but they're not that common and I don't really know the ins & outs.

[paule]

Matt, Chris, thanks again both for your responses.

I think the first place would be the HMRC, thanks for that Matt - I hadn't thought about them - you're 100% correct saying we're not trying to hide/avoid anything here, so if they're happy, it might be a viable option still.

If not, then it's off to find an accountant I go... if anyone can advise on any that may be suitable, that would be great (together potentially with a lawyer)!

Thanks again

[Williams lester]

Not sure you would get the best advice from HMRC, you will find most of their call cnetre staff are not tax experts and would most likely not give you the specialist advice you need.

There is a sticky at the top of the accountancy section on how to choose your accountant, but if you can tell us where you are someone may be able to recommend an accountant in your area.

[Homshaw]

The idea sounds high risk if you are going down the usual avenue of paying a divi up to the tax free limited then divis.

Not only would you be responsible for ensuring that you were IR35 compliant but you would be at risk if anyone else were found not to be IR35 compliant.

[paule]

Ok, great thanks for the further advice.

I guess a call to HMRC won't hurt, but looks like I'm on the trail of an accountant then...

The easiest place for me to get to (where I do most of my work) is Birmingham, so any recommendations around Birmingham, or in Birmingham City Centre would be great.

Thanks again folks, you've all been a great help so far in identifying issues and how to go about resolving them.

[paule]

Couldn't find out how to edit my reply... just to say I've read through the sticky on choosing an accountant, but I'd really be open to anyone recommending someone - or themselves, if they think they understand where I'm coming from!

Thanks

[KM-Tiger]

Couldn't find out how to edit my reply...

There is a strict time limit on that - a few minutes I think.

Long enough to deal with obvious typos, but prevents the unscrupulous changing what they said much later.

[Homshaw]

Not too long ago there were companies, albeit operated by outside agents. which had lots of contractors as shareholders. The dividend paid depended on their individual earnings

Once HMRC suggest the outside agent could be held accountable for IR35 these disappeared.

I think if each contractor had a limited company and there was a further company that did all the invoicing and distributed the amounts earned on receipt of an invoice, if that's what the ultimate client needs, then that should work fine.

The Professional Contractors Group may be worth approaching on this one

[Maslins]

Whilst I'm sure the Ltd Co option with multiple shareholders may be a possibility, I think you should seriously consider the LLP.

It's pretty much designed for exactly your situation. Several professionals wanting to work together under a communal business, but still able to take money out flexibly.

[Homshaw]

I agree the LLP offers limited liability.

What I don't like is a situation where one of the partners is found to be in breach of IR35 and since his contract is with the LLP and the members are sole traders it would be responsible for determining compliance.

Does that not mean you are effectively sharing in his risk albeit on assets held within the LLP and any outstanding invoices? Even then it would involve winding up the LLP to escape further liability

The other thing about LLPs is that unless your income is high your tax liability is higher than that of a limited company

On reflection you do need a good accountant. Next problem is how to find one. I would approach PCG. They have approved accountants who undergo specialised additional training.

[paule]

Thanks everyone! So much to consider, I think we'll definitely need further advice, it sounds like a minefield!

Still open to further discussion, and to any recommendations, had one already through PM - thanks, I'll be in touch shortly.

LLP sounded good, but having investigated further, it doesn't really sound like the kind of structure we were hoping for.

... confused as ever ...