IT contracting in the UK for a German client

I am considering the offer of reloacting from Germany To UK (London) and my current client is willing to offer an offsite contract i.e I will be working from Home (London) for the Client. Since I am new to UK Contracting and limited knowledge about offsite contracting, I will really appreciate if someone can forsee any issue or things I need to take care of in such case. I am planning to setup a Limited Company and invoice the client (with VAT) .

Appreciate any input!

Many Thanks!

Hi Invincible,

In the UK, in general you are required to register for VAT when your annual sales exceed £67,000.

HMRC (Her Majesty's Revenue and Customs) are responsible for all tax affairs, including VAT.

The webpage which explains when you must register for VAT can be found here: http://www.hmrc.gov.uk/vat/reg-how-to.htm

If you registered for VAT in the UK, you would invoice your customer net of VAT (i.e. 0%), as long as he gives you his German VAT number.

If your annual sales are not going to exceed £67,000 (around 85,000 EUR using HMRC's exchange rate) then I would advise that you do not register for VAT.

Why not? Well, you would still end up charging your German customer the same amount. Being VAT registered means that you have to fill out monthly (or quarterly, if you request this from HMRC) VAT returns. These are quite simple, much easier than the German equivalent. However, it is an 'extra' responsibility, it will take up your time and means you have to keep excellent records. The VAT people have more powers than the police, so you must make sure you do everything right.

HOWEVER, registering for VAT does have some good points. Basically, if you pay VAT on your business purchases, then if you have a VAT number then you can claim this VAT back. For example, you might pay UK VAT on stationary, computers, petrol (for business use) etc.

So, you need to weigh up the advantages and disadvantages of registering for VAT. If you don't expect to have many business expenses, then I would advise against registering.

One thing to note - it sometimes takes several months to receive a UK VAT number because HMRC like to carry out various checks to make sure your application is legitimate. This is because over the past years criminals have been exploiting the VAT system in the UK.

Setting up a limited company in the UK is cheap and easy. On www.ukplc.net you can set one up over the internet.

With a limited company, you can keep your personal and business life separate. There are also tax advantages. By owning a limited company (i.e. owning the shares), you can pay yourself a small salary, and then the rest in dividends.

Basically in the UK we have two taxes on income. Income tax, and National Insurance (NI).

Information about income tax: http://www.hmrc.gov.uk/rates/it.htm
Information about national insurance: http://www.hmrc.gov.uk/rates/nic.htm

If you set up a limited company you will pay Class 1 and Class 1b National Insurance contributions.

National Insurance is only applied to your SALARY. However, DIVIDENDS are not subject to National Insurance.

Consequently, you can pay yourself a small salary and large dividends, and then you do not pay much National Insurance.

Company profits are taxed at 20%. [edit - for tax year 2008/2009 this will increase to 21%]

If you have any questions, just ask.

Regards
Nicholas

Many thanks Nicholas !

Really appreciate quite detailed response, I owe you a drink for this one :-).

Since my annual sales are going to exceed £67,000 I might have to register for VAT. Although as you mentioned since my net of VAT is. 0% - "primarily zero-rated", I could avoid registering (after getting advice/confirmation from the expert) . Anyway I will update this forum once I finish the setup.

Please don't mind but I have couple of more queries,

do you have any suggestion in my case (Home-based offsite contracting with non-UK client) to find out whether I am inside IR35 or not? A point to a good professional will also be a great help?
If possible, would you suggest any accountant ? Right now I am considering SJD or Upton (base on some forum feedback)

Many Thanks!

Providing you word your contract correctly and include things like the right to substitute yourself etc then you'd be no more (and probably less because of being able to work from home in a different country) likely to be caught by IR35 than the vast majority of other UK IT contractors.
don't really see any particular benefit in not being VAT registered in your position.

Little bit about National Insurance, if you keep your salary low (I think to 5775 but I can't remember exactly as I pay myself 6K, then you don't pay any NI)

Final thing to note is pensions and/or closing the company and paying capital gains on the assets.

I've decided to pay a decent chunk into a pension from which you can extract 25% tax free at 50 and further much smaller withdrawals without tax after then (or of course buy an annuity or something). This money is "inoculated" from IR35 investigation/taxation.
The rest of the money will sit in the company and can be taken as dividend with no further tax to pay providing income in the year is less than 40K ish.
OR...if you need to bucks quick you can close the company and probably benefit from paying about 10% Capital Gains OR just take a bigger dividend and pay the 20% (ish) tax on the income over 40K

P.S. you won't need employees liability insurance if your employees are your family
P.P.S. try to limit your liability in the contract to a low amount and get insurance to match. 10million liability insurance is pricey!

I use Quay, wouldn't recommend them but to be honest, however I think with all the budget accountancy firms they're much of a muchness so I'm not going to change. For me an accountant is there to kick my ass and do the mundane. I never make decisions based solely on their advice (as it can be incomplete) and I check the figures they give me to fill in my returns.

Best to register then.

I studied accounts at uni and so don't use an accountant. My mother is an accountant so I can always call her for advice when things get tricky. It's difficult to find a good one, and I'm sorry I don't have any suggestions.

Forming a UK company means you'll be drawing up your accounts in sterling. HMRC and Companies House do allow you to draw up your accounts in euros, however I wouldn't advise it. It makes everyday transactions such as paying yourself extremely tedious. You'll need to convert each invoice into sterling using HMRC's monthly exchange rate. If you aren't used to preparing accounts, this can end up quite confusing and a good accountant will be essential. Make sure the accountant you choose has experience with transacting in two currencies, otherwise he/she'll be a waste of time.

IR35 is a difficult subject because its largely subjective - one tax adviser may say one thing and another may say the opposite. For this reason, I would forget about tax advisers all together. I suggest that you write to HMRC Written Enquiries, outline your case (mention you'll be looking for UK clients as well perhaps?) and ask them for an opinion. It's always best to get the answer from the horse's mouth.

Write to them, don't ring them. Their phone operators aren't always experts and often give conflicting information.

I think they'll be ok with it. IR35 is legislation which aims to prevent contractors circumventing the payment of UK national insurance. Your 'employer', so to speak, is a German company. so you aren't really circumventing the payment of UK NICS. I don't think the legislation was intended to have effect in your case.

Kind Regards
Nicholas

Thanks Nicholas & Ollya for your input!

I have e-mailed HMRC for the IR35 , will update once I have further information.

Regarding VAT registration, only point I was not sure since I will have Net 0% VAT on my invoices I will always have positive VAT difference (from what I pay for my expenses) i.e HMRC will have to pay me VAT. I wonder if I am attracting trouble by doing so.

Regarding Accountant, I always prefer to have input from 'professionals' to make sure I won't mess around with HMRC. But as you already mention, Since it is difficult to find good accountant in UK, I have to be careful.

Once again Thanks for the help!

Err - this horse, responsible for coming up with deliberately vague rules, is the same horse which wants your money. It's not hard to guess, therefore, that you'll nearly always get told you're going to 'fail' IR35 even if the reality is that you won't.

There are lots of people who are in the position of reclaiming UK VAT every month, me included. You aren't attracting trouble, you are just, in my opinion, more likely to come under scrutiny in the future. This isn't a problem is you are doing everything correctly.

At any rate you wouldn't be reclaiming large amounts.

VAT, yes, because the rules are not vague. Corporation Tax for example, also yes. IR35? No chance. It's fine if you go through a proper investigation, but just emailing your contract and asking "should I pay you lots of tax, or less tax?" is nearly always going to be returned with "thanks for your enquiry, on the basis of your contract, we recommend that you pay us lots of tax" in response ;)

The alternative would be to require his German employer to register as a UK employer and deal with HMRC. The German company would probably look at the admin involved and decide it's not worth the effort. Surely HMRC would realise this? They'd be cutting their nose to spite their face.

Is that correct? I thought, although I'm no accountant, that you're marked a 'deemed employee' for IR35 tax/ni but not as an employee in standard employment terms. In other words, the only difference is that you take your gross turnover, and pay tax/NI on it as if you'd instead paid the whole lot out as salary. I could be completely wrong though!

However, for VAT questions/answers, calling HMRC up is a great idea, as those regulations are black & white.

Am not sure. It's all so silly and confusing. They should get rid of IR35 altogether.

I had an investigation recently. It all went well and they were actually reaally friendly (and very quickly found me "outside" of IR35), but it would be even better, and save much time all round, if they just got rid of it or clarified it properly. Rules should not be vague.