If you earn over 40k, should you set up a LTD company?

Fuctifino

Hi All,

Just wondering, if you earn over €40k/50k as a full time employee, should you not set up your own company, and invoice your employer at the same rate as you would be getting on a wage?

Am i not right in saying that you would only have to pay corporation tax on the profits of this company, or am i very much mistaken?

If so, why don't more people do this?, is it not mutually beneficial for both the employer and employee?

Brewie

There are a number of reasons for this. Here are a few:

• The new company would pay CT @ 12.5%
• The Director/Employee would then pay personal tax ie double taxation.
• Company accounts would need to be audited/audit excempt either way accountants fees involved
• Possible VAT registration required
• VAT & PAYE Revenue returns
• You would then be Self employeed if you owned the company.
• God forbid, you were no longer required by your now employer you would be let go ie just stopped being invoiced, therefore no redundancy and as you are self employed and no dole/job seekers etc etc
• Absolutely no job security

This just doesnt happen for a reason when renumeration amounts to the figures you mentioned

Fuctifino

Brewie wrote: »

There are a number of reasons for this. Here are a few:

• The new company would pay CT @ 12.5%
• The Director/Employee would then pay person tax ie double taxation.
• Company accounts would need to be audited/audit excempt either way accountants fees involved
• Possible VAT registration required
• VAT & PAYE Revenue returns
• You would then be Self employeed if you owned the company.
• God forbid, you were no longer required by your now employer you would be let go ie just stopped being invoiced -> no redundancy and as you are self employed no dole/job seekers etc etc
• Absolutely no job security

This just doesnt happen for a reason when renumeration amounts to the figures you mentioned

Regardless of Auditing, and job security, the company paying 12.5% CT - if the director wasn't paid a wage, just took profits from the company, is this not doable?

srsly78

Director can take money out in 2 ways:
1. Dividends.
2. Wage

Dividends are not tax efficient in Ireland, Directors are better off paying themselves a wage. UK is opposite story. So, pay out all money as wages = no profit = no CT.

Brewie

It's doable and have seen it done on the odd occasion but if you were a normal employee, unless some specific circumstances were met, I dont see why you would.

Are you going to work for free?

or set up said company and take the profits as dividends?

Either way you would be double taxed.


In todays environment, I cant understand why someone would want to change their status from employee to self employed especially when there's so much more hassle invloved and complications

srsly78

You only get double taxed if you do it wrong.

You do NOT want to make any profit if you are a 1 man service company. The normal 12.5% rate does not apply in this situation, you get crucified on retained profits. Solution = don't make any profit.

EIREHotspur

srsly78 wrote: »

You only get double taxed if you do it wrong.

You do NOT want to make any profit if you are a 1 man service company. The normal 12.5% rate does not apply in this situation, you get crucified on retained profits. Solution = don't make any profit.

So in other words you are saying don't make a profit as in buy and charge everything like fuel, fixtures & fittings, computers, phone calls etc to the business so that he doesn't make profit?

Thats why for instance every year a lot of photographers pump more money into 2k-5k lenses as expenses to offset against profits.

New Business is exempt from Corp Tax for a few years though?

srsly78

Yes, maximise expenses and wages to reduce profit to zero.

The exemption does not apply to 1 man service companies. There are criteria to determine what constitutes a service company, but I don't have the link to hand. Basically if you contract your services to someone else you fall foul of this.

They obviously have this rule in place to stop people like me completely abusing the system by taking advantage of all the incentives.

OP: I would say LTD is worth it once you know you are gonna be doing it for the long haul, and issuing invoices totalling more than 60k+ a year.

fergald24

The application of PAYE on the payment by the employer/company to the company/employee would depend on the whether the worked carried out for the employer/company would be regarded as a "contract of" or a "contract for" services. If it is a contact of services (i.e. an emplyment) PAYE & employers PRSI will apply regardless of where you make the payment to. Therefore very unlikely that if PAYE currently applies to the payment to the individual it would not apply to the payment to the company

srsly78

Seeing as how my customer/employer is in the UK I would love to see the Irish revenue try to come after me for that :pac:

Contractors do not have the same status as normal employees, we have no job security etc. There is no way they will make us pay employers prsi because of this. It's the same story in the UK (this is what IR35 is about). The taxman keeps threatening to go after contractors, but it never stands up in court.

Oh yeah, the trick is to call yourself a consultant not a contractor. This makes all the difference

fergald24

Revenue successfully goes after "contractors" and wins regularly. I represent companies who employ/retain "contractors", all depends on the fact pattern.

pawnacide

Weren't the revenue clamping down on these practices.. I read somewhere couriers and hauliers who were set up as self employed but were in fact working for one company were being investigated.
But maybe that was just one particular company.

srsly78

Please provide some evidence for this. You are saying that thousands of contractors are committing fraud... I happen to know a lot of contractors and what you are saying is simply not true in most cases. As I indicated above, since my customer is in the UK, why would the Irish Revenue possibly object? The UK revenue might object, but that is not my problem.

The one case I will grant you is where people really take the piss, where they have a contractor working for the same company for 5 years... The "fact pattern" they go after is easy to guess and avoid (don't have 1 customer in 5 years!!!)

pawnacide

Just what I read, as far as i can remember they were employees who subsequently became contractors but nothing else changed.

Ring the revenue and ask them is the easiest solution.

srsly78

Yeah that sounds like one of the "take the piss" scenarios alright.

smeharg

The tax issues are play only a small part here.

I think loss of employee rights, job security, social welfare benefits is of much more importance. These are the reasons why more people don't do it.

As other posters have said the taxation isn't a problem if done right. You may end up paying less tax but will that make up for the loss of all the other benefits?

Revenue has been clamping down on subcontractors in various sectors, the most recent and high profile being locums in pharmacies and medical practices.

It's not the contractor that's in the wrong if Revenue deem a contract to be an employment contract and not a self-employment contact - It's the employer company.

Operating through a limited company, though, gets around this problem.

EIREHotspur

srsly78 wrote: »

Yes, maximise expenses and wages to reduce profit to zero.

The exemption does not apply to 1 man service companies. There are criteria to determine what constitutes a service company, but I don't have the link to hand. Basically if you contract your services to someone else you fall foul of this.

They obviously have this rule in place to stop people like me completely abusing the system by taking advantage of all the incentives.

OP: I would say LTD is worth it once you know you are gonna be doing it for the long haul, and issuing invoices totalling more than 60k+ a year.

To clarify....do you mean if some guy sets up as a Single Member Company company and sub contracts work out he will not be exempt on CT?
or
Do you mean any person setting up a Single Member Company offering a service like a Photographer, Web Designer etc?

smeharg

EIREHotspur wrote: »

To clarify....do you mean if some guy sets up as a Single Member Company company and sub contracts work out he will not be exempt on CT?
or
Do you mean any person setting up a Single Member Company offering a service like a Photographer, Web Designer etc?

The relief doesn't apply to professional services companies.

I don't think it matters if the company is a single member company.

The rules changed in 2011. It's no longer a straight exemption. It's now linked to employers PRSI. So the company must create employment to get the relief.