IT Contractor / Tax relating to Limited Company.

ulster

Hi all,

I got a role as an IT contractor (I'm in Ireland) for a company based in the US. Because of this, I'll have to do my own taxes (well I could use an agent, but I'd like to avoid that), and I'm looking for some high-level advice.

Would setting up a limited company be the most tax efficient way to go? I've read about Umbrella companies, but it seems like it's quite punitive.

I'm also trying to understand how I should "declare" the format I will be paid. Should I be looking to split my earnings between salary and dividends, or should I favour one particular method? I've also read about Corporation Tax and Dividend Witholding Tax. I assume with a Ltd company I'd be liable for these, or is it possible to get some exemptions.

Thanks.

JoeFromTipp

Hi Ulster,

Note, I'm not an accountant so please take the below for what it is. It's just my personal experience so far. About 5 years ago I set up my own company for the same situation you're in, except my clients are in Europe. It's been pretty easy to manage since. I do all the returns myself on the ROS Revenue website and I haven't had any major issues.

As a company director there is a generous amount which can be put in to a pension as a business expense so that's how I am splitting the company earnings. I don't know what age you are or whether a pension is in your thoughts but that's the route I chose to go down.

You will have to pay corporation tax although if it's a new company and you're doing something you never did before there were exemptions for the first three years when I was setting up. I decided not to go down that route though and paid the corporation tax from the start. My daily work is basically more or less the same as what I was doing in my previous full time employment. It could be argued with the "marketing" and running the business I'm doing other roles but I didn't see the point in risking that with Revenue.

If you decide to keep money in the company you need to pay the surcharge on undistributed income of service companies. This is designed to prevent the build up of cash in a company like this. I don't think there's any difference in the taxation between salary and dividends but I'm open to correction on that. My company has never gone down the dividends route. I think in the UK dividends are taxed differently.

If you want more details PM me and I'd pay happy to discuss further.

Joe.

ulster

JoeFromTipp wrote: »

Hi Ulster,

Note, I'm not an accountant so please take the below for what it is. It's just my personal experience so far. About 5 years ago I set up my own company for the same situation you're in, except my clients are in Europe. It's been pretty easy to manage since. I do all the returns myself on the ROS Revenue website and I haven't had any major issues.

As a company director there is a generous amount which can be put in to a pension as a business expense so that's how I am splitting the company earnings. I don't know what age you are or whether a pension is in your thoughts but that's the route I chose to go down.

You will have to pay corporation tax although if it's a new company and you're doing something you never did before there were exemptions for the first three years when I was setting up. I decided not to go down that route though and paid the corporation tax from the start. My daily work is basically more or less the same as what I was doing in my previous full time employment. It could be argued with the "marketing" and running the business I'm doing other roles but I didn't see the point in risking that with Revenue.

If you decide to keep money in the company you need to pay the surcharge on undistributed income of service companies. This is designed to prevent the build up of cash in a company like this. I don't think there's any difference in the taxation between salary and dividends but I'm open to correction on that. My company has never gone down the dividends route. I think in the UK dividends are taxed differently.

If you want more details PM me and I'd pay happy to discuss further.

Joe.

Hi Joe, thanks for that reply. It was great.

When you were setting up, did you need to register for VAT? I read on Revenue's website that if the place of supply is outside the EU, the contractor doesn't need to charge Irish VAT. If that's the case, does that mean I would not need to register? Revenues website says that if your turnover exceeds a certain threshold for services, one has to register - that confuses me. Any ideas?

About the Corporation Tax, I probably have the wrong impression, but is it not just applied to profits, so if I was earning 80k let's say, and taking that as a Director's salary, there would be no money left in the company to apply the CT on?

Lenar3556

My advice would be speak to an accountant and get a good system going from the start. Something that you can easily maintain yourself to raise invoices and and manage expenses. There are some really good cloud accounting packages that really pull things together. €50 a month type cost.

In relation to the LTD vs Sole Trader, one of the considerations will be how much money you will be making vs what you are spending. If you take in 80k and take 80k out in salary and expenses every year you will pay no corporation tax, but similarly the company offers you little benefit over sole trader but with additional filing obligations.

If you were taking in 80k and spending 30k the balance is corporation taxed at 12.5%, but that could be quite efficient if you were consistently earning more than you were spending and were building up value within the company. As pointed out above the Section 441 surcharge may add another 7.5% or so to this, if it applies to your type of business.

There are other limited liability values with companies vs sole trader but you might not need these.

You will likely need insurance in any case.

VAT - if 80k is your anticipated sales, you will likely have to register for VAT. It’s probably in your interest to register for VAT in any case as you can reclaim on purchases and VAT on your sales won’t really cause you much difficulty.

JoeFromTipp

ulster wrote: »

Hi Joe, thanks for that reply. It was great.

When you were setting up, did you need to register for VAT? I read on Revenue's website that if the place of supply is outside the EU, the contractor doesn't need to charge Irish VAT. If that's the case, does that mean I would not need to register? Revenues website says that if your turnover exceeds a certain threshold for services, one has to register - that confuses me. Any ideas?

About the Corporation Tax, I probably have the wrong impression, but is it not just applied to profits, so if I was earning 80k let's say, and taking that as a Director's salary, there would be no money left in the company to apply the CT on?

Yes, I registered for VAT, I think the limit was 70K at the time. Lenar3556 has explained the rest far better than I could.

One possible benefit I would see setting up as a company is that in 10 years time if you find the company is earning more you need to pay as a salary and you want to start a pension then you can over-pay a significant bulk amount initially into the pension for years of service. I'm not sure if the same is true for a sole trader. Again best to ask an accountant or pension adviser about that. I've no idea how likely that's going to change in the future though.

I use GNUCash (on my Windows laptop) to keep my accounts, each month there's about 7 entries on average and after spending some time initially setting it up and understanding how it works it's very straightforward. You're only going to be issuing one invoice a month, I assume and have basic expenses of a mobile subscription, O365, maybe a co-working place? If you're working from home the company can pay you €3.20 a day without paying any tax, PRSI or USC on it. The directors of a company can also get €500 each per year tax free in the form of a gift voucher but this has to be paid in one go.