Wouldn't a limited company also have to pay VAT on the services it provides?



Yup. Just like paying into a pension by salary sacrifice or the various Income Tax allowances and reliefs. There are [iloads[/i of legalised methods of tax avoidance. None of which are any different from a moral standpoint.

Most one man band limited companies like this register for vat under the governments flat rate scheme. You can then charge your ustomers 20 percent but only have to pay HMRC 14.5 percent or less.

Again, the only word of warning I'll give to the OP is that you are now walking into the deep end of the swimming pool, you have to be VERY disciplined to run yourself as a Limited Company and when you throw in VAT as well then you are talking about a complete change in your perceptions of how you earn money and how you pay taxes.

If you've arrived at this point from being a PAYE employee for years to suddenly being self employed then stop and think about how you are going to organise the fact that the money that gets paid into your bank account every month is NOT all your money, some of it belongs to HMRC and they get rather shirty when you don't hand it over to them.

Been there, bought the t-shirt, had the t-shirt repossessed

Its a difficult question to answer because everyone's circumstances are different. For example, if you have a wife or partner that doesn't currently work then that is an obvious easy route to get money out of the business tax free. Your best bet is to go and see a good local accountant who will be able to advise you based on your own personal circumstances.

Karlos,

The sensible thing is to get advice from an accountant. All will have dealt with this scenario before, all will be able be to advise based on the IR35 rules. It may cost you a few quid up front to get their advice, but they will probably re-assure you and remove a lot of the worry and confusion that you have.

You do not need to go the Limited Company route. As stated by others this does have advantages - you can pay a small salary with the usual PAYE & NI deductions, and then pay yourself a dividend. Dividends attract a flat 20% tax, and no National Insurance. And this is irrespective of whatever you total annual earnings are from all sources.

The main thing to be mindful off is if you go Limited, Self Employed, Unbrella, you will have to employ a bit of disciplined administration. This will not be a big burden if managed continually, and is not rocket science.

They are completely different form a moral standpoint because its blindingly obvious what the differences are between the situations. The government expressly grants you tax relief on pension contributions as an incentive to save for a pension. They have not deliberately set things up for the self employed so they can avoid tax. That is no different than "doing a Jimmy Carr". It was obvious the money that was paid to the K2 company were his wages for his services. It is equally obvious a contractor's company is getting the contractors wages for his services. They should be therefore taxed as income tax not capital gains. The fact there are things like tax relief on pension contributions so this is the same is a ridiculous argument. We are dealing with income and income should be taxed as such.

If its OK for contractors to pay themselves via dividends to lower their tax then its OK for Jimmy Carr to do what he was doing. Clearly neither are morally acceptable or they both are.