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You probably don’t want to try this ….

I’ve just read a thread on Punternet about money laundering.  All fairly boring stuff, but then this jumped out at me:

I am employed by my limited company.  I pay myself a wage & pay PAYE on that.  My Company organises my Health Insurance, Gym Membership and funds my education as a benefit.

Also, if I decide to start a family, Maternity Pay is easier to manage for an employee than for a Self-Employed person.

Now I don’t know anything about this girl, other than what she has written on this thread, and it may be that she has taken professional advice or there’s more to it than she has revealed, but it strikes me that far from being clever this strategy is fraught with problems.

From the little we know it appears that she has a limited company which receives her income from a day job (which she describes as ‘clothed’ contracts) and her income from escorting (presumably ‘unclothed’ or ‘partially clothed’.) The company then pays her a wage (or salary) and also pays for her health insurance, gym membership and education.

So, why wouldn’t you want to do this?

  1. Paying yourself a wage through a limited company is less tax efficient than being taxed as a self-employed person. That is because the self employed pay tax at 20% and NI at 9%, while employees pay tax at 20% and NI at 12%, with an extra 13.8% payable by the company. The company gets corporation tax relief on the payments it makes, which brings the effective rate down a bit. But overall the company wage route costs a total of 43.04% in tax and NI while the self-employed escort pays 29%. So on £10,000 of escorting income you would end up paying an extra £1,404 of tax & NI.
  2. At first sight getting your own company to pay for gym membership and health insurance sounds tax efficient. A self-employed escort will not get tax relief for them but a company typically will. However they will be treated as taxable benefits in kind so the escort will be charged 20% tax on the cost of the benefit, while the company will be charged NI at 13.8%.
  3. If the contract is in the name of the individual rather than the company (and for health insurance or education it typically will be) the cost is even higher because the individual is also hit for employees NI of 12%. That makes the whole exercise more expensive than being self-employed and simply paying for your personal expenses out of your taxed income.
  4. Benefits in kind are reported to HMRC on the dreaded form P11d. This is not a regime you want to get into if it can possibly be avoided because there is a much higher likelihood of an inspection which gives HMRC the opportunity to rummage around in all the company’s books. P11d’s are easy to get wrong and there are inevitable penalties when you do.
  5. That leads on to another issue. If your civilian job is straightforward why would you want to push a cash business, with all the inherent difficulties in proving your income, through the same business structure? A small clean company and a separate cash based self-employment are much less likely to attract an investigation than a mixed larger company. And if you do get investigated the mixed company is going to be much messier and more expensive to handle.
  6. If the civilian work is for businesses (which actually seems likely in this case because she is getting paid by BACS) you might want to voluntarily register for VAT even if you are below the VAT threshold. That’s because a VAT registered business customer will not be concerned if you add VAT to your charges, but you will be better off because you can recover the VAT you suffer on your business expenses. However you really don’t want your escorting income to be caught by VAT because you would either have to increase your charges by 20% or sacrifice 16.67% of your escort receipts to the VATman. With your escorting in a self-employed business and your civilian work in a company, the two are entirely separate so you can register one for VAT without it affecting the other. Put both into a company and you must either register all or nothing.
  7. Of course tax savings could be achieved using a limited company if income was drawn out as dividends rather than as wages – and although she doesn’t say so I suspect she may be doing this to some extent. That’s because dividends do not attract NI. So there is a potential saving of 9% to be had; but that needs to be weighed up against some other crucial factors.
  8. Because contracts involving prostitution have no legal force it is doubtful whether an escort can legally divert her income into a limited company. The punters almost certainly think they are dealing with an individual rather than a company employee. If there is no mention of the company on an escort’s website, or in any of the emails or texts setting up their meeting, and she never says a word about it to him, then it’s pretty obvious he is doing business with her. When he pays her the cash, and she provides services to him, the income is hers. It is nonsense to pretend the income belongs to a company, and she cannot make an agreement with her company to change that because immoral contracts are illegal. Any attempt to say “this is the company’s income, I saw the client as agent for the company” risks HMRC responding that the arrangement has no legal validity and is a complete sham, the income belongs to  the escort and we want tax from her; if she has paid it all into a company that’s interesting but irrelevant.
  9. An escort could form a company and advertise it to clients via her website and emails, but anyone with £1 to spare could go to the Companies House website and get the full name of the director. And if anyone other than the escort is a director or involved in the management or ownership of the company they are at risk of prosecution for control and gain from prostitution.
  10. And then there’s the decision in R v Registrar of Companies, ex parte Attorney General which resulted in Lindi St Clair (Miss Whiplash) having the registration of her company quashed.

Our escort’s final comment that maternity pay is easier to deal with for an employee than for a self-employed person will astonish anyone who has had to handle the payroll for a business with employees getting SMP. OK it’s probably not as difficult as the process of child-birth but it ain’t straightforward. It is certainly true that employees get more maternity pay than the self-employed, but that is because they pay a lot more NI.

Conclusion

If you have an existing limited company and you start doing a bit of escorting what should you do? Well the first thing to do is to take careful professional advice, and make sure you give your advisor all the relevant facts. Generally the simplest and most straightforward approach will be best: your escorting is a new self-employed activity, and should be registered as such, rather put through your company.

 

UPDATE:

The lady concerned has quite reasonably commented “I am inclined to take advice from my Accountant and from HMRC, rather than a messageboard on these things.”

It certainly was not not my intention to give her advice, and to do so on the basis of a partial understanding of the facts would of course be very dangerous. My intention was to draw out some of the general principles that need to be considered by anyone contemplating doing escorting work through a limited company. My overall view remains that doing so is fraught with difficulties, not least the issues thrown up by the Lindi St Clair (Personal Services) Ltd case, which sadly few accountants seem to know about.

If my article comes over as presumptuous, I am very happy to apologise.

 

 

One comment

  1. Jolyon says:

    It seems this is not going away, and as is the way with Punternet threads it’s not getting any closer to a consensus. A tax advisor called ClarenceNightingale has posted this:

    I must say that most of the posts on this thread are utterly stupid. If you want decent tax advice then go and see a good accountant. If you don’t know what money laundering is then google it and surely you will find an answer, it is a dumb question to ask on a messageboard and you should know that you will get some really daft answers.

    As for Lara’s use of a limited company, I can see that if her company has many different trading activities then it would be much more profitable to use a limited company. Those of you who say there is not much difference have obviously not used the correct company structure or method of accounting. Take it from me that it is usually more profitable to use a limited company to trade if your activities are substantial and varied. It is also more tax efficient and if you non domiciled in the UK for tax purposes there are a range of ways to avoid tax (note the use of the word avoid, as opposed to evade). Basically to summise, if Lara uses a limited company then it is up to her accountant to advise her correctly and to use the most tax efficient structure depening on her circumstances.

    Source of knowledge: 15 years of working/owning and advising in the UK and offshore tax efficiency and company structure sector.

    It’s hard to know whether this is an attempt to blind everyone with science, or just bluster, but let’s take it seriously for a moment.

    ” …if you non domiciled in the UK for tax purposes there are a range of ways to avoid tax.” Well, yes there are, but I fail to see how this is helpful or relevant. For income tax purposes domicile only matters in relation to income that arises outside the UK – for anyone whose escorting work is done in the UK it doesn’t make a scrap of difference where they are domiciled.

    “Take it from me that it is usually more profitable to use a limited company to trade if your activities are substantial and varied.” I may be missing something obvious here but (ignoring the tax issues for a moment) I fail to see how escorting through a company is more profitable than being self-employed. Profit is income earned less expenses – how does escorting through a company increase income from punters or reduce business expenses?

    “It is also more tax efficient …” There can indeed be tax savings from running a business through a company but it is not a straightforward calculation. The tax savings depend on how profitable the business is, whether the director/shareholder is a basic or higher rate taxpayer, whether all the available cash and profits are to be drawn out of the company, whether profit is extracted by salary or dividend, and whether other people (husbands, wives or whatever) are involved in the company. The company route is usually more tax efficient if profits exceed £68,000, or if all the profits are drawn out by dividend. The scenario as originally described had profits drawn out by salary, which for a basic rate tax payer would certainly lead to much higher tax bills than would self-employment.

    But the real killer is the point made by Jack Jones a little earlier in the Punternet thread. The effect of the decision in the Whiplash case (R v Registrar of Companies, ex parte Attorney General 1980) is that escorts cannot channel income from prostitution through a limited company. And if they do they will end up with a tax nightmare. Let’s put some numbers on it. Suppose an escort receives a total of £20,000 from punters in a year and incurs expenses of £5,000. If she is self employed she will pay tax on her profit of £15,000. But if she pays the lot into her company which then pays her business expenses she risks HMRC saying the £20,000 is her income from self-employment with no expenses because she hasn’t incurred any – the company has paid them all. However the company cannot claim tax relief for any of the expenses because they were not incurred wholly and exclusively for the company’s trade.

    “Basically to summise, if Lara uses a limited company then it is up to her accountant to advise her correctly and to use the most tax efficient structure depening on her circumstances.” We do at least agree on that.

    “Source of knowledge: 15 years of working/owning and advising in the UK and offshore tax efficiency and company structure sector.” I can’t helping thinking that the problem with this post is not what he knows, but the things he doesn’t know, and in particular the implications of the Whiplash cases. Let’s hope Lara’s accountant understands their full implications.

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