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Suppose I am self-employed. I join forces with another self-employed person. I can provide a service that he can't and vice versa. We produce and sell a single product. Suppose we agree to split profits from sales 50/50, and that all income comes to my bank accounts.

Suppose we make £10,000 gross income from the product in a given tax year. I owe my partner £5,000 by agreement.

If my partner invoices me for £5,000, I then pay him as a service charged to me.

I then pay tax and NI on my profits. He then pays tax & NI on his profits.

My question: Is this legal, or is there another way to achieve this legally? I am trying to avoid employing this person.

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Why would it be illegal?

It seems you are buying a service (that you cannot provide) from your partner. Nothing wrong with that.

Whether your company structure is optimal, is another matter that very much depends on your jurisdiction.

Addendum:

Assuming self-employment is somewhat comparable between the UK and Denmark, the main concern for the (tax) authorities is whether both of you are business owners independently of each other; i.e. that none of you are obligated to find work for each other, as that would be deemed being a 'de facto employee'.

When I started out, one of my first assignments was a collaboration with 3 other freelancers. We even got business cards in the company that maintained the client contact - even though we were in no way employees. It is perfectly legal for a group of freelancers to join forces in a 'collaborative partnership'.

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  • I've elaborated my answer. Yes - it is a workaround - but perfectly fine and 'light-weight' and in fact a quite normal way to go about things when starting out. – morsor Mar 8 '16 at 8:47
  • We would be both self-employed, each registered separately with HMRC, both responsible for our own records and annual tax returns. However, this would be a frequent interaction making apps/games. I do the coding. He does the graphics. I can't do the graphics. He can't do the coding. But we want to keep it simple to begin with, so would prefer to be separately self-employed. – Pixel Mar 8 '16 at 9:19
  • It is a perfectly sensible solution and exactly what lots of others (myself included) have done. Being two self-employed persons starting out, either of you could also easily choose to work with other partners. The only problem I could imagine, would be if it always is the same person who finds new clients - and the other person never has any other clients. – morsor Mar 8 '16 at 9:28
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Edit: Most of this answer is based on a part of the question that has now been removed:

Assuming the above is illegal, then I think a Limited Partnership, or a Limited Liability Partnership may be the answer[...]


I actually work in an almost identical situation.

You don't have to register a Limited Partnership or a Limited Liability Partnership (LLP)—you can register as an ordinary business Partnership—which is very similar to being a sole trader and you are still technically self-employed. Similarly to being a sole trader, you are still personally responsible for all losses, bills, debts etc. But all partners are responsible for their share of the business.

When you register as a partnership, one partner will be the nominated partner—who is responsible for submitting the partnership tax returns and keeping business records.

You can both take your share of profits, pay your own NI contributions and any tax due on your share of the profits etc, essentially exactly the same as being a sole trader. The only difference is that you have to submit a separate tax return for the partnership.

You can even do—as you said—have all the income come in to your bank account, pay your partners share to him and account for it as business income and your respective shares of the profit, without the need for invoicing each other etc.

Relevant Documents & Reading (GOV.UK):

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In short - nothing illegal or wrong. You are buying/selling a service. Make sure you keep receipts - a tax man can be understanding about mistakes (meaning you pay what you owe with little/no fine) but if the taxman thinks you were being evasive or negligent, they can be very very unforgiving. Tax efficiency is legal, tax avoidance is not.

(EDITED) There is a slight exception to the above that you should be aware off. If you and the other self employed person share a home together, or you are married - the tax man might find cause for concern - hence the importance of having a chat with an accountant.

A question on startups stackexchange was raised which I answered. I am UK based, the OP was US based, but the Q&A would be a useful read for you to reduce your risks. If you don't want to read everything, then just consider points 1,2 and 3

https://startups.stackexchange.com/questions/8576/how-to-build-a-startup-freelance-software-qa-in-the-us/8585#8585

Best of luck...

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Just to add something that I don't think has been addressed and that you should verify with your accountant:

Suppose we make £10,000 gross income from the product in a given tax year. I owe my partner £5,000 by agreement. [...] I then pay tax and NI on my profits. He then pays tax & NI on his profits.

What you need to be careful about is: when you receive the full amount and then pay your partner (who is not really a partner but another independent entrepreneur), you need to make sure to include the full amount you received as gross income. What the other freelancer cost you is usually considered as an expense. So in a way, you need to see it as you are both hiring each others to work on projects. The one who receives the full payment is like a client and when you need to pay your partner, he needs to send you an invoice for his work.

Depending where you are and the regulations there, some countries would require you to declare the full amount you got even if you shared it. Your partner's payment is considered an expense and the full amount you got is your revenue. The profit is the (10k - 5k). Your partner will not have any trouble but you could if you ever get audited. Talk to your accountant about this to make sure there won't be any issue and how you should proceed! I can't say if it can be an issue in the UK but it's the way to proceed where I live.

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  • Thanks for the interesting view on this. Definitely worth looking into ! – Pixel Mar 18 '16 at 10:55

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