a guide to contracting through your own limited company · 2019-11-28 · a guide to contracting...
TRANSCRIPT
A Guide to Contracting Through Your Own Limited Company
We’re Regulated so you’re Protected.
Contents
Starting Out as a Contractor
What is a limited company? 2 What are the benefits? 2
What are the responsibilities? 3
Registering your limited company 4
A business bank account 5
IR35 and Your Limited Company
What is the IR35 legislation 5
IR35 contract reviews 5
How do I pay myself? 6
Other Considerations
Signing contracts 7
Contractor insurance 7
Contractor expenses 8
Contracting & VAT 9
Corporation tax 10
Timesheets & Invoices 11
Your personal tax return 11
Starting Out as a Contractor
One of the first key decisions any contractor needs to makeis how to structure their new business. Many contractors decide to work through their own limited company, because for the majority this represents the most tax efficient trading structure. However, before rushing out and setting up your Limited Company, make yourself a drink and take 10 minutes out to read our simple guide, which is bursting with helpful, professional advice.
Let’s start by looking at what a Limited Company is, what their benefits are and what responsibilities or duties they bring...
What is a limited company?
The term limited refers to the fact that the company’s finances are separate from the personal finances of the owners. Shareholders (the owners) have ‘limited liability’ which means they are liable only for the amount they have invested in the company and are not responsible for company debts.
What are the benefits?
Operating through a Limited Company is a far more tax efficient option; through a combination of low salary and high dividends contractors can significantly reduce their tax and national insurance liabilities.
The Limited company’s finances are separate from the individual’s finances.
Clients do not want to engage an individual contractor directly; instead they prefer to engage a limited company which essentially acts as an intermediary.
This is also true of many agencies; they prefer to have a contract with a Limited Company, as it removes all the headaches of employing the contractor.
With a Limited Company, contractors are able to claim legitimate business expenses (see the section on contractor expenses later on in this guide).
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2Starting Out as a Contractor
What are your responsibilities?
As a limited company there are a number of requirements that have to be fulfilled:
The Company must be registered at Companies House.
Annual Accounts must be filed at Companies House.
Annual Returns must be submitted each year to Companies House.
HMRC must be informed of the Company’s profits each year
The company must complete an annual Inland Revenue corporation tax return and pay the due taxes within nine months of the Company year end.
Anyone employed by the Company must pay income tax and NI on their salary.
While this list may seem a bit daunting at first most contractors employ the services of an accountant to carry out these responsibilities for them.
Freestyle Accounting include all the above responsibilities as part of their ‘Freestyle Contractor’ service.
3Starting Out as a Contractor
Registering your limited company
All new businesses need to be registered at Companies House before they can be set up as a limited company (or become“incorporated”).
Once you have decided on a name for your company, you will need to complete the following documents and return them to Companies House to complete the incorporation process:
Memorandum of Association – includes information on Company Name, Location and Type of Business.
Articles of Association – Outlines director’s power, shareholders rights, etc.
Form 10 – Provides details of the Directors’ and Company Secretary’s Name and Addresses, together with the Registered Company address.
Form 12 – Simply states that the Company complies with the terms of the Companies Act.
These documents are normally prepared by an accountant or a formation agent.
The ‘Freestyle Contractor’ service takes care of everything for you from initial set up of your limited company through to VAT and PAYE registration.
A business bank account
As the finances of your limited company need to be separate from your own personal funds, you’ll need to arrange a bank account for the business.
Freestyle Accounting have negotiated a very favourable deal with Cater Allen Private Bank to provide all our contractors with a FREE business bank account (normally £15 / month). Whilst this is an attractive benefit, you are of course free to arrange your own account should you prefer to do so.
As part of the ‘Freestyle Contractor’ service, we will setup your business bank account for you free of charge.
4Starting Out as a Contractor
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IR35 and Your Limited Company
What is the IR35 legislation?
IR35, also known as the ‘intermediaries legislation’, was introduced because the Government believed that some contractors were providing their services through a limited company or a partnership as a means of avoiding tax and national insurance contributions (nics).
The IR35 legislation seeks to determine what the working relationship would be if you were engaged directly by the End Client; in short it asks the question - are you an employee “disguised” behind your limited company?”
If you (the employee) are provided by your limited company to an ultimate client on contract terms which would normally constitute employment with that client, then this is called a ‘relevant engagement’ and the IR35 rules apply. In this situation (where your contract is ‘inside IR35’) the concept of “deemed salary” is introduced and any income from that contract will be subject to tax and national insurance contributions, as if it had been paid as a salary.
For a more detailed explanation of the IR35 legislation along with information on how to determine if it will affect you please read our IR35 Guide.
IR35 contract reviews
If you are unsure as to whether your contract will be inside or outside the IR35 legislation, you can request an IR35 contract review from an IR35 tax specialist for a set fee.
Inside or outside IR35
As mentioned above the tax advantages of your own Limited Company are wholly dependent on whether your contract falls inside or outside the IR35 “rules”.
Contractors who fall outside the IR35 rules will be better off operating through a limited company, whereas those inside IR35 may find that an umbrella company payroll solution is amore suitable option.
5IR35 and Your Limited Company
The ‘Freestyle Contractor’ service provides you with unlimited IR35 contract reviews, plus a HMRC tax investigations service (provided by IR35 specialists, Abbey Tax) should you be subject to an IR35 investigation.
How do I pay myself?
Again, the way in which you pay yourself through a limited company depends on the IR35 status of the individual contract you are working on.
If your contract is outside IR35…
Provided your contract is outside IR35 then the most tax efficient way to pay yourself will be to take the traditional route of a low salary (subject to PAYE income tax and national insurance) combined with high dividends.
What are dividends?Dividends are a distribution of the company’s ‘after-tax profits’ to the shareholder(s) of a limited company. Any limited company which has generated profits can pay a dividend to its shareholders.
Please Note: It is necessary to complete a dividend declaration form each time a dividend is declared.
If your contract is inside IR35…
Unfortunately, if your contract is caught by IR35 then all income will be subject to PAYE income tax and national insurance, regardless of whether it is paid through salary or dividends.
PAYE payroll
PAYE is “pay as you earn” income tax that has to be deducted from your salary before it is paid to you.
Under the ‘Freestyle Contractor’ service all PAYE salary calculations, payslips and dividend declaration paperwork will be done for you as part of the fixed fee service.
6IR35 and Your Limited Company
Other Considerations
There are a number of additional things to consider when setting up your own limited company:
Signing contracts
Once you have found a contract and decided to trade through your own Limited Company you will need to sign contracts with the various parties involved. Follow these simple steps:
Send your new limited company details to the recruitment agency.
Sign the agency contract for the agreed period / hourly rate as company director of your limited company.
Please Note: If you have negotiated a contract directly with the client then the contract will obviously be directly between the client company and your limited company.
Contractor insurance
As an independent contractor you will be providing yourservices as well as professional advice to clients. In the event that you make mistakes or errors while contracting for a client, they are perfectly within their rights to claim for negligence. For this reason many clients will insist that you are covered by appropriate insurance before they will hire you.
Most contractors will require the following insurance to ensure they are adequately covered:
Professional Indemnity Insurance
Professional Indemnity insurance (PI insurance) protects contractors against claims for negligence, loss of data or documents, unintentional breaches of intellectual property andclaims for dishonesty. As the risks faced by individual contractors will depend on their area of expertise, specialist insurers will provide professional indemnity policies that are tailor made to the contractor’s area of expertise.
Professional Indemnity insurance is included in the Freestyle Contractor service.
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7Other Considerations
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The following insurances may also be required, depending on your circumstances.
Employer’s Liability Insurance
Employer’s liability insurance will cover any ‘employees’ you may have working within your company for any injury sustained at work. It is a legal requirement for employers to have Employer’s liability cover, unless the only employees are the director and family members. Contractors working through a limited company would normally only have one employee, which would be themselves. However, it is recommended that they still take out Employers liability cover, as this covers them for any accidents they may have at work.
Public Liability Insurance
Public liability insurance protects you against your legal liability where you accidentally cause damage or loss to someone else’s property. It also covers you for any accidental injury you cause to someone else whilst working at clients’ premises.
Contractor expenses
The expenses you are allowed to claim through your Limited Company are dependent on the IR35 status of your contract. Provided your contract is outside IR35 then the following expenses can be claimed:
Your gross salary
Spouse’s salary (which must be actually paid and not unrealistic, having regard to the duties performed)
Travel expenses and car mileage
Accommodation and subsistence
Telephone – business calls only
Books, magazines, subscriptions and courses (related to business and your contract work)
Bank charges and interest (company bank account)
Pension scheme – where paid by the company to a HMRC approved scheme
Business insurances, business contents and other business related insurances
Computer costs
Accountancy fees
Business related stationery and postage costs
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Other Considerations
However, if your contract is caught by IR35 then you can only claim expenses incurred wholly, exclusively and necessarily in the performance of your contract work together with a 5%“administration allowance”. These are as follows:
5% administration allowance (5% of gross fees received)
Travel expenses
Accommodation expenses
Pension contributions
Certain professional subscriptions
Contracting & VAT
What is VAT?
Value added tax (VAT) is a tax on consumer expenditure. It is collected on business transactions, imports and acquisitions, and is administered by H.M. Revenue & Customs.
If your company’s taxable supplies (the supply of any goods and services which are subject to VAT at any rate) are likely to exceed £83,000 (VAT registration limit from April 2016) in the next 12 months then you will need to register for VAT. Once your company is Vat registered you will need to charge VAT on your invoices at the standard rate of 20%. Until then you can simply raise sales invoices without adding VAT.
What are the advantages of VAT registration?
You will be able to recover any VAT that you incur on items that you buy for the business. You can usually claim VAT on:
Computer equipment and software
Stationary
Accountancy and legal fees
Telephone
Petrol and motor repairs (if claiming a mileage allowance the VAT element is 1p a mile)
50% of the VAT paid on either the car lease rental payments or car contract hire payments.
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What are the disadvantages of VAT registration?
The drawback to being VAT registered is that you are required to complete quarterly VAT returns and submit them to H.M. Customs & Excise. Most companies will employ an accountant to complete their VAT returns.
Our ‘Freestyle Contractor’ service includes quarterly VAT returns as part of the fixed monthly fee.
The Flat Rate VAT Scheme
The flat rate VAT scheme was introduced to reduce the administration burden on small businesses. It allows companies with up to £150,000 turnover to work out the net VAT due to Customs by recording their tax inclusive turnover and applying the appropriate flat rate percentage for their trade sector to total income. The flat rate percentages by trade sector can be found in our Flat Rate VAT scheme article.
Corporation tax
Corporation tax is tax on your company’s taxable income or profits. The rate of corporation tax is 20%.
Companies are required to work out their own corporation tax and are required to deliver a corporation tax return by the statutory filing date, normally 12 months after the end of the accounting period. Failure to do so can result in the company receiving a penalty.
The corporation tax return is another service that is included in the fixed monthly fee for our Freestyle Contractor Limited Company service.
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Timesheets & Invoices
As with all contractors you will need to record your time on a timesheet so that your agency or client can approve the hours / days that you have worked in a certain billing period. In addition, you will need to ensure that an invoice is raised and submitted to your agency / client for your time.
With ‘Freestyle Contractor’ you have access to our online portal where you can create invoices, log your expenses and mileage and see an up-to-date financial position of your limited company, including how much you can pay yourself in dividends.
Your personal tax return
Once you start contracting through your Limited Company, you will be required to submit a Personal Tax Return, detailing your income for each financial year. Most accountants will prepare your annual tax return for a set fee of around £150 + VAT.
Our ‘Freestyle Contractor’ service is truly all-inclusive, so your annual tax return is included in our fixed monthly fee.
Hopefully this guide has given you a good insight into what’s involved in contracting through a Ltd company! If you are interested in our all-inclusive Freestyle Contractor service, we can provide a FREE ‘no-obligation’ income illustration based on your personal circumstances along with an eBrochure detailing the service.
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Contact us to start maximising yourcontracting income today!
For your FREE Consultation:
1. Call us on 0800 954 2101
2. Complete our online enquiry form
3. Email [email protected]
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Freestyle Accounting Ltd
Tel: 0800 954 2101Email: [email protected]: www.freestyleaccounting.com
Freestyle House, 8 Mercia Business VillageCoventry, CV4 8HX
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