How do I start up as a Contractor?

Transcription

1 guide for freelancers and contractors How do I start up as a Contractor? Your step by step guide to getting your contracting business off to a successful start

2 Keeping one step ahead, from the start Starting up as a contractor is an exciting, but often confusing time. It s therefore important that you identify the key issues that should be considered from the outset and deal with them appropriately, to ensure your contracting experience is enjoyable and hassle free. Here, you ll find tips and advice on starting up on your own. But, before you make any decisions, it s important to talk to a professional adviser who understands the issues faced by contractors. The right specialist contractor accountant will be able to answer your questions and tell you so much more about the questions you may not yet know to ask. They will be able to set up your company for you and help you to avoid any nasty surprises further down the line. To find out more about selecting the right adviser for you, also download your FREE Guide to Choosing the Right Contractor Accountant 2

3 Before you get started first ask yourself a few questions Unlike permanent employment, as a contractor you will effectively be your own boss free, to a large extent, to decide when and where to work. Before you make the decision to go it alone, it s important you ask yourself some tough questions, to help you establish whether contracting is, in fact, the right move for you. 1. Are you disciplined enough to work hard at making a success of your career as a contractor? 2. Is there a market for your skill set and experience? 3. Do you know your own strengths and your limitations, so that you don t oversell yourself? 4. Are you flexible and able to adapt quickly to new environments and varying projects? 5. Do you know your market value and is your rate competitive? What are others in your field charging? 6. How are your negotiation skills and will you be able to ensure you get the right rates to keep your business profitable? 7. Do you have a strong network of contacts to keep those referrals coming in? 8. Are you a people person and will you be able to deal with new colleagues and varying levels of demands? 9. How will you make sure you meet your training needs and keep up to date with knowledge and new developments relating to your area of expertise? 10. Are you organised enough to manage your finances and to put funds away in case of a rainy day? Once you ve answered these questions and you feel confident that contracting is the right choice for you, you can then start to get your new business wheels in motion. 3

4 Successfully starting up as a contractor Starting up as a contractor involves a number of important steps, to make sure you get things right first time. Once you ve chosen the right specialist contractor accountant, they will be able to advise you on how best to start up as a contractor and guide you through the set up process. 1. Decide on your contractor trading structure should you be a limited company, use an Umbrella, or trade as a sole trader/partnership? The structure you choose to trade under as a contractor has commercial, financial and tax consequences, but the best choice for you will be determined by your individual circumstances: How long you intend to be contracting for? What are the terms in the contract with the customer? How long will the contract be for? How much income will be earned under the contract Is the contract full or part time? What are you likely to do after this contract ends? How disciplined are you at doing administration? Is the contract likely to expose you to commercial risks? Increasingly, the most popular and, generally, the most tax efficient contractor trading model is the limited company option. This does, however, require a commitment to the lifestyle of being a contractor, but it offers the rewards of freedom, flexibility and control over your career path. Below, you will find more information about limited companies, Umbrellas, sole traders and partnerships. Speak to your specialist contractor accountant who will advise on the best company structure for you they will also manage the company formation on your behalf. Whichever route you choose though, it is important that you maintain discipline and comply with the legislation relevant to running a business. 4

5 Limited companies tax benefits, added protection If you want to run your own business that has its own legal identity and can earn profits and pay taxes in its own right, then having your own limited company could be right for you. For contractors with an annual income of more than 40,000, this trading model is often the most tax efficient option. What does it mean to be limited? Being limited effectively means that your business finances are separate from your own personal money and, if you run into difficulty, you will only lose money from the business. There is no claim against your personal assets. need to arrange appropriate insurances and protect the assets of the business. Paying yourself and reducing your tax burden, by balancing salary and divi- dends Getting set up Before you can start contracting through your limited company you would need to form it or purchase a ready formed one. Then there is a defined list of tasks you need to go through to set up the company so that it s ready to go. In order of importance, you will need to: Choose a suitable company name Make a decision on share ownership (self or self and partner/spouse), and appoint the directors who will control the business Establish a separate company bank account Register for VAT Set up a payroll scheme, and Inform the taxman of your details Your specialist contractor accountant, who can set up the company, will also advise on the following: Your responsibilities As a shareholder (owner) and director (employee) you will be responsible for the operation and control of your company, its bookkeeping, preparation of tax returns and filing of information, and ensuring you understand your risks under IR35 and other legislation. You will When you want to extract money from the business you have the choice of either: Paying a dividend to yourself, as a shareholder (owner) of the business; or Paying yourself a salary or bonus as a director (employee). These two methods can be structured in a way that legitimately reduces the overall tax burden. Additionally, a limited company pays corporation tax on its profits, after salaries have been deducted, but before dividends. All of these different taxes are at varying rates and work under different rules. The interaction of these rates can be used to your advantage and to suit your personal requirements - but they should be managed with advice. Making starting up simple Trading as a limited company is normally more beneficial for contractors in the vast majority of instances, and implies more permanence than choosing the Umbrella route. As a new contractor, set up issues can appear daunting, so speak to your specialist contractor accountant who will discuss your needs with you at the outset and review your contract for IR35 compliance. 5

6 Umbrella companies less admin, more tax? Working under an Umbrella arrangement is most suitable to contractors who do not wish to be burdened with the administrative hassle of being self-employed normally when they first leave permanent employment. Umbrellas are also popular with contractors who are only in it for the short term, or those where their contracting income is unlikely to exceed 40,000 per annum. Contractors who move between being independent and permanently employed, use Umbrella organisations to dip in and dip out of the contracting market with ease. They pay taxes as employees ( Permies ) with the exception that they can achieve some limited benefit by claiming tax relief on business expenses they incur. Claiming expenses through an Umbrella While this is dependent upon your contract with the ultimate customer, after deduction of PAYE and NIC, your take home salary can be increased, because legitimate business expenses are taken off your income, before the tax due is calculated. This is normally done for you by the Umbrella company. To learn more about choosing an Umbrella, or to find out if this is the best company structure for you, speak to your specialist contractor accountant. What Umbrella companies do? Umbrella workers are employed by the Umbrella company which deals with the ultimate customer. The Umbrella entity performs all of the necessary administration that would otherwise fall to the contractor, in return for a fixed fee or a percentage of the fees charged to the client. As a contractor employed under an Umbrella arrangement for tax purposes, you are treated very similar to a permanent worker. 6

7 In summary: Advantages and disadvantages LIMITED COMPANIES ADVANTAGES Higher take home pay Full control of revenue More tax planning opportunities Benefit from flat rate VAT scheme Limited personal liability Benefit from more claimable expenses Complete control of company matters Outside of Agency Workers regulations VS UMBRELLAS ADVANTAGES Hassle free / quick to set up Less administration / paperwork Low commercial risk Good for short term contracts and short term contractors No costly process of forming / dissolving companies Benefit from more claimable expenses Complete control of company matters Outside of Agency Workers regulations DISADVANTAGES More administration You hold ultimate responsibility for filing accounts correctly and on time DISADVANTAGES Less control over affairs AWR uncertainty and costs Some of the tax benefits of being limited Can be delays in receiving payment from third party 7

8 Sole trader/partnership benefit vs. risk? Working as a sole trader has many of the freedoms of operating a limited company, but with less of the formality. But, as with being limited, a sole trader is still responsible for the maintenance of accounting records, the production of an income statement, collection of fees, professional indemnity insurance and payment of taxation. Agencies continue to strongly prefer contractors to use limited companies or agencies. Some agencies will not deal with sole traders, due to a perceived risk of the agency becoming liable for sole traders tax liabilities, should the contractor not pay them. Whilst the risk of being liable for the unpaid tax of others may be overly pessimistic, in this case the concerns of the agencies are real and do have commercial weight. But, individual sole traders do not have the same protections as a limited liability company; therefore the requirement for professional indemnity insurance is even clearer. Further, remember that, because of the potential employment risks involved, agencies may be unwilling to find contracts for sole traders. Sole trader tax What does it mean to be sole trader? A sole trader is, in effect, self-employed. The income you generate though the business will be counted alongside your personal income, making the accountancy side of running a business relatively straightforward. But, unlike a limited company, as your business and personal finances are combined, if you run into trouble, you are solely responsible financially. Legal identity of a sole trader A sole trader has no separate legal identity from the individual and no registration is required, other than to inform HM Revenue & Customs (HMRC) of its existence. Any income of a sole trader is assessed on the individual in the tax year in which it is earned. Income is taxed at income tax rates in force at that time. If the same level of fees is earned by a contractor using a limited company, the ability to have some of the income taxed under income tax rates, and some under corporation tax rates, results in lower amounts of tax overall. Partnerships Partnerships are extensions of sole traders. More than one consultant will group together, forming a partnership, to find contracts, share skills and resources. The nature of the business arrangements for sharing costs and profits are normally explained in a partnership agreement. For taxation purposes each partner will be taxed on their individual share of the income, as set out in the partnership agreement, as if they were sole traders. 8

9 In summary: Advantages and disadvantages of being a sole trader ADVANTAGES Hassle free / quick to set up Low start-up costs Hands on running of business Financial information kept private DISADVANTAGES Your personal and business liabilities are shared so your personal assets are at risk if things go wrong Significantly less tax efficient than limited companies Bankruptcy more common amongst sole traders, making getting a bank loan more challenging 2. VAT Should you be registered? In deciding whether or not you should register for Value Added Tax (VAT) when setting up on your own, you should ask yourself a few questions: What type of contracting will I be doing? How much income will the business generate over 12 months? Am I likely to be purchasing many services and items that attract VAT? Will all the services be provided in the UK, and to whom will I invoice the work? Will the services I provide be VATable? Does the Agency/client require you to be VAT registered? VAT is charged at the current standard rate of 20% on almost all products and services provided in the UK. If you are running a business and expect to turnover 81,000 or more over the next 12 months, then you must register for VAT*. However, if your turnover has gone over the registration threshold temporarily, then you may be able to apply for an exception. Almost all limited company contractors voluntarily register for VAT, irrespective of turnover, as it looks more professional to submit a VAT invoice, and there are also other benefits to be had from registering. HMRC operates a number of VAT schemes, but flat rate scheme ( FRS ) VAT is by far the most common option for contractors, as it enables you to simply apply a flat rate VAT percentage to your turnover, thereby cutting down on the time spent on accounting. It s very simple to operate and is ideal for most contractors. On average it takes about 2 weeks to establish a VAT registration under the flat rate scheme rules. Depending on the type/nature of consulting work you perform, if you are registered for VAT under FRS, then a government issued percentage is applied to your gross turnover (say 14.5% as the most frequent example) and that is the amount you pay to HMRC. 9

10 The actual rate you charge your customers is still the headline rate of 20%, which is what you collect from them. The difference between the 20% you charge the client and the amount you pay over (at 14.5%) is intended to cover the VAT you have suffered on your costs. *2014/15 tax year If the difference between these rates is more than the VAT you have suffered on costs, then you have made a profit from being registered. Because most contractors incur limited amounts of VAT on costs, they do indeed benefit from this treatment. VAT charged and collected at 20% 15,000 Amount due under the FRS at 14.5% 13,050 Effective gain - called profit by many contractors! 1,950 If the actual VAT suffered in the year was 1,125 then the real gain is reduced to 825. In order to be better off under the standard VAT scheme you would need to incur VAT inclusive costs of over 1,000 a month. Speak to your specialist contractor accountant who will provide you with further details. They will also be able to register you for VAT and help you complete a quarterly VAT return. 10

11 3. IR35 what is it and how does it affect you? IR35 s scope does extend to cover all contractors! Because it s subjective, and the legislation does not contain many definitions, you can t ever be 100% IR35 compliant. IR35 affects individuals who are deemed to not be fully self-employed, but are disguised employees contractors who are treated and act as permanent staff. IR35 prevents these individuals from benefiting from the tax advantages that trading through a limited company can bring. In considering whether you re affected by IR35, ask yourself a few questions: Who is my contract with? Have I worked with, or for them before? How did I find the work and is there a formal agreement in place? Do I anticipate having other projects at the same time? The legislation works on a contract by contract basis, so one contract being determined as falling within the scope of IR35 legislation, does not mean that all future work will necessarily be treated in the same way. Numerous factors need to be considered in order for each contract to be assessed. Because it s subjective, and the legislation does not contain many definitions, you can t ever be 100% IR35 compliant. The factors addressed during the contract review process are designed to clarify how the principal areas relevant under IR35 are dealt with. The key sensitive areas under IR35 fall into the following categories: Element of control: Having autonomy over work methods and practices No mutuality of obligation: Having a defined project with no future obligation or need from either side to provide further work or services. Immediate termination of contract is a good indicator Requirement for Personal Service: Having the ability to substitute, sub contract or re-assign the project or your involvement within it Commercial Risk: Exposure to financial risks, error correction without reward, bad debts, and provision of insurances Provision of own equipment, and being in business in your own right (different rights and obligations to permanent staff, own web site, own training programmes) 11

12 4. S626 Chapter 5 Income Tax (Trading and Other Income) Act 2005 involving your spouse in your new business? Section 626 is also known as the husband and wife tax. The rules were introduced to stop family members passing money and assets between themselves, on the basis that they would then take it back. But, what happens when a husband and wife setup a business together both carry out work for the company and they therefore share the income? Or what if you have a limited company through which you carry out work and a family member, who doesn t earn income for the company, but assists with the day to day administration, owns shares in the company? Will you be caught by S626? If you are a husband and wife team, make sure you don t end up getting caught out by the taxman. Speak to your specialist contractor accountant who will advise you on issues relating to S626 and deal with HMRC enquiries on your behalf. 12

13 Intouch Accounting: The Perfect Mix of Team, Technology & Expertise At Intouch Accounting, we only deal with contractors and freelancers. We re therefore not trying to be a one size fits all for any type of business. We know what it means to be a contractor, because we work with contractors all day, making it possible for them to enjoy the freedom of freelancing and contracting and helping them to increase their take home pay! We know that starting up as a contractor can be overwhelming at times. That s why we ve set up a personal adviser for people just like you supporting those new to contracting to navigate the many choices, and providing advice on the best possible solutions to help you onto a strong footing, right from the start. At Intouch Accounting, we provide a personal online accounting service, advising on all accounting and tax issues affecting UK based contractors or freelancers who provide their services using their own limited company. We also have experience in advising non-uk based contractors and consultants. 13

14 We are proud to say that for new contractors needing a limited company we: Are ideally placed to assist first time contractors our dedicated helpdesk is managed by people who spend all their time focussing on supporting new contractors, helping them to make the right choices from the start Can incorporate a new limited company for you, assist in suitable name selection, establish a bank account, set up and notify a FRS VAT registration and a PAYE scheme Are available to advise you on multiple shareholder matters Can guide you through the paperwork, person to person and provide you with a dedicated personal accountant for the duration of our relationship with you and your business And we provide all this for an amazing value fixed fee of just 92 plus VAT per month! Once the incorporation has been completed, we will take care of everything else listed below, as part of our standard monthly accounting service for your new company. In order to deliver the extensive monthly service, we: Provide you with secure personal access to our secure online accounting technology, built with contractors and freelancers in mind, enabling you to avoid clumsy attachments and the re-keying of data from the bank. Our accounting technology is at the forefront of the contractor accounting profession putting the information you need at your fingertips, day and night Offer unlimited expert advice, delivered by a team of specialist contractor accountants providing the right solutions and keeping our clients up to date with legislative changes and the latest industry developments Are regulated by the Institute of Chartered Accountants in England and Wales (ICAEW) and Freelancer and Contractor Services Association (FCSA), giving you peace of mind and extra reassurance of thehigh level quality service we provide to all our clients. 14

15 Services provided by Intouch Accounting It s not just what we can do for you, as a contractor or freelancer; It s also how we do it that makes the difference. As a client of Intouch Accounting you can relax in the knowledge that we ll make sure your new contractor business gets off to the right start. At every step of the way you ll receive expert accountancy advice from a specific personal accountant dedicated to your account, combined with our own contractor specific online accountancy software designed to make your life easier. We ll remind you when you need to send us information. We ll then process this information on your behalf and, once you ve confirmed it, send it to the taxman and Companies House on your behalf. And, for all of this, we charge you a monthly fee that is fixed and all inclusive! We ve listened to our clients and we know what s important to them... that s why more than 98% of those who ve signed up with Intouch Accounting, have stayed with us! And the one or two who ve left, have told us it s because they re going back in-house, but they ll return to us if their situation changes. 15

16 guide for freelancers and contractors Client Enquiries: New Enquiries: Skype: Intouchaccounting Online: intouchaccounting.com Intouch Accounting Ltd, Everdene House, Deansleigh Road, Bournemouth, BH7 7DU Registered in England & Wales - Company No