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Starting Up

What do I do first?

Decide which type of contractor arrangement suits your circumstances best. If contractor work is only likely to be short term, then consider invoicing and payment under an umbrella company. If you're thinking of contracting as a longer term option, then consider trading as a limited company to take advantage of the extra control over your income and tax planning, as well as the liability protection it provides.

If you choose to contract as a limited company, it starts with you choosing a suitable company name, making a decision on share ownership (on your own or with spouse), setting up a company bank account, notifying HMRC & Companies House, registering for VAT if applicable and ensuring that your payroll is in place. All of this we do on your behalf as part of our monthly plan.

How do I form a company?

Once you have selected a company name, we can register the company for you at Companies House. The process is relatively straight-forward, and you can be up and running within 48 hours.

Limited v Umbrella

What are the advantages of a limited company?

Becoming a director and a shareholder of your own limited company is one of the most tax efficient ways to contract and it also gives you control over your affairs.

As a limited company, there is a wider range of expenses your can claim including your accountancy fees and home office, please see our expenses section for an inexhaustible list.

As a director, you will pay yourself a combination of wages and dividends. Wages and dividends carry different taxation levels so you will retain more of your earnings. You can also use the flat rate VAT scheme, which may allow you to keep some of the VAT you receive.

You have more control when to draw your money and more freedom to plan your finances or investments. You can also decide to appoint other directors i.e. your spouse.

With guidance from your accountant setting up and running a limited company is not as difficult as it may first appear.

What are the disadvantages of limited company?

Setting up as a limited company can be costly, if you are only contracting for a brief time, i.e. 3 months of less. Also, if you choose to go back to an employed position, there will still be a requirement to submit the company's year end accounts.

There is more paperwork involved in running a limited company which requires a certain amount of discipline including company tax, corporation tax, VAT returns filing with HMRC and monthly payroll, this and more is included in our monthly plan.

It's a requirement to file your accounts at Companies House each year, this information is also public.

What are the advantages of an umbrella company?

Contracting under an umbrella company is appropriate for short contracts with earnings under £25,000 per annum. Umbrella companies are useful if you wish to contract in between longer periods of permanent employment.

The umbrella company acts in the same way as a PAYE employer. All you have to do is submit your expenses with your timesheet and you will receive your salary with the tax and NI already deducted. Also, as you are paid as a PAYE salary, there is no need to worry about IR35.

The umbrella company also takes responsibility for all your invoicing and your paperwork.

What are the disadvantages of an umbrella company?

With an umbrella company your income will be made up of PAYE salary or reimbursed business expenses. From your salary income, you will have to pay tax and Employees NI and also Employers NI at 13.8% above the minimum threshold, this can work out more costly. You also do not have the advantage of paying yourself dividends as you would have, if you were set up as a limited company.

Although contracting under an umbrella company may be fairly simple to use, the actual costs of the umbrella service may reach as much as 9% of the value of the contract. Many umbrella companies insist on either a minimum level of charging of a minimum time for which you must pay for their services. By comparison, accountancy fees for running a limited company are around £1200 per year irrespective of turnover.

Limited Company Expenses

Travel and Subsistence Changes

New rules regarding travel and subsistence relief for contractors was introduced in April 2016 for workers who are subject to Supervision, Direction and Control.

These new rules mean that any worker employed through an umbrella company or a limited company director working inside IR35 can no longer claim for travel and subsistence costs as expenses and the company can no longer obtain tax relief on these costs.

The rules do not affect contractors working outside of IR35.

Limited company expenses - What expenses can I claim?

As a limited company, only genuine expenses are allowed, HMRC describe that expenses can be claimed provided they are wholly and exclusively for the purposes of your business. This includes expenses like accountancy fees, employer's NI contributions, travel, stationery and insurance, to name a few. Expenses that are considered to have a dual purpose, business and personal are not allowed but for example, working from home expenses are allowed proportionately. Always check with your accountant, it may save you money.

Can I claim accommodation expenses?

Accommodation expenses can be claimed when working away from the normal place of work. This must not exceed 24 months at a temporary workplace. There is no recognised allowance for overnight accommodation or meals but it must be considered as reasonable.

Can I claim for meals?

Only at a temporary workplace meaning the 24 month rule applies. You must keep those receipts for everything spent.

Can I claim travel expenses?

Travel expenses can be claimed to a temporary workplace only, meaning less than 24 months. Anything after the 24 months threshold would be considered a permanent workplace. It's important to keep a mileage log. If you're travelling on public transport, remember to keep your receipts.

How do I claim mileage?

If your contract is less than 24 months, you can claim mileage to the main site. Anything over the 24 months is determined as a permanent workplace and main site travel expenses cannot be claimed.

Can I claim for training courses?

If the training course is relevant to the business, you will be able to claim the fees. The initial training for your trade is not allowed either is training for totally new and unrelated trades.

Can I claim for business insurance?

Business insurance can be claimed as long as it's for business purposes. You can claim for public liability, employers' liability, professional indemnity and legal expenses to name a few.

Can I claim for pension contributions?

As a limited company, pension contributions have great tax saving benefits including corporation tax, employers NI can also be reduced. This area is covered in detail at our free company financial health check.

Can I claim for income protection?

Permanent health insurance can be paid through your limited company or personally. If you claim against a business permanent health insurance policy, you will have to pay tax and NI contributions on the payments you receive.

Can I claim for a mobile phone?

You can claim for a mobile phone, as long as the contract is in the company name. If the company pay a contract not in the company name it will be classed as a taxable benefit.

Can I claim for using my home as an office?

Your office must be a business office and not the kitchen table. Bear in mind, HMRC can inspect your office, at any time. Your expenses should represent the cost of providing an office at home i.e. a proportion of heating, lighting, etc. Plus a proportion of council tax and other direct property costs. For example: In a property of 8 rooms, 1/8 of your costs could be claimed. If you are buying office furniture, equipment or software, ensure that you are invoiced in the company name.

If your expenses equate to a large amount, potentially your office can be excluded from your principal private dwelling allowance and when you come to sell your property, the proportion i.e. 1/8, of the property could be subject to Capital Gains Tax. HMRC allow a flat rate of £4 per day without any receipts.

Can I claim for spectacles?

You can claim for an eyesight test, if it is necessary for the use of visual display equipment in your workplace. The cost of spectacles cannot be claimed.

Can I claim for childcare costs?

As a limited company, you can claim from the company to help with childcare costs only to a registered childminder. As a basic rate tax payer, the allowance is £55 per week, at the higher rate tax (40%) £28 per week and the top rate of tax (45%) at £25 per week.

Can I claim for clothing?

Claiming successfully for clothing can proof difficult, clothing must wholly and exclusively be for business. If the clothing is not normal every day wear, i.e. protective clothing or special purpose like stage costumes, you should be able to claim.

Are there advantages to buying a company car as a limited company?

Typically a company car and fuel for personal use is seen as a taxable benefit in kind. Whether you are better off using a company car or your own vehicle and reclaiming the mileage depends on a number of factors.

Based on your specific circumstances, we will work out the best options for you.

Generally speaking, we would recommend not too make your decision for reasons of tax efficiency only. Whether you choose a private or company car, it's not advisable to buy a brand new one. And as a rule, cars with ultra-low emissions can be more expensive as a company than a private car.

Can I claim for entertainment?

Business entertaining is not seen as a tax deductible expense in most cases. As a director, you can claim reimbursement of certain business entertainment expenses such as hospitality or business gifts to the value of £50. They must be deemed as necessary business expenses.

Can the company pay for a staff party?

The company can pay up to £150 per head per year towards functions. Anything over this threshold becomes personally taxable as a benefit.

Loan

Can I take a loan from the company?

You can take a director's loan from the company however one of HMRC rules, is that the loan must be paid back in full within 9 months and 1 day from the company's year end, of the same period the loan was taken out. So, if you took out a loan at the end of July 2014 and your year end is August 2014, the loan would have to be repaid in May 2015.

If you do not pay the loan back within that allocated period, the company will be required to pay corporation tax on the loan, known as Section 415 tax, this equates to 25% of the loan's value.

If you are considering taking out a loan, please let us know so we can advise you accordingly.

Dividends

What are dividends?

Dividends are a distribution of your Companies profits to its shareholder/s. It's a tax efficient way of paying yourself from the profits of the company.

There's no National Insurance to pay on dividend payments whereas your salary attracts both employers and employees NI.

How often can I pay dividends?

As they are company profits, you can take them when you like, as long as you leave enough money to meet the company's tax and other obligations.

Do dividends have to be shared if equally between all shareholders?

Dividend payments are made at the same time to all shareholders, i.e. if your spouse was a shareholder with a 50% share, he or she will receive 50% of the dividend.

Companies House

What is a Companies House annual return?

There is sometimes confusion over the annual return and the company's annual accounts.

The Annual Return to Companies House is a snapshot of general information about the company's directors, secretary (where appointed), registered office address, principal business activities, shareholders and share capital. This return is known as AR01 and there's a £13 online filing fee, this is covered within our monthly plan. This is required even if the company is dormant.

Annual Return

Who is responsible for filing the Annual Return?

The company's directors and company secretary (if appointed) are responsible for filing the Companies House Annual Return. A failure to do so can result in a fine. We file your return on your behalf within our monthly plan.

Can the Annual Return due date be changed?

You can change the Annual Return date, provided that the next Annual Return date is not more than 12 months after that of the last submitted return. The Annual Return should be delivered within 28 days of the chosen return date.

Annual Accounts

What are Annual Accounts?

As a limited company, there's a legal duty to submit annual accounts for the company to Companies House 9 months after the year end date. If the company is in its first year of incorporation, accounts would be required within 21 months of the incorporation. Companies House only require an abbreviated set of accounts to be filed whereas a full set of accounts are required by HMRC, 12 months after the year end date, including a detailed profit and loss account and director's report.

Submitting your accounts is part of our monthly plan as well as ensuring that you are compliant and on time. You must however do your bit by signing and approving your accounts on request.

It is possible for contractors to prepare their own accounts but as the benefit of working through a limited company is tax efficiency, at which we are experts, you may miss out on allowances and pay more tax than you really need to.

Personal Tax Return/Self- Assessment?

What is a Personal Tax Return/Self- Assessment? And when is it due?

If you are self-employed, own a property that you rent out or receive an income from overseas then you'll need to complete a self-assessment and pay the correct amount of tax before the payment due date. HMRC will not ask you for this, it's your responsibility as a tax payer.

Payments are normally made in two installments on 31 January and 31 July each year (except for PAYE and other tax deducted at source). Any balance due is settled the following 31 January.

Interest will run from the date the tax is due. There is also a 5% surcharge, if any part of the tax for the year is unpaid by 28 February after the end of the tax year. There will also be a further 5% surcharge on any amounts still unpaid five months later, at the end of July.

Sorting out your annual self-assessment tax return needn't be difficult, we can complete your tax return from only £95 + VAT.

VAT

Should I be VAT registered?

If your turnover in the previous 12 months exceeds the compulsory registration threshold, currently £83,000, you must register. This is based on a rolling 12 months basis i.e. the last 12 months from any given point, not the calendar year and not the company's year end.

Can I register for VAT if my turnover is under the threshold?

Many companies are VAT registered and fall under the threshold. Having a VAT number can give the illusion that your company is larger than it is. Some companies insist that suppliers must be VAT registered. Many small businesses also do this so that they can claim VAT back on items purchased.

How does VAT work?

If you're a VAT registered business, you have to add VAT at the appropriate rate to everything you sell, usually 20%. And every 3 months you need to pay over the VAT you've collected to HMRC.

When you buy from another VAT registered business, you can claim the VAT back e.g. If you collect £1,000 in VAT from your customers and you buy from a registered VAT supplier and you're charged £200 + VAT, totaling £240.

You give HMRC the collected VAT minus the VAT you've paid out, so £1000 minus £40 equals £960, which means that you are £40 better off if you weren't VAT registered.

How does flat rate VAT work?

The flat rate VAT scheme aims to simplify VAT. You pay VAT as a flat rate percentage on your gross turnover which is variable depending on your business activity. You cannot reclaim VAT on your purchases and expenses, but you can on larger purchases over £2,000. You can leave the scheme at any time but you have to wait 12 months before you can re-enter.

Corporation Tax

What is Corporation Tax?

It's the company equivalent of income tax but for registered companies; corporation tax is based on the profits your business makes, and the rate depends on the profit made.

What is the rate of Corporation Tax?

The normal rate of corporation tax is 20% for the year beginning 1 April 2016. This rate will fall to 19% for the year beginning 1 April 2017, and to 17% for the year beginning 1 April 2020.

When do I need to pay Corporation Tax?

Corporation tax is due for payment nine months and one day after the end of the accounting period for your previous financial year. So if, your accounting period ends March 31, you your corporation tax bill is required for payment by January 1 the following year.

Our Working Relationship

How easy is it to change accountants to Staffords?

You are not alone in believing that having selected an accountant and then stayed with them for many years it is simply too difficult to change.

In reality changing accountants is incredibly easy, in only 2 simple steps:-

Step 1

We will inform your existing accountant in writing, that you are leaving and request permission to pass over all details/documents and clearance to act. It's wise, to check if there is a notice period or termination fees prior to transferring to us. You will need to also provide all information that you hold to us.

Step 2

Once, all takeover documents are sent to us, we will bring your file up to date, notify HMRC and Companies House of the change and will be fully ready to service your requirements.

Is Staffords a firm of chartered accountants?

Yes, we are registered with the Institute of Chartered Accountants of England and Wales (ICAEW).

Do I need to be local to work with you?

Our clients are based throughout the country and overseas, with our free software, email, phone and Skype, there's plenty ways for good communications.

What is a registered office?

A registered office is the Company's official address on the public record, it doesn't have to be the place you work.

As part of our monthly plan, you can use us as your registered office, so we get all the important mail from HMRC and Companies House, saving you time sending on post to us. We'll also send you all the stuff that we don't need, so there's no extra junk mail.

Do you offer a payroll service?

Payroll for two directors is already included in our limited company monthly plan. If you have employees or more directors, there are no limited numbers, our tailored payroll service is built around your needs, from only £19.50+VAT.

What support and how much advice will I get from Staffords?

There are many aspects to accounting that can be confusing but that's what we are here for. Supporting our clients for over 20 years, there aren't many questions that we haven't answered. We're not just here to remind you of key dates, you can speak to our accountants for as long as you feel necessary, our team is here to put you first.

Is there a minimum terms or contract?

If you choose to leave our services at any time, we will not charge any exit fees or administrative costs.

What are my responsibilities?

As part of us working together, we will advise you of the key dates throughout your financial year and at what stage we require information from you.

We suggest to all our clients to keep their accounts up-to-date, it only takes a few minutes a week and if you do a reconciliation once a month, you will be on top.

Do you do my invoicing?

You are responsible for invoicing, you can create your quotes and invoices in our free software and schedule them to suit.

Do you offer other professional services?

We work with partners selected for their skill in dealing with issues contractors and freelancers face. They have extensive experience in areas of IR35, pension & healthcare and business insurance, you can call on their expert advice at anytime.

IR35

What is IR35 and how can it be avoided?

IR35 is tax legislation which aims to set apart genuine contractors and "disguised employees". It prevents individuals from avoiding tax by working as self-employed contractors through their own limited company even though they do the same job as an employee.

e.g. A Project Manager may leave their employed position at the end of the month, only to return the following month as a contractor Project Manager, carrying out the same function as they did before but working via a limited company.

In this example, the contract puts you within IR35, and you would pay income tax and NI much the same as an employee rather than being paid by salary and dividends.

A contract subject to IR35 tax regime is referred to as being inside IR35 and a contract that is not subject to taxation under IR35 rules is referred to as outside IR35.

There is no way of knowing whether or not a contract is subject to IR35 unless a dispute with HMRC reaches court. As your accountant, we will ensure that any dispute is avoided, an annual review is part of our monthly plan and a full comprehensive report can be provided for only £130.00.

What Insurance do I need?

Business Liability Insurance

For peace of mind, public liability insurance covers any compensation you may have to pay due to accidental injury or property damage.

Professional Indemnity insurance

Professional indemnity insurance provides financial protection for your company in the event of defending a claim made against you, including damages.

Employers' Liability insurance

Employers' liability is required, if you have more than one shareholder or employees.

Life Cover Insurance

As a limited company, there is no income tax to pay on life insurance and it's not seen as a benefit in kind so funding life cover through the company has the additional benefit of being tax efficient.

Income Protection Insurance

If you can't work because of an accident or illness, the reality is that you won't get paid and without savings, you can easily run into financial difficult.

A carefully tailored income protection policy can maintain a minimum level of income to cover mortgage costs and bills until you recovery. Or in the event of a longer term condition, you will be provided with a vital source of income until retirement.

Critical Illness Insurance

Critical illness cover, is a long-term insurance policy where you'll receive a tax-free lump sum, in the event of being diagnosed with one of the serious illnesses covered by the policy. It's designed to pay off your mortgage or debts. This cover goes well with Income Protection Insurance.

As part of our FREE financial health check, we will discuss your insurance needs so there's no need to worry.