If you’re thinking of setting up a contractor, how you decide to manage your finances is vitally important. Everyone is different, but here are four things to consider as you start arranging your business affairs. We asked Dolan Accountancy, dedicated contractor accountants, to advise on how best to approach the subject:
Why contract in the first place?
People are attracted to contracting for many reasons but chiefly because it can be rewarding, give you more freedom and flexibility, there is greater opportunity for skills development and a wider variety of work. Tax-wise its benefits include better planning. Here are a few key issues to consider:
What type of business should you set up?
There are two main options, running your business as a limited company, or operating through an Umbrella Company. For contractors, a limited company is definitely the most popular way to work, and it’s certainly the option we’d recommend – as operating through an Umbrella Company is only really worth it only if you’re earning less than £25,000 a year and/or you’re only planning to contract for a relatively short time.
So, going back to the other option, this involves setting up, and becoming a director of, your own limited company - which gives you all of the ‘limited liability’ benefits which you don’t get as a sole trader, and ensures that your work life and your personal life are completely separate, from a financial perspective. But of course, that does come with some legal responsibilities, and it’s important to know what these are, so we would strongly recommend that you take advice from a specialist contractor accountant, before making any decisions.
How to set up a limited company
The first thing you need to do is to choose a company name. Remember it cannot be the same as, or even similar to, another registered company name - so you need to check the Companies House register before proceeding. You then need to choose a registered address where HMRC will send all your official paperwork. It has to be a physical UK address, and most people simply use their home.
Any limited company has to have at least one director, and this will be you. You’ll also be the only shareholder and will own 100% of the company. The named director is responsible for running the company in accordance with all relevant legal requirements. For example, when you register a new limited company you need a ‘memorandum of association’ which is a legal document signed by all initial shareholders, and ‘articles of association’ which are written rules about running the company.
Once you’ve done all of this, or asked your accountant to do it, you can then register your company online – and it will usually be set up within a few hours. The last step is to set up a business bank account, which is a legal requirement so that all business funds are traceable.
Registering for VAT, or not?
Legally, you have to register for VAT if you expect to earn more than the current VAT threshold (currently £85,000 for FY2017/18) in any given tax year. Many contractors choose to register anyway, even if it’s not legally necessary, as it can help you to appear more professional. Once you do this, you need to keep all of your VAT receipts and then complete a detailed VAT return each quarter.
You could choose to register for the Flat Rate VAT Scheme instead – and in general we still recommend this, as it is far easier to administrate. But it’s no longer as lucrative as it used to be, after major changes to the scheme in April 2017. Remember also that if you’re on a contract of less than £85,000 a year, and have no other income, you could always opt not to register at all.
An expense is defined as something which is made ‘wholly and exclusively for the purposes of your business’ according to HMRC. It’s important to keep track of all your business expenses, as these can be offset against income and so will help to reduce your tax bill. You need to keep all of your receipts for at least six years so that you can prove the purchase was made, to cover you in the unlikely event of a tax inspection.
IR35 was introduced in April 2000, to guard against what HMRC refers to as ‘disguised employment’. For example; if you were to leave your employer on a Friday afternoon and go back on the Monday as a contractor, with all of the benefits that brings - but essentially doing the same job and having the same low level of risk - the argument is that you shouldn’t have access to any of the benefits of being a contractor.
If your contract is deemed to be ‘inside IR35’, many of the benefits of running a limited company are reduced - but in general it’s still worth doing, as there are many other good reasons, and your next contract may fall outside IR35. One last thing to mention, as of April 2017, the rules for public and private sector are now also different, adding extra confusion! To help answer all of these questions and more, we’d definitely recommend taking advice from a specialist contractor accountant.
Can we help?
To find out more about how Dolan Accountancy could help you and your business, please visit: www.dolanaccountancy.com
About Dolan Accountancy
Dolan Accountancy – specialist contractor accountants deliver a combination of experience, service and technology for just £95 + VAT per month; one of the lowest rates in the industry. No more hidden costs, no switching accountants every few months, no more outsourcing to other internal and external teams, just the service you have grown to love over the years at its very best.
With the IR35 legislation changes in the public sector in 2017, Dolan has decided to offer all contractors complete flexibility. As a client of Dolan Accountancy, you can use our award winning umbrella service completely margin free, for those contracts that are better suited to umbrella employment.