Contracting?

[Saturn 5]

I have recently started contracting in the IT industry. I'd like to start my own limited company to save on tax. I've looked at Companies House web-site and scratched my head. I'm very busy working so don't have a lot of time to research this. Are there any good companies out there that, for a reasonable price, will set up a company etc. etc. for you? Also, do you have to have an accountant, and, if you have an accountant, do they only charge you when you are in a contract?

I am currently going through an umbrella company, but I get the feeling that I could keep more of my salary by forming a limited company.

Any advice would be appreciated especially from someone who has been through this recently.

[Narnia]

I haven't been through this in a while but I might save you money. You can buy an off the shelf limited company, maybe with a peculiar name, but it will be yours none the less, relatively cheaply. Do an online search. It used to be <?100. As a limited company you have to file accounts once a year. If you pay an accountant it should be based on the time he takes to organise your records and then producing accounts. If you are organised then that shouldn't take much time. What he/she can advise you on is how best to pay as little tax as possible.That's what you pay them for.Just remember to keep receipts for everything.

[MrBen]

Saturn 5 - Many UK IT contractors choose to work through their own limited company. This model has pro's and cons versus an umbrella. The main advantage is that you can elect to pay yourself a minimum salary of say ?6-12k which with the standard personal allowance you'll only pay a small amount of tax. Then draw the rest as a dividend from profits (paid after deduction of legitimate expenses and corporation tax). The tax advantage is that dividends are only taxed at an effective rate of 25% or so above the higher rate versus 40-50% if you were a standard PAYE higher rate earner. You can also deduct HMRC allowable expenses like said basic salary, petrol mileage, stationary, accountants fees, IT equipment before you pay any tax at all.

The downside of a ltd co is the threat from badly worded pieced of tax legislation called IR35 introduced by the government in 2000 or so. You either fall "inside " or "out" of this status determination. If it is deemed you fall"inside" then you basically have to pay full PAYE tax. If IR35 does not apply then you can proceed with the tax advantages above. This is still a grey area and you'll find plenty basic guides and advice for newbies at Contractor UK portal. In the meantime the coalition government have promised to review IR35 and to potentially look to replace it with clearer law although that still appears tricky and some way off.

The other main downside of a ltd co is the admin. You will need to make annual submissions to Companies House, prepare annual accounts, quarterly vat returns (if registered), payroll and ensure good book keeping for your income, outgoings, receipts etc. Your umbrella handles most of this for you. If you move to an accountant then you'll have to take on more of these responsibilities although most good ones will handle the majority for you. If this is not your forte then get someone good and make sure you at least know the basics.

I've PM'd you some other useful contacts. Good luck.

[aspidistra]

You'll get more than through an umbrella, but then need to take into account cost of accountant.

Things you'll either need to do yourself or get your accountant to do, apart from creating the annual financial statements:

- PAYE each month

- quarterly PAYE return and payment to HMRC (arrange with HMRC to pay quarterly, not monthly)

- annual Employers returns (there are a couple) to go to the Employers' division of HMRC

- filing accounts with Companies House each year (can now be done online)

- Companies House annual return (can be done online)

- any other notifications to CH (likely to be sporadic)

- filing corporation tax short return, and related payment, to two different HMRC offices within the Corporation Tax division

- VAT, if you are over the threshold. Again, yet another division of HMRC

HMRC Employers division supply a CD-rom to calculate employers NI, employees NI and tax each month, so doing your own PAYE is not too onerous and will save you a couple of hundred quid with the accountant.

[ClareC]

Hiya, I have my own limited company and paid a tax consultancy to set it up and run it etc. Very easy and they do all the admin; tax returns, VAT returns, payroll, PAYE, corporation tax, personaltax return, companies house return etc etc etc. They also keep up to date with any relevant changes in the law etc and advise accordingly and set up all the company bank accounts etc basically everything! If your still looking for this type of service, let me know and I will PM you the details.

[karter]

The employer cd-rom is shite but works (slowly) and will save you money. Just keep your eye on the govt websites as they will no longer send any updtaes out via post. MrBens post is good advice.

[aspidistra]

MrBen Wrote:

-------------------------------------------------------

>

> The downside of a ltd co is the threat from badly

> worded pieced of tax legislation called IR35

> introduced by the government in 2000 or so. You

> either fall "inside " or "out" of this status

> determination.

The key thing is how the contract is worded, and most potential clients these days are perfectly happy to draw up contract terms that a 'friendly'.

If you are able to sometimes at least work from your own premises (home), supply your own laptop or other tools, work only on a project basis, receive payment only on invoice, and have a reasonably friendly-worded contract (which allows you discretion in how you carry out any work), you should be fine. If you also provide insurance etc., and have a range of clients over the year, even better.

[MrBen]

That's about right although whilst the contract wording is important it is not in itself guarantee you'll fall outside. HMRC look at a range of softer factors in any assessment. Their main objection is that many ontractors are effectively a "disguised employee" of the end client. It's ambiguity makes it a classic example of really bad legislation. The Professional Contractor's Group (PCG) offer a partial hedge by providing insurance against your legal costs (but not tax liability) for any HMRC investigation which is good. You are also funding a well organised non profit body that will lobby the government to support contractors interests.

It is possible however that any replacement legislation will take the route as has happened in Australia where you'd have to show that no more than 80% of your income comes from one client at any one time. Hard when most UK employers want 5 day weeks on any given contract. It changed things overnight in Oz where the heady lucrative days of late 90's contracting are long gone. Something similar could well happen here in due course but until then.....

[Saturn 5]

Sorry for not responding straight away, but I haven't logged onto the forum for a couple of days now.

I'd like to thank you all for your very interesting responses. If I may, I'd like to go away and read/absorb this information and return with any questions. Sorry, but I've been extremely busy at work.

Once again, many thanks for all your tips and help. Much appreciated.

I'll get back to you soon.