Decide whether you will be a limited company, self employed or an umbrella company

a) Limited company vs self employment

3 advantages to a limited company

1. Commercial credibility – some of your customers may only want to business with limited companies

2. Protection from bankruptcy – if your limited company goes bust, you don’t personally go bust. If you are self-employed and go bust, you personally go bankrupt

3. Save tax – here are the limited company tax savings compared with self-employment

Profits Tax saving
30,000 1,809
40,000 2,709
50,000 3,821
60,000 4,021
70,000 4,221

3 disadvantages to a limited company

1. A bit more to learn (we do 99% of it though

2. Accountancy fees are higher (but tax saving always covers this and then some)

3. Need a company bank account

b) Limited company vs umbrella company

Umbrella companies are only good for short term contracts less than £25,000. It is a bit simpler to run but you pay more tax.

c) Set up self employment

Easy. We can do this for you. The first thing that will happen is that you will pay Class 2 National Insurance at £2.80 per week.

d) Set up limited company – step by step

1. Decide who are the shareholders / directors. Shareholders are more important, these are the people who earn from the company. Directors are responsible for running the company

2. Decide on a company name, office and email us your name, address, date of birth, occupation, nationality and NI number

3. We will set the company up within 24 hours and email you an incorporation certificate

4. Set up a bank account (you will need your incorporation certificate

5. We will then set up you as an employer (for payroll) and self assessment (for tax returns) and set us up as your agent with HMRC

6. You will receive a letter from the corporation tax office, send it to us

7. Voila

You need to put ALL your business expenses through your business, otherwise you’ll over pay tax.

Here is a list of all the types of expenses that can go through a business – self-employment or limited company:

Cost of sales

Raw Materials

Stock

Other direct costs e.g. packing/despatch

Freelancers

Overheads

Employee costs (this could also be in cost of sales if a service business)

Salaries, wages, bonuses, Employers NI, pension contributions, casual wages, canteen costs, recruitment agency fees, subcontractors and other wages costs

Premises costs

Rent, ground rent, rates, water, refuse, light and heat, property, insurance, security and use of home

Repairs

Repair of property, replacements, renewals, maintenance

General administrative expenses

Telephone, fax, mobile telephone, stationery, photocopying, printing, postage, courier and computer costs, subscriptions and insurance

Motoring expenses

Petrol, servicing, licence, repairs, motor insurance, hire and leasing, car parking, RAC/AA membership

Travel and subsistence

Rail, air, bus, travel, taxis subsistence and hotel costs

Entertainment

Staff entertaining (e.g. Christmas party), customer gifts up to £50 per person advertising your business

Advertising and promotion

Advertising, promotion, mailshots, free samples, brochures, newsletters, trade shows

Legal and professional costs

Accountancy, legal, architects, surveyors, stocktakers’ fees, indemnity insurance

Bad debts

InterestOn bank loans, overdraft and other loans

Other finance charges

Bank charges, HP interest, credit card charges, leasing not already included

Depreciation and losses on sale

NOT ALLOWED: Customer entertaining, Food if not away from home (e.g. 40 miles from home)

You can use our software (included in our price) and you just need you to input a list of sales invoices or your income and a list of your expenses. Just make sure you include everything on your spreadsheet that is on your bank statements.

Or you can use our more funky software – FreeAgent for £20 + VAT per month (50% less price than if you go to FreeAgent direct). This allows you to photograph your receipts and upload them, have you bank statements feed into your software automatically and is a cloud based accountancy software which basically does LOADS for you. Training is all included in the £20 + VAT per month.

The rules for VAT registration are the same for self-employed people as well as limited companies.

The basic rule is if your sales is going to be more than £82,000 in the next 12 months you should register for VAT. You shouldn’t wait until you pass the £82,000 if your monthly run rate is higher than £6,833 i.e. if right from the beginning, you think you will go above annual £82,000, you should register straight away.

You can still register for VAT even if your sales don’t go above £82,000. The reason why you may do this is to appear to customers bigger than you are.

Four different types of ways to account for VAT

The first thing you have to do when you become VAT registered is start charging VAT on your sales invoices i.e. 20% on top of your normal fee/price.

The basic rule is if your sales is going to be more than £82,000 in the next 12 months you should register for VAT. You shouldn’t wait until you pass the £82,000 if your monthly run rate is higher than £6,833 i.e. if right from the beginning, you think you will go above annual £82,000, you should register straight away.So your invoice looks like this on a fee that you are charging to a customer of £1,000.

NET £1,000
VAT £200
GROSS £1,200

The customer then pays you the £1,200.

You then have to make sure that you get VAT receipts for all your business expenditure so that you can claim the VAT back (only on option 1 and 2, see below).

However, if becoming VAT registered isn’t complicated enough, you are then faced with 4 options of how to account for VAT.

Option 1 – VAT on invoices

You declare to HMRC all the VAT on your invoices in the quarter minus all the VAT on your purchase invoices and expenses.

This is the most common way of accounting for VAT.

Option 2 – VAT on cash

You declare to HMRC all the VAT on your sales receipts in the quarter minus all the VAT on your purchase invoices and expenses.

The advantage of this is that you are only ever paying VAT over to HMRC that you have received from your customer. In option 1, you could pay VAT over to HMRC on an invoice that hasn’t been paid yet.

The disadvantage of this is that makes the bookkeeping more complicated.

Option 3 – VAT on invoices using the flat rate scheme

The flat rate scheme is for businesses of less than £150,000 turnover (sales).

Rather than option 1, you are assigned by HMRC a specific flat rate %. So for example 12%. The % is based on your type of business, you can find the current list here:

https://www.gov.uk/vat-flat-rate-scheme/vat-flat-rates

You then add up all your sales invoices and INCLUDE the VAT – i.e. you add up the GROSS amount of your invoices (the NET + the VAT = the GROSS) and then you multiply this amount by the flat rate %.

Sounds like a no brainer since your flat rate % will be lower than %. However, you COMPLETELY IGNORE the VAT on your expenditure.

(I say COMPLETELY IGNORE, there is a special rule that means you can still claim the VAT on ‘capital costs’ over £2,000 even on the flat rate scheme)

Option 4 – VAT on invoices cash the flat rate scheme

This is the same principle as option 3, it just means you add up the sales receipts (which will include the VAT) and apply the flat rate %.

The flat rate scheme was introduced by HMRC to make it easier for smaller businesses to account for VAT, it was not meant to save you VAT.

However, for certain businesses you will save VAT and the difference between option 1 and 2 and option 3 and 4 could be significant.

Generally speaking, if you don’t have a huge amount of VATable expenditure then the flat rate scheme could save you VAT especially if your flat rate % for your industry is lower i.e. around the 12% mark. Another incentive for you to use the flat rate scheme is that you get a 1% discount on the industry flat rate in the first year AND accountants tend to charge less for flat rate VAT returns since they are much more straightforward.

I regularly calculate the difference between going on the flat rate scheme or using the more traditional method of option 1 and 2. If you would like me to do this for you, email me at russell@rsaccountancy.co.uk . The difference could be an annual VAT saving of up to £3,000 per year.

If you only work for 1 customer you may fall into the IR35 rules (which essentially takes away the tax saving benefit of a limited company). This is because you get tax benefits of being self employed than being employed and HMRC want to know that you are definitely not an employee disguising yourself as a limited company.

If this is an issue, we will need to review the contract (ideally the contract will state that the client has no right to direction, control, supervision etc – i.e. you are not an employee)

You pay 20% corporation tax on your profits (self employment – 29% after the first £10,600 profits).

Here’s how your accounts could look at the end of the year?

Sales income £50,000
Expenses -£10,000
Profit £40,000
Tax –20% £8,000
Left over for you £32,000

If you take out less than £38,000 from your company there will be no income tax, if you take out more, there will be 25% income tax over and above this

Two ways.

Salary and Dividends

We will set you up as an employee and pay you £10,600 salary every year (from the nearest tax year where you haven’t or won’t earn £10,600 already). You will physically pay yourself £883.33 per month. There is no income tax to pay on this amount, just a small amount of National Insurance (£300).

Every month you can pay yourself a dividend. Two things to remember, the dividend has to come from after tax profits (i.e. you can’t give yourself money that’s owed from the tax man) and you have to sign a piece of a paper and physically print it out and put in a folder (we will give you the template)

The key deadlines for limited companies

Year-end accounts and corporation tax payment – 9 months after your year end

Personal tax return and any income tax – 31 January

Annual return – anniversary date of when the company was set up

VAT returns – every quarter, payment due 1 month and 7 days after the quarter end

The key deadlines for self-employed individuals are:

Personal tax return and self-employed accounts – 31 January (tax due 31 January and 31 July)

There are three potential taxes you will pay.

Corporation tax – ensure that you include all your expenses

Income tax – don’t take out more than £38,000 from the company, if you need to then consider

splitting the company with a spouse, or looking at the timing of the dividends or pension contributions

VAT – usually the flat rate scheme will save you VAT but we can double check

Yes.

Public Liability insurance – to insure you against injury or death to third parties and damage to third party property as a result of your actions

Professional Indemnity Insurance – to insure you against any claims made against you

Employer Liability insurance – not needed if you are the only employee and own at least 50% of the shares

Lots. You’ll need an employment contract first of all (an HR or lawyer can do this for you or you could get a generic one of the web). This contract will confirm pay and number of holidays. If you have a part-time employee, make sure you pro-rata the salary.

When they commence employment, you’ll need to first set yourself up as an Employer and set them up as an employee.

You then pay them monthly with a payslip but you don’t pay them like you would a freelancer.

You pay them a monthly apportionment of their annual salary less the PAYE/NI.

This is where it gets tricky.

Say, you hire someone at salary of £2,000.

They start on July 1.

At the end of the month you pay them 1/12 of their salary which is £2,000.

Here is what it will say on the payslip.

Gross salary £2,000

Less PAYE (20% after the first £883.33 – £10,600 annually) – £223.33

Less National Insurance (12% after the first £672 per month) – £159.36

Total deductions – £382.69

Net pay £1,617.31

You would pay the employee on the last day of the month but you always pay the net pay to the employee.

You then have to pay the following to HMRC by the 22nd of the following month:

PAYE taken from employee – £223.33

National Insurance taken from employee – £159.36

AND

Employers national insurance

(13.8% of the amount over £676 per month, in this case £1,324 x 13.8%) – £182.72

Total to pay £565.41

So in total you are paying your employee £1,617.31 and the taxman £565.41. Your total cost for employment is £2,182.72.

Notice, this is more than the £2,000 per month you first thought. This is because the Employers National Insurance (13.8% over £676 per month

My rule of thumb is think of the salary and add on 10%, this is the true cost of an employee (in this case it is add on 9%).

You can ask an accountant or a payroll bureau to run the payroll for you or you can do it yourself on HMRC software.

I personally recommend getting someone to do it since even if you master the basic deductions above, it can get a load more complicated when you are faced with:

Maternity pay

Sick pay

Holiday pay

Student loan repayments

It is also worth getting an HR advisor on board to give ongoing HR and legal advice.

VAT is probably one of the most complex of taxes, but it just got a whole lot more complicated……

So if you want to know whether you are affected by VAT MOSS – see below….

2. Do you sell to the EU?

3. Do you sell digital products or digital services (no or minimal human intervention)?

4. Do you sell business to consumer in the EU (if you sell to a ‘marketplace’ this could be ‘business to business’ and therefore MOSS doesn’t apply)

If the answer is yes to all 3, you have to

5. Register by 10 February 2015

6. Complete VAT MOSS returns (starting with the quarter ended 31 March 2015)

6. Account for the VAT on the country of the customer (not UK VAT)

Important: All this applies whether or not you are registered for VAT in the UK

If you need help with this, email me at russell@rsaccountancy.co.uk