Whichever way you choose to operate it is important to appreciate that running a business is not simply working in a different way.
Once you set up a business you enter a whole new realm of laws and regulations. It is essential that you begin to think and act as a business, not just as a worker who is operating through a business set up for convenience. For example, by law, if you form a limited company you will need a company nameplate at your registered office, although we have not found any instance of this rule being enforced. You should have letterheads, business cards, a company name and identity. You need to start thinking in terms of the company, not you as an individual. You should think about having a business telephone line installed separate from your private line. If you already possess a desk, computers, fax machine, photocopier, etc., you should consider ‘selling’ these to your business, initially recording the value as a personal loan to the company from you (set up expenses). You may also consider putting some of your own personal money into the business as a loan from you to the business. These can be repaid later as the business begins to generate income.
It is worth investing a small amount in a good book on Company Law for the businessman.
SETTING UP A LIMITED COMPANY
Why do I need a Limited Company?
Technically, you do not actually need to set up a limited company to be a freelancer. In law, you can work as a self-employed sole trader, as an employee of a composite or ‘umbrella’ company or as a PAYE employee to an agent. Throughout this document we shall use the generic term ‘freelancer’ to cover all self-employed workers, including consultants, interim managers and others.
You may wonder why you cannot be just self-employed.
a) You can work as a self-employed sole trader if your clients and agents are prepared to engage you on that basis. However, most are reluctant because if your tax status is challenged then it is the client that becomes liable for any additional tax and NIC due. In addition, the 1998 Income and Corporation Taxes Act (Section 134 ICTA 1988) effectively prevents individuals from being self-employed where an agency is involved, as it obliges the agency to treat the individual as if he/she were an employee by deducting PAYE and NI from the payments due.
b) A limited company also offers the owners (i.e. the shareholders) protection against liability for the company’s debts. So, if the company should become bankrupt, as a shareholder, you will only lose the value of your shares. As a director you will not be liable for the company debts either, unless it is proved that you have acted fraudulently or improperly under company law. You can still operate as self-employed or as a partnership but effectively you will be restricted to finding clients directly.
How do I set up a Limited Company?
The quickest and easiest way to set up a limited company is to go to an accountant or company formation bureau and buy an “off-the-shelf” company. You can also purchase off-the-shelf companies from specialist company formation agents (found on the Internet or in Yellow Pages). The name and the Articles Of Association of this company can be very easily modified to your requirements.
An off-the-shelf company usually costs £100-£150, although some accountants will set one up for you for free. You will need to notify any changes to the company name, directors, company secretary and the Registered Office of the company to the Registrars at Companies House on the correct forms. You can find out more about this in the guidance booklets available via the Companies House website (www.companieshouse.gov.uk).
Alternatively, incorporate the company yourself. This is actually quite straightforward and can be quite a bit cheaper, around £20 or £80 for a same-day service, than using a third party formation service. Guidance is, once again, available from Companies House.
What are the legal requirements for Limited Companies?
A limited company must have at least one director, a company secretary and a registered office, and must have “Limited” or “Ltd” after its name. The company secretary can also be a director but a sole director cannot be the company secretary. This means that there must always be at least two people involved in the running of a company.
Many freelancers choose their spouse or partner to act as company secretary but your accountant may be prepared to do the task. For the purposes of the average freelancer, the job is largely a symbolic one. The Company Secretary’s job is to ensure that the company is run according to company law but this responsibility is shared with the directors.
Ownership in terms of the split of shares in the company is up to you but, normally, 100% of the shares would be issued to you as managing director. Alternatively, many freelancers split the shares with their spouses. In the latter case, be prepared to defend the split of interest in the company should the Inland Revenue ever question it. In general, it is considered best to make the split when the company is first formed.
The registered office is where the company “lives” for official purposes. This could be your accountant’s office or your home/office (check the terms of any lease or mortgage agreement to make sure there are no restrictions regarding commercial operations).
The registered office must be within the jurisdiction in which the company was incorporated. To put it simply, a company formed in Scotland must have a registered office in Scotland, a company formed in England or Wales must have its registered office in England or Wales. Legally, a plaque or sign must be displayed outside the building to show that this is the company registered office, although the PCG does not know of any freelancers who have been prosecuted or investigated for failing to comply.
Finally, a limited company must file annual accounts with Companies House and the Inland Revenue. The limited company must also complete an annual shuttle return to Companies House. This confirms who owns and who runs the company.
See the Companies House website for more information: https://www.gov.uk/government/organisations/companies-house
What does a Director do?
The post of director is not easy to define in a few words. Basically, the directors must make sure the company is run properly, according to the law and in the interests of the shareholders. Companies House produces a leaflet (GBA1) explaining the basics about being a director or secretary of a company. There are also many books available that explain the legal requirements of company officers.
The directors and company secretary are legally responsible for ensuring that the limited company meets these obligations and is run according to the Companies Act – the statute that governs the running of limited companies.
Am I employed by my company?
A director of a limited company is not strictly an employee of that company unless he/she has a contract of employment. Many freelancers do indeed draw up such a contract. This would specify the expected duties of that individual and the compensation they would enjoy (salary, holidays, etc.). The existence of such a contract may be a pointer to the director’s work for the company being indicative of non-employment with client companies for IR35 purposes.
However, bear in mind that ‘employment’ leads to such responsibilities as the provision of the minimum wage and other statutory benefits.
If you wish to set up formal contracts of employment between yourself (and other directors) and your company, it is advisable to get these drawn up by an employment specialist. Some have pre-created standard contracts that you can then tailor to your specific needs.
What can a limited company do?
A limited company is actually a distinct legal entity in its own right. You are not the same as the “company”; the law sees the limited company as a separate “person”. It has rights and responsibilities. A limited company can own property or equipment, such as computers. The company may have a business account with a supplier, can have its own bank accounts and can hold shares in other companies.
Companies House Guidance for Setting Up a Limited Company
Companies House guidance booklets: https://www.gov.uk/topic/company-registration-filing/starting-company
CHOOSING AN ACCOUNTANT
Why do I need an accountant?
An accountant can take care of most of the additional work and responsibility associated with running a limited company. Your accountant may also be able to advise you on tax and legal matters and help you manage your personal and company tax liabilities.
How do I find an accountant?
You can look in the Yellow Pages but you should really choose an accountant that understands freelancing. You will probably spend a lot of time talking to your accountant, so treat this as a long-term relationship and choose carefully. You need someone you can talk to, get along with and, most importantly, trust.
There are some large “freelancer” accountancy firms aimed solely at IT freelancers. These specialise in freelancer issues, such as IR35. Some users of these firms have reported that the overall standard of service is variable and they can have issues dealing with non-routine matters, although it is worth noting that some of specialist accountancies offer money back guarantees on their services. Equally, problems have also reported with smaller or non-specialised accountancies.
When choosing an accountant, you should look for:
- Personal recommendations – ask other freelancers or post a question on the PCG forums.
- Membership of a professional body such as one of the Institutes of Chartered Accountants. This offers you more protection against malpractice. Remember that anybody can call themselves an accountant, qualified or not. Similarly, accountants who specialise in handling freelancers are usually Limited companies and, therefore, in the event of there being a complaint, the freelancer has full rights under UK law.
- Evidence that the accountant understands freelancing. Does the firm handle the accounts for any other freelancers?
- What does this accountant know about IR35?
- Location – it really does not matter where your accountant is but, if you have any problems, it is nice to know you do not have to travel far to sort them out.
- Can’t I do it myself?
You can keep your company accounts yourself if you wish, using a spreadsheet or a simple accounting package such as Sage or Quickbooks (both around £125 +VAT). This should not take you more than a few hours a month. However, you should still get a qualified accountant to draw up the end-of-year accounts. Your accountant will also calculate your corporation tax liability and complete the corporation tax return for you. It is your legal responsibility to make sure your accounts are correct so it really is worth the cost. But, if the thought of wading through all those receipts fills you with horror, you can get your accountant to do the whole lot for you.
How much do accountants cost?
A good business accountant will charge around £80–£100 + VAT per month. For this, the accountant will draw up your end-of-year accounts and may prepare your VAT returns. This is the minimum level of service most freelancers use. If you want your accountant to do any more for you, like preparing your expenses or issuing invoices, you will be charged accordingly.
Institute of Chartered Accountants for England and Wales: www.icaew.co.uk Institute of Chartered Accountants for Scotland: https://www.icas.com Association of Chartered Certified Accountants: https://www.accaglobal.com/uk/en.html
CHOOSING A BANK
Why do I need a separate business bank account?
“You” are not the same in legal terms as “the company”, so “the company” needs its own account. Always keep your personal affairs separate from those of the company. Some freelancers prefer to have the separate accounts in separate banks so the bank cannot use knowledge about your business to make decisions regarding your personal finances. However, others prefer to develop a relationship with a particular bank.
Should I just use my local bank’s business account?
You do not need to choose a bank with a “local” branch. There are specialist freelancer accounts and high- rate business savings accounts available over the Internet and from non-high street banks. These accounts are generally better value. Many freelancers choose to run two accounts – one with higher interest where they set aside money for tax and VAT.
What sort of account do I need?
As a freelancer, you’ll be looking for an account that offers the following:
- Free banking.
- A good rate of interest on cash savings (you will be keeping thousands of pounds of tax money in here). Rates vary but should be within a couple of percentage points or so of the current Bank of England rate. Use a separate business savings account to earn as much interest as you can. Remember that the interest earned on company money is outside of IR35.
- You’ll need a company chequebook. A company credit card may be useful but many freelancers use their personal credit cards for expenses and then claim these back from their company. In this case, be careful to clearly separate business and personal use!
- Freelancing companies rarely need loan finance, an overdraft or any other credit arrangement, so you may not need an account with this facility.
Why not ask on the PCG forums about the best banking deals currently available for freelancers?