Limited company contracting guide (UK)

Introduction

This is our complete limited company contracting guide. We cover here all aspects and angles that need consideration, when you first start out as a UK contractor.

When you take the step to setting up a limited company for contracting, there may be many questions that you would like the answers to. In fact, besides your actual contract work, there can be so much more to think about. It can feel overwhelming, especially if this is the first time that you are working through a limited company.

Permanent employees, self-employed & directors of limited companies

When you are a permanent employee, you will work a set number of hours. In return, you are paid for your work, each week or month. As part of your permanent employment, you will also have certain responsibilities and be expected to complete certain tasks. An employee will also be entitled to sick pay and an annual allowance for holidays.

Sole traders / those who are self-employed, will be responsible for generating their own income. They will also need to file an annual Self-Assessment tax return. If they do not work due to being sick or being on holiday, they do not get paid.

For limited company contractors, there are many things to consider, including much the same as the self-employed. There are also certain duties as a director and additional filing responsibilities, when you have your own company.

Initial thoughts

This guide will aim to give you an overall insight into what to think about, when you are running your own limited company. When you do this, you can look to be as tax efficient as possible, as you go along. We have a list of tax tips to help you and the details on what you can claim as business expenses. In addition, we have a guide which shows how you can pay yourself tax efficiently, in terms of drawing income from your company.

There are also differences to consider, depending on whether you will be contracting or freelancing.

Section 1 –limited company contracting -initial considerations

Incorporation of your limited company

There are a number of ways in which you can complete the company formation process. Most contractors will let their accountant incorporate a new company for them. However, it is not too difficult to do this yourself. Forming your own company follows a certain process and there will be a cost to this too.

Guide to contracting -registered office 

You will need to decide on the official address for your company’s registered office. This is the legal address of your company. It is the place where official mail from Companies House and the tax authorities is sent to. There are a number of choices when you choose your registered office. Importantly, we would recommend that you get this official address right from the outset.

Company year end 

Every company has to have a financial `year end’. This will usually be the end of a calendar month. You can pick the year end as part of the process when you set up your own company. However, if you do not choose a preferred company year end, it will automatically default to the end of the month in the following year. Therefore, if you set your company up in June 2022 and do not choose a year end, this will auto default to 30 June 2023.

Directors 

Limited company directors are the people that run and control a UK private company. You will need to consider, besides appointing yourself as a director, if you would like to appoint any other directors.

Shareholders 

Shareholders are the entities in a company that receive a share of the company’s profits by way of dividends. They are also entitled to a share of the company’s final distribution of funds, when it eventually closes down. An entity in this context means an individual or another limited company.

When you set the company up, you will need to consider how many sharers to issue. You will also need to decide who the shareholders in your company are to be. Please note, it is wise to issue more than one share when setting up a company. A common choice at the outset is 100 shares. If you will be the one generating the work through your company, you will want to set yourself up as a shareholder. However, you could also choose to issue shares to your partner or to someone else who is involved with your company.

Generally, a contractor or small business owner with their own company, will be both the director and shareholder. They may also appoint their partner as a shareholder and a director, especially if they are helping the small business owner run their company.

Statutory records 

UK companies are required to keep and maintain statutory records. These show who the company officials and shareholders are, amongst other information. Your accountant will usually look after these records for you.

IR35

The history or IR35 and how it works

In recent years, the IR35 rules (also known as the off-payroll rules) were first rolled out to the Public Sector. In more recent times, these rules are now in place for the private sector. This means that it is now down to the service provider (for large and medium companies) to determine whether these rules apply to a particular contract or not. Prior to these introductions into the public and private sectors, it was down to the contractor to determine the IR35 status.

As mentioned, the recent change only applies to large and medium companies. Therefore, for any contracts through small companies, the determination of IR35 status still falls upon the contractor.

This is definition of a large or medium business, is one which meets two or more of the following conditions:

  • An annual net turnover of more than £10.2 million.
  • A balance sheet total of more than £5.1 million.
  • More than 50 employees.

IR35 considerations

If you are the contractor and the business that is providing services to you (either direct or through a recruitment agency) does not meet two out of the three conditions mentioned above, it is classed by HMRC as being a small business. As a result, IR35 (off-payroll rules) will not apply. Therefore, it is down to the contractor to determine their own IR35 status.

Due to the shift of responsibility, many recruiters stopped providing contracts that were outside IR35. As a consequence, and subsequently to this, it was then the case that many contractors then turned to working through umbrella companies and many still do now. Due to a period of time having now passed, recruiters have had the chance to adapt to the changes and the contract market is slowly picking up again.

When you are looking for a contract, recruitment agency will now make it clear whether each of their contracting roles are inside or outside of the IR35 rules. You can also do your own checks too by arranging for a contract review with a specialist in this area. Contractor Advice UK recommends Qdos for this service.

Accountant

Appoint an accountant 

As part of our limited company contracting guide, we recommend that you appoint an accountant. We also advise that it is a good idea to look for a specialist contractor accountant from the outset.

When you appoint an accountant, it is advisable to do your research as there are many out there to choose from.

When you are a contractor, as mentioned, it would be wise to pick a good accountant who specialises in the contracting industry. They should also have detailed knowledge in this sector. There are certain areas that a normal high street accountant may not be aware of. These areas include the IR35 legislation and the rules around claiming for travelling expenses. Your contractor accountant should also help with your tax planning for the year ahead and in future.

Routine filing that your accountant will perform

Your accountant will assist in filing the annual accounts and annual returns with the UK authorities. These are namely Companies House and HM Revenue & Customs (HMRC). Your accountant will also assist with the updating of your company’s accounting system. Furthermore, they will also help with the filing of other quarterly or monthly returns with HMRC, such as VAT and PAYE.

Every accountant will charge accountancy fees. Therefore, it is advisable to look for a competitive one with a fixed fee that does not have hidden extras.

This page details what the best contractor accountancy services should look like.

Opening a business bank account 

Once your company is set up, you can then open a company bank account.

There are certain aspects to consider here. If you go with a good bank from the outset, it can save you hassles further down the line. Most high street banks offer free banking for the first year. After this period of time has elapsed, the fee is around £6 per month. The deals out there are always changing on an ongoing basis.

We will mention further in this article about keeping and maintaining your company’s accounting records. We recommend keeping your records on the FreeAgent digital platform. FreeAgent imports transactions from your company’s bank statements and this helps make your company’s book-keeping much easier. Most banks work very well with FreeAgent. However, Natwest, RBS and Mettle will also pay the FreeAgent licence fees, if you sign up with them from the outset. This is a saving of £180 a year.

Business insurance 

As a contractor or small business owner you will need to consider business insurance.

Ordinarily, within your contract terms and conditions, you may be required to take out professional indemnity insurance. However, as part of setting up your company, you should consider if you need any other insurances for your business. This could include public liability, employer’s liability and tax insurance (IR35).

Choosing a book-keeping / accounting system 

There is one key aspect to consider when you start to run your own business. This is how to update and maintain your business records, as you go along. This is important and if you are organised it will make it easier for your accountant. This in turn should reflect in the fees that they charge you. As mentioned, FreeAgent is an excellent choice for an online accounting system, if you are a contractor or small business owner.

Therefore, it is good from the outset, to know how you should maintain your business records. It is also good to know how long you need to keep these records for.

Section 2 –limited company contracting -company taxes and paying tax

Set up a Business Tax account with HM Revenue & Customs (HMRC) 

In our limited company contracting guide, we would advise you to set up a Business Tax account. You can do this with HMRC, via their website, from the outset.

This will enable you to have an overview of your company’s taxes, as you go forward. When you set this up yourself, it will make it much easier and quicker for you to add your accountant as an agent. We would recommend that over time, once registered for a business tax, you add the services for:

  • VAT -see below regarding VAT registration.
  • Corporation Tax.
  • PAYE / NIC -known as PAYE for Employers.

Register for VAT

VAT registration is something else to consider when you first set up your own company.

The rule for VAT registration is that if you know your trading income will be over £85,000, you will need to register for VAT. However, you can also register for VAT voluntarily.

As part of VAT registration, you will also need to consider if the normal / standard scheme or VAT Flat Rate scheme is the best option. Nowadays, contractors are usually better off under the normal scheme.

Once registered (if you are under the normal scheme), you will be able to reclaim VAT on your costs. Being VAT registered effectively means that your VAT inclusive costs will actually cost your business one sixth less in future.

Once an online VAT registration application is submitted, it usually takes two working days to receive your VAT number. It then takes a further two working to have access to your VAT service on your HMRC Business Tax account. At this point, you can also download your VAT certificate.

Corporation Tax 

When you set up your company, Companies House will pass the details to HMRC. Once this occurs, they will automatically register your new company for Corporation Tax.

All businesses pay Corporation Tax on their company profits. This tax is payable once per and it is due for payment year nine months and one day after your company’s year-end.

PAYE/NIC 

Your accountant or even you can register your company for a PAYE scheme. This will enable your company to pay salaries in the future and these can be processed via FreeAgent.

Tax (PAYE) and NI (National Insurance) are payable to HMRC on any company salaries. The tax amounts are ordinarily payable to HMRC on a quarterly basis. The amounts are due by the 19th of the month after the end of each calendar quarter.

Section 3 –limited company contracting -trading as a company 

Guide to contracting -invoicing your client 

When you start a new contract, you may be required to invoice your client on a weekly or monthly basis.  If you are working through an agency for your client, the agency may self-bill and they will send you a remittance advice.

Please note, it is important, when you are actually sending invoices to your client:

  • These contain the correct details.
  • You ensure that you recharge your expenses There is a correct way to do this when you are VAT registered. This is something that often confuses contractors.

Claiming for expenses through your business 

When it comes to doing this, contractors and business owners can often miss claiming for certain expenses. If you do claim for all of your expenses, the benefits are:

  • You will save tax on these.
  • Any business expenses that you have paid for yourself can be reclaimed from your business. In other words, your business stands the cost, rather than you.

When your business is set up, there will be pre trading expenses. There will also be ongoing business expenses that your business will incur, as time moves forward. With regards to claiming for the expenses that you pay for yourself, you might consider reimbursing these on a monthly basis.

Once you start your company, will you be doing any work from home? If the answer here is yes, it is also good to know from the outset:

Section 4 -extracting income from your business

Considering and deciding on your take home pay

We now turn to your take home pay from your company. Once your company has begun trading, you can:

  • Reimburse your expenses.
  • Draw a salary.
  • Pay dividends.

Reimburse your expenses 

It is entirely up to you when you reimburse these to yourself. A routine way to deal with this is to reimburse yourself for your expenses at the end of each month.

Paying salaries when you go contracting

When you start working through your own company, you will think about paying yourself a salary, just like you would receive if you were employed on the payroll elsewhere.

Now that you have your own company this will be your new employer. Therefore, you could take a low salary, middle level salary or a high salary, depending on your circumstances.

If your spouse or partner will assist you in running your company, you can also consider paying them a salary for their time. The type of work that they could do could be administration type work. This could include opening mail and answering the phone. It could also include responding to and sending e-mails, invoicing and business website type work. Their salary should be at a commercial rate, for the time that they spend working for your company.

Paying yourself dividends 

When a company is set up, a number of shares are issued at the outset.

Ordinarily, you would be the sole shareholder. However, you may choose to issue some shares to another individual, such as your spouse as part of the set-up process.

Best practice is to pay dividends on a monthly or quarterly basis. You can do so by making a transfer from the company account to your personal or joint account.

There are also many aspects to paying dividends. These include:

Pension 

You can consider setting up a contractor pension scheme. Your company could also make employer contributions into your personal pension scheme.

Pension payments through your company will save Corporation Tax because these costs are regarded as business expenses.

When you do make pension payments through your company, it enables you to extract extra income through here and this will benefit you personally in the future.

Section 5 –limited company contracting -official filing

Annual filing 

We now turn to official company and personal filing requirements. When you are a director running your own company there will be certain filing requirement every year. These are part of your director’s duties and the main requirements are:

  • File company accounts (financial information) with Companies House. These are a reduced version from the full set of accounts that you file with the tax office.
  • File a full set of company accounts and company tax return (form CT600) with HMRC.

Other filing requirements 

Besides the above annual requirements, you or your accountant will also file:

  • VAT returns (quarterly).
  • PAYE/NIC RTI (Real Time Information) returns (usually quarterly).
  • You will also need to file a P11D return once per year if your company provides you with benefits in kind, such as a company car or other benefits.

Final thoughts 

We detail in this limited company contracting guide, many things to consider. Most of these are important when you first set up own company. It is highly recommended to be organised from the outset and this will stand you in good stead going forward.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 10th, 2021 / Categories: First timer guide, Main Guides, Starting Up Your Own Company /

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