Itzel Danica's Blog

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How much of ‘inconvenience’ is there in running a Limited Company

When I review a typical article outlining the advantages and disadvantages of freelancing using your very own Limited Company Compared to suing an umbrella service provider, like Freelance United. The umbrella is usually classified as the ‘a headache free’ direction and the limited firm path as the ‘tax efficient route’ (albeit with some ‘trouble’ included).

Certainly, if you do determine to freelance employing an umbrella company, there are the lot fewer documents to take care of. As long as you’re capable of submitting an invoice to your customer, and sending it via our online portal, we can take care of the rest. We will deal with all types of admin, and also pay you a wage every month or week, net of all tax obligations, the umbrella cost, and other reductions.

If you established as a limited company director and assuming the IR35 legislation does not capture you, you can in some cases pay less tax compared to your umbrella equivalents, however just how much ‘a headache’ is associated with going limited?

When I started out, I was a little intimidated by the idea of ‘running my company registering for different tax obligations, managing HMRC as well as Business Residence, finding an excellent accounting professional and also opening up a business account. This is just to get started!

Running your limited Company

In regards to on a daily basis, and also yearly activities, the main ones consist of:

1. Submitting an Annual Return (AR01) to Companies House.

This gives companies with an update to the basic info it holds regarding your firm (e.g. change of address/ business personnel/ share resources). Easy to complete (generally by your accountant at a cost), the main point you need to look out for is submitting it prior to the due date (normally one month after the anniversary of your business incorporation date).

2. Completing your Yearly Accounts.

Unsurprisingly, a financial advisor will compile your accounts, as well as return a duplicate to Companies House and also HMRC each year. You will certainly pay Corporation Tax obligation on your earnings within nine months of the due date.

3. Invoicing

The common Freelancer will certainly send out an invoice to the representative/ customer when per month. Barely hassle, although you ‘d be astonished at many service providers groan regarding invoicing. You can make your life even simpler by using an on-line accountancy system either created by your accounting professional or a 3rd party application like FreeAgent (Our invoicing app is free once you join). With online software application, you simply set up the customer’s specifics, develop and submit an invoice, and be happy in the knowledge that the invoice has currently been lodged with your accounts information, as well as any late payments can be tracked easily.

4. Paying your taxes

For the freelancers that are VAT-registered, each quarter you’ll need to submit your VAT return as well as pay the responsibility. Corporation Tax is paid every year. As a company director, you’ll likewise need to register to pay your personal tax through self-assessment by the end of January each year. Again, all of these tasks can be carried out by your accounting professional (based on you inspecting the numbers as well as authorizing them off). Once again this will cost you money.

Find out more concerning the taxes you’ll run into as a service provider.

Besides these tasks, there are ongoing admin tasks you might have to take on, such as chasing after the odd overdue billing, compiling your costs, and reviewing your tax affairs with your accountant (e.g. working out the most tax effective means to pay on your own). Managing your expenses and basic bookkeeping. While this doesn’t sound like a lot, it does take time and the time you spend on this is a time you can’t be billing.

Working with an Accountant

If there’s one single point you might do to make certain that your life as a limited company freelancer is as trouble-free as possible, it is to discover an efficient, communicative, as well as professional accountant. These aren’t as easy to find as you’d think, and the good ones know how to charge for their services

Your financial advisor can take care of mostly all of the trouble connected with running a company. They will certainly deal with all your tax affairs, run your month-to-month pay-roll, and create your annual accounts but once again you be paying over £100 a month for the privilege

You should maintain organised and maintain exact documents, and also provide your financial advisor with information on all your customer invoices, and also any expenses you have acquired.

The post How much of ‘inconvenience’ is there in running a Limited Company appeared first on Freelance United.

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Will closing your company keep you away from IR35?

Many contractors think that they can save themselves from IR35 investigations by simply closing down the company that’s causing problems. The common notion is that closing down a company will mean that HMRC doesn’t have the power to investigate when the company isn’t there any more. However, there are some problems even though this escape from IR35 seems somewhat logical.

The fact is that when you apply to you apply with Companies House to strike off your company, the Registrar will take up to three months to remove the company from register. Meanwhile, the Registrar will be obliged to inform all interested parties of such striking off. If there are no interested parties and no pending litigation, the Registrar will proceed with striking off procedure and the company will start to exist. Since there is a three-month period and a notice is sent to all interested parties, there is rarely any chance that HMRC will not react and investigate your company affairs before Registrar could close it down after three months.

The Registrar is obliged to publish notice of a company’s request for striking off. This notice is published in official gazette. The parties that have some kind of interest or want to object this stirking off will be able to raise their concerns after seeing the notice.

The official gazette for companies registered in England and Wales is London Gazette the official gazette for companies registered in Scotland is the Edinburgh Gazette. The Belfast Gazette serves as the official gazette for companies registered in Northern Ireland.

Since the Registrar has to wait for 3 months before finally striking off the company, HMRC can react within this time. HMRC can even restore a company even when it has closed if there are PAYE arrears that still need to be inquired. However, in practice HMRC doesn’t intervene after the Registrar strikes off a company after 3 months have passed since the initial application by the company directors. Historically, HMRC has never taken this route.

HMRC can recover PAYE debt after it satisfied two conditions. The first condition requires that PAYE arrears exist due to an error made in good faith. The second condition requires HMRC to establish that employee has received relevant payment despite having the information about employer’s failure to deduct tax from taxable payments.

Conclusively, it isn’t a safe route to apply for striking off a company only to avoid IR35. Technically, you should be able to get away from IR35 as the company will cease to exist and you can start anew by simply incorporating a new company that has no history with HRMC and IR35. However, HMRC will have three months to come after you and it can even recover PAYE debt after you close the company.

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How to Improve Your IR35 Status in 2015

There were 192 inquiries about IR35 status in the last tax year (2013-2014) and taxman yielded a total of £430,000 from these inquiries. If we compare these stats with the previous yields, we will clearly notice that the number of inquiries drop only by a little while the yield drops by half from 2012-2013. Overall, IR35 inquiries brought in 61% less yield that the yield last year.

Despite changes happening to IR35 legislation and reduced output for the taxman, the IR35 is going to be with us for a quite a long time. So there is no better way out than to prepare for it by improving your prospects so that you can face the situation if HMRC come knocking doors of your business.

If you think you are outside IR35, be ready to prove it

If you think that you are outside IR35, you should be ready to prove this fact. You will need to collect different type of evidence that will show that your business is outside IR35. Additionally, you can have your contract reviewed from a professional so that you can include the review in your business practices. This will help you follow the right practices and you will be able to collect evidence that will be handy when HMRC comes knocking at your doors.

If your contract review turns out to be positive, you should keep its record safe so that you can include it in your evidence in case of an HMRC inquiry and prove that you are a genuine business.

A business insurance can help

When HMRC investigates your business, a business insurance is going to prove a great help. You should consider taking out a business insurance especially the personal indemnity insurance and you will have another factor on HMRC’s business entity test in your favor.

Although HMRC has always dismissed the factor that business insurance contributes to determine IR35 status, the new legislation has changed this scenario. Now a business insurance is as much a factor of business entity test as much is the substitution and contract review.

Business insurance doesn’t cost a fortune. You can buy full range of policies around £20 a month. Insurance at this cost shouldn’t be a problem especially when you weigh the cost against the benefits of taking out an insurance.

Substitution and personal service

Substitution and personal service is one of the most important factors in IR35 tests. The right of substitution implies that a contractor can provide a reasonable substitute to provide services. Even the new Agency Worker Regulation emphasis that contractors and independent workers should establish the fact that their contract is genuinely independent.

To establish your right of substitution, you should send a substitute as a suitable replacement for a day’s work. This isn’t going to cause any problems but you will have a very strong evidence that your contract is independent.

Company stationary can help you clear IR35

As insignificant as it may sound, having your own business stationary can make a huge difference how IR35 sees your contract. You can either purchase of make your own stationary. Even a judge in hearing a case stated that having business cards and company stationary was a major factor in determining the nature of contract. To make sure that you have all the possible evidence in this regard, you can simply do the following.

Have a business website

Buy or make company stationary

Use company letterheads

Collect evidence for showing nature of actual relationship with your client

Finally, the last thing you can do to provide evidence of your business being genuine is to establish the actual relationship with your end client. You can do so by producing the ‘confirmation of arrangements’ document. This document should clearly show that you comply to certain working practices through your contract that were confirmed by both the parties and that these compliances render your business as a genuine business and not disguised employment.

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Are Contractor Pensions Considered Allowable Expense by HMRC?

A pension contribution is usually considered an allowable expense as long as the contribution is made to a registered pension scheme and the purpose of such payments is directly trade-related. To put simply, if these contributions are part of the a renumeration package to be paid as part of the trade, it will be allowable expense.

It is important to note that the whole part of the renumeration package is exclusively paid for the purpose of employer’s trade. In case the total amount paid for renumeration package doesn’t simply include pension contributions, then HMRC will consider looking at the situation.

In some cases, an employer can make increased pension contributions and still be able to claim it as allowable expenses. This is typically a case when a pension scheme is underfunded. The employer may decide to make increased payments and still be safe from HMRC. HMRC will check contributions between different periods and investigate the history of contributions.

Renumeration paid to a close fiend or a relative are accepted by HMRC when there is a ground to prove that these were paid wholly and exclusively for the purpose of the trade. These contributions will be compared against the contributions paid to employers who are unconnected but perform similar duties and offer similar value to the company. If there are no such employees in the company, then HMRC will make comparisons of contributions to the third parties who are performing similar duty in a similar setup. HMRC will do this to determine whether or not the contributions exceed the reasonable amount paid as reward for the work done. In case a friend or a relative is paid higher contributions compared to the other employees with similar tasks or third-party employees, HMRC will doubt such payments and doubt that these payments aren’t being made for trade purpose exclusively.

To conclude, if a contractor company is making payments to director, or director’s wife or even a close friend who is an employee as pension contributions, HMRC may decide to take a closer look when claimed as expenses. However, if the payments are made entirely for the purpose of the trade then one doesn’t have to worry about expenses being disallowed.

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Taking a financial risk – Can it help you with IR35?

Many contractors take financial risks when operating through their limited companies. Similarly clients also take risks and it sometimes affects contractors as they are unable to recover payments for work completed. However, majority of them don’t realize that they have a great opportunity to grab as many as 14 points for the business entity test.

Taking a financial risk indicates that you are operating as your own business. It essentially demonstrates the fact that your business can pass the business entity test. Realizing this fact, HMRC has alloted 14 points that you can score when taking a risk as a business.

The business entity test is designed in such a way that any independent contractors who take a financial risk can get 4 points for showing their financial responsibility to correct faulty mistakes. Any contractor taking a financial risk should ensure that he has enough evidence to support his claim for these points. The evidence may come from a clause in the contract stipulating responsibility of correcting your mistake in case of a financial risk. Additionally, details of what can possibly go wrong and how you can fix it will strengthen the evidence.

You get 10 points when your client takes a risk and doesn’t have sufficient funds to pay you for work completed. When you are working as a contractor, you take the risk of being unable to recover payments for work done in situations when your client doesn’t have enough money to pay you for some reason. This is a risk that comes with being a contractor. If your client has taken risks and they have disabled him from paying you due to lack of funds in the past 24 months, you can use this to your advantage and get 10 points in the business entity test.

When you are unable to recover payments, it shows that you are in business at your own. This distinguishes your nature of work from employment and therefore helps you stay clear of HMRC. Here is what you are going to need in order to establish your claim for these important 10 points.

You should be able to establish the fact that you were unable to recover payments by showing write offs in accounting records. If you keep your records proper, you should easily find these records.

If you had been in a situation when you were unable to recover payments, there should be some sort of email or snail mail communication between you, the client and the intermediary. You should be able to produce copies of such communication to further strengthen your claim to 10 points.

Another obvious evidence that you can easily collect and strengthen your claim is evidence of legal communication during the recovery process. If you were unable to recover payments, you’d have definitely gone for legal action. That should give you enough evidence to support your claim.

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How owning or renting a premises for business can affect your status in respect to IR35?

If you are planning to own or rent a premises that will be used specifically for running your business, you should not worry about IR35 legislation as long as you can provide sufficient evidence. Your business will also get 10 additional points on Business Entity Test that will help you stay clear of IR35 legislation.

In order to take the 10 points from Business Entity Test, you will need to prove evidence to prove that you are using premises to run business only and that it is separate from your home and client’s premises. To establish your claim, you are going to need address of your business premises along with lease documents and utility bills that you have paid.

To demonstrate that your premises is separate from client’s premises and your home, you are going to need to need your home address and your client’s address.

It is important to note that any of you or your business can own or rent the premises. When you or your business owns or rents the business premises, it is quite evident that you are a contractor and not an employee as an employee would have no reason to rent or own the business premises. It just shouldn’t be connected with your home or client’s premises in any way since it will render evidence in favor of you being an employee.

Owning or renting a business place to conduct your business doesn’t put you outside the IR35 as such. All it does it give you an advantage and 10 points that can help you pass the business entity test. If you can rent or own a place to dedicatedly operate your business from, you should go ahead and do that. This will at least prove to be a positive factor and your chances of being IR35 immune will increase.

In addition to being workplace, there are various other factors that HMRC uses to determine your status in reference to IR35. These factors are control over the manner and timing of work, right of substitution, provision of equipment, involvement of financial risk and mutuality of obligation between the parties.

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Do you need to worry about IR35 when working from home?

There are scenarios when you are working from home and may never have to visit client’s site during the entire period of your contract. Many contractors who are working on this type of a contract may think that they don’t have to worry about IR35 since they don’t ever go to client’s site, which makes a clear case of control. But being in control doesn’t make you exempt from IR35 as there are still substitution and mutuality of obligation that you will need to demonstrate in order to stay clear of IR35.

For better understanding what all these terms mean, I will elaborate each one of these starting with substitution.

Demonstrate substitution

Substitution is the right of a contractor that enables him to send a substitute to provide services. The substitute acts on the behalf of the original contractor and therefore demonstrates the right of substitution. The contractor has to be responsible for the completion of services and for paying the substitute. On the other hand, the client retains the right to refuse to accept the substitute on basis of insufficient qualifications and experience.

Since substitution is one of the three tests for determining status of your contract in reference to IR35, it is important that you do actually exercise this right even if you send a substitute for just a day. This way you will be able to demonstrate your right of substitution.

Demonstrate control

Your contract will also be tested for control in order to determine its status in reference to IR35. This test determines the degree of control over the execution of services exercised by the client. Control also includes control over workplace. So the place where the contractor actually does the work can demonstrate degree of control the client has over the manner of execution of services.

A client can determine what needs to be done and then the contractor decides the manner in which it has to be done for a contract to pass the control test. In case you are working from home, you have complete control over where and how the services are provided.

Demonstrate mutuality of obligation

Mutuality of obligation is the third test that is used for determining the status of your contract in reference to IR35. For a contract to fall outside IR35 legislation, there should be no mutuality of obligation in terms of continuity of services. No party to the contract should be obliged to offer work or accept work.

Other areas to consider

Status of your contract under IR35 legislation isn’t only determined on the above three tests but there are other areas that you need to consider as well. These include financial risk and provision of equipment.

Do you need IR35 insurance?

So if you are working from home, you have control over the manner and place of work and there is no mutual obligation on either party, you don’t have to worry about IR35. But still there are some other gray areas that can cause problems. Having an IR35 insurance shows your prudence and gives you peace of mind even when your contracts looks safe from IR35 on the outside.

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Accounting mistakes to avoid – Contractor Finance

If you have been making common accounting mistakes, it’s time for a fresh start. The new tax year is approaching and you can make some new resolutions to keep. The best you can do is to avoid these fatal mistakes.

Ignoring claimable expenses

Doing the books is probably the least enjoyable part of running a contracting business. This is something that keeps slipping down priority list for majority of contractors unless it starts hurting business really bad.

When you put accounts at low priority, you tend to miss small expenses that you can claim. These expenses are usually under £10. Now these expenses usually make one-third of total claimable expenses so if you ignore them, you are paying a lot of additional tax and making a huge mistake.

You can avoid this mistake by simply being more efficient. You can use different tools that will help you keep better track of your finances and accounting. For example, there are some smartphone apps out there that let you take a picture of your receipt and then send it directly to your accounting program as a receipt.

Ignoring tax deadlines

There is no doubt that running a contractor business leaves with little time for anything else especially when you are new and still settling into your industry. This situation may lead to a disastrous situation where you might start ignoring tax deadlines. If you miss your deadlines, you are going to be in big trouble as HMRC will impose penalties for delay. If you continue doing this, your penalties will keep increasing and you will have to pay huge amount for interest. Once you are caught in this trap, you are simply going to find it impossible to get rid of surcharges and get your finances back to normal.

The best way to avoid missing tax deadlines is to keep track of deadlines somewhere. Make note or simply add them to your calendar but whatever you do, be sure to look at them. You can set reminders a week ahead if you are kind of a person who usually forgets deadlines. If you are unsure about a deadline, you should get in touch with HMRC at the earliest and ask for additional time. In most cases they will give you some relaxation or let you pay through installments.

Failing to keep things simple

One of the most common mistake is over-doing things and making booking way too complex than what it really needs to be. You just need to keep track of money you are making and tax that you need to pay. Adding too much of unnecessary detail can sometimes lead to complications that don’t need to be there. Sometimes your only problem may be using a complicated software that don’t really fit your needs.

Doing too much yourself

Sometimes you might simply be doing too much yourself. Ideally, you should take some help with accounting and other financial matters. Hiring a good contractor accountant will let you relax and avoid all the mistakes that contractors usually make. Just make sure that you are hiring someone who understands contracting finance and has experience in your industry.

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Budget 2015 – What contractors need to know?

2015 budget [download Budget Document here] is here and it has announced that economy will continue to grow in a pattern similar to what we saw in 2014. Growth rate of 2014 was 2.5% and it is expected to remain around 2.4% this year. This is a good news for everyone including contractors and freelancers.

Personal allowance will increase starting from April 2015 while pension saving lifetime tax allowance will be reduced. The Corporation Tax for £300,000 and above will also be reduced to 20% which will bring it in line with what majority of contractors working through limited companies are paying already.

This year’s budget will also start a new personal savings allowance which will provide tax relief on interest rate. To be precise, taxpayers at basic rate will enjoy tax relief for first £1,000 in interest while taxpayers at higher rate will have first £500 in interest free of tax.

Freelancers and contractors currently pay Class 2 National Insurance if they are operating as sole traders. They don’t pay this if working through limited or umbrella companies. This class 2 NI will be abolished for self-employed which means sole traders won’t have to pay it anymore just like limited/umbrella company contractors.

This year’s budget also proposes a new digital solution to replace Self Assessment Tax Return (SATR) by 2020. This new solution will enable taxpayers to pay when they want and even choose installments if it facilitates paying their taxes.

This budget also provides an idea on what government is planning regarding travel and subsistence tax relief. As obvious from page 61 and 62 of the Budget Document, these expenses will be restricted only to workers under supervision and control of end-user. This clearly implies that self-employed workers will be affected. This change in legislation is proposed based on the concern that some payroll companies abuse these expenses to avoid tax.

The Entrepreneurs’ Relief is also touched in the budget which proposes to tighten the policy for relief so that only those selling genuine shares in businesses are provided this relief.

New budget also proposes that the fuel duty will remain frozen throughout the year, making it the longest freeze period in last two decades. Similarly, Help to Buy ISA will offer special rewards for anyone who deposits £200/month for first home. These savings will receive a generous 25% boost. Budget 2015 didn’t touch on extending the Annual Investment Allowance (AIA).

Chancellor delivers 2015 Budget Statement – Wednesday 18 March 2015

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Why sole traders are finding it difficult to find new work?

Becoming a sole trader means setting up a self-employed person which is often preferred by contractors and freelancers since it the easiest and most convenient route to getting started as a contractor. But still there are things that push contractors towards other solutions i.e. choosing an umbrella or setting up a limited company. There are various reason for this and one of the major reason is that contractors working as self-employed sole traders find it very difficult to find new work.

So what is the reason that recruitment agencies are reluctant to hire sole traders? To investigate this, we may have to look at The Income Tax Act 2003.

Income Tax Act 2003 and its implications on recruitment agencies

The Income Tax Act 2003 disallows agencies to involve a self-employed contractor between supplier and client. Section 44 of the Act makes it impossible for agencies to keep sole traders since anyone working through the agencies will be treated as an ‘employee’ for tax purpose and agency acting as ‘employer’ will need to deduct NI contributions as well as income tax from employees’ income. You can download this legislation in PDF here.

Although HMRC looks at intention of the parties to figure out nature of contract and employment but it is not the case in this situation. Agencies avoid hiring self-employed contractors because then they will have to provide employment rights to these contractors and pay income tax on their behalf while acting as an employee. This is the reason recruitment agencies will rarely engage with a sole trader. They will always prefer hiring contractors working through limited or an umbrella company.

So the only solution available to contractors looking for work through recruitment agencies is to setup their own limited company or join an umbrella company. Joining an umbrella company should be easy as there are a dozen of quality umbrella services that don’t charge anything for joining an umbrella. Majority of these service provides offer excellent customer service which means you can call them and let them guide you through the process. Similarly, setting up a limited company should be easy with various service providers letting you setup a company in minutes. You can also check out this Gov.uk guide on setting limited companies or simply checkout our comprehensive guide to get started.

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New Agency Legislation lets HMRC obtain more information about contractors than ever before

The Government will implement new rules that will give HMRC more information about contractors due to new reporting requirements. According to these rules, recruitment agencies will need to provide more information about contracting and their wage than wha they have been providing earlier.

The current rules as derived from Agency Legislation of April 2014, recruiters need to update HMRC about workers who shall not be treated as employees. This identification is important primarily for the tax purpose. The reason recruitment agencies and businesses were asked in these rules to report employment status was huge number of reported fraud cases where workers reported false self-employment. However, these rules didn’t affect much the way limited company and professional contractors operate in the UK.

The new proposed laws will make new changes. According to these proposed changes, recruiters are required to provide additional information (download additional reporting requirements PDF) while reporting employment status. As a result, HMRC learn a great deal more about agency workers. These laws are expected to become active by April 2015.

The additional information that these rules requires includes payment information and details of contractors limited company. In addition, HMRC will now require infomration about duration of each assignment and manner of contractor’s engagement.

Although there is a huge concern about these new rules in the contracting community, HMRC continues to state that these rules will not affect IR35 in any way. However, there is no doubt that these rules will ignite an increase in HMRC investigations and therefore contractors will need to stay prepared to communicate with HMRC.

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