Useful Information

Getting started.....
IR35 – The most important legislation for any contractor/freelancer and it’s the starting point for any contractor. It was introduced in April 2000 by Gordon Brown and to sum it all up in one sentence, it’s the fine line between a supplier and an employee. Or in Mr Brown’s words it ‘counters tax avoidance in the area of personal service provision’.

So how do you find out your IR35 status? The simple answer is to ask your agency AND your accountant to review your consulting contract. They will imply whether you are ‘inside IR35’ or ‘outside IR35’.

Inside IR35 means you’re effectively an employee of the company you work for and must take 95% of your contract value as PAYE salary. Leaving 5% to offset against other business costs.

Outside IR35 means you are a supplier to your client and therefore are free to decide on your own level of PAYE salary and dividends alike.

So what’s next?

Buying a Limited Company – If you are a total novice at incorporating Limited Companies leave it to the accountant!!

Start by thinking of a name, many contractors, say avoid using your own personal name, to avoid looking like a ‘one man band’ and in fact all our panel of contractors have taken this advice, so we cannot say whether or not it’s good advice or not.

Then identify Directors and shareholders.

  • Directors are those who drive the business forward, making important decisions.
  • Shareholders are those who receive the dividends.

Business Bank Account – Once you have received the documentation of your new company, you will need a business bank account to start receiving funds from clients. Take the certificate of incorporation along with any other identification, to your chosen bank and set one up. Each bank varies greatly for speed of set up, so be prepared to wait a few weeks!

VAT Registration – Do I need to become vat registered? You must become VAT registered if your sales for the financial year exceed £70,000. However, before you reach this magical amount you may benefit financially by being on the flat rate scheme of vat, so be sure to ask the question to your accountant. VAT registration can take from 2 weeks plus, if completed online, so be prepared.

PAYE Registration – What is this scheme? If you would like to take a salary from your Limited Company and start to pay, PAYE tax and NI, then you must set up a PAYE scheme for your company. Make sure to ask your accountant how to utilise your personal allowance in the most tax efficient way.

Bookkeeping – BREAKING NEWS!! HMRC are trying to introduce a new legislation that will come into play in late 2011. This legislation will target small entities with poor bookkeeping records, so be very aware.

For the main offenders of poor bookkeeping records, HMRC will have the power to enforce £3,000 penalties!!

Accurate bookkeeping has never been so important, so choose your accountant and your bookkeeping system wisely.

Bookkeeping, in fairness, has always been a very important element of running your own company, you MUST have accurate and timely books to enable the shareholders have access to dividends. If your company cannot support the dividends taken with its profits after tax, then you are taking dividends illegally. More about that on Paying Yourself.

Sales Invoicing – A sales invoice must include the following;

  • Your Limited Company name, address and company registration number (stated on your incorporation certificate)
  • VAT Registration number (if known) – You can only claim VAT if you have a vat number on your invoices.
  • Business bank details – Your client needs to know where to pay you!!
  • Client details – Their name and address.
  • Quantity of hours/days
  • Hourly/daily rate
  • VAT amount (if applicable)
  • And finally the....Grand total

TIP - Make sure to charge VAT on top of any expenses you include on your sales invoice, as this forms part of your overall services.

Expenses – Keep paper work for every expense, whether that is an invoice, a printout statement, a receipt, you name it – Keep it safe. One accountant gave us a great tip, buy a lever-arch file with 12 plastic wallets and simply file the documents away in monthly order, if you don’t, there will be receipts all over the car, house, shed and no doubt, inside the dog! Read more information on expenses here.

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