Freelance writing - self employed? company? and VAT

[stressed2007]

A friend of mine is getting a job doing some freelance writing for a firm. He needs to invoice them for his time on an ongoing basis and they have said something about him setting uo a company to do so. He will only be doing work for them.

Does anyone know the legalities of doing this? I would have thought he just charged for his time and at the end of the tax year files a tax return and pays tax. I do not understand why he has to do this through a company? Does he still need to pay NI? Also doe he have to charge VAT for his services?

Are there any tax reasons why he would want to invoice through a company?

Thanks very much.

[luggalump]

Sounds like he needs to get some professional advice from an accountant (which I'm not!)

At face value setting up a one-man company can have some benefits, like the main tax that he'll end up paying is corporation tax at 21% of profits. Then take a small salary equivalent to his personal allowance (so zero PAYE & negligible NI) and the 10% tax on dividends is given back for investments in UK companies.

But (1)... a one-man company that only does work for one customer is likely to viewed by HMRC as a service company (where he's effectively an employee of the client - and is trying limit their tax liability), so HMRC has other means to claw it back. Unless he can prove it is not such a service company, like his work/costs/expenses/equipment are it his own risk. Search Google for "IR35" for more info

But (2)... if he's not familiar enough with company accounting to do it all himself, then he'll be paying for professional help, which may cost more than any tax savings. I was once told that it isn't really worthwhile unless taking in £120K or more per year.

VAT - Have to register if turnover (income) is more than £68K, whether as a company or self-employed. You can register for VAT if turnover is lower, but don't unless there VAT on expenses amounts eats to far into profits, which I doubt is a problem for a writer. If turnover is less than £150K, there's also a simplified accounting "flat-rate scheme" which may be useful for those whose expenses are disproportionately small.

[mranchovy]

You have received lots of useful information on this and the other threads you started (if you cross-post people waste time repeating stuff they don't know has already been written on another thread).

But the real answer to the question 'why does he have to do this through a company' is so that the organisation he is doing the work for doesn't get caught as his employer and so liable for PAYE, holiday pay, possible redundancy etc.

There are some advantages to him as well, but the company doesn't care about this, they just need to make sure they don't fall foul of employment law and this is the way to do it - it is a very common arrangement. Most freelancers use accountants to run it all for them, and some firms specialise in this - google "contractor accounts".

[stressed2007]

And if you don't cross post you often don't get any replies.

Thanks for the answer but I wasn't asking why he does this through a company per se but why he does this through a company rather then as self employed. Thanks for the advice on contractor accounts I will look into this.

[mattellie]

stressed OH is a freelance writer who does most of his work for one company.

Just to add to leggalump?s excellent advice, there used to be tax advantages to setting up a company in this way whereby money was paid into that company and you would then pay yourself a dividend rather than a salary. However, this loophole was closed a few years ago.

Now, the only advantages in doing this are for the employer rather than the employee so I wouldn?t bother

[stressed2007]

thanks very much for this - why would invoicing through a company benefit the employer though?

[mattellie]

Oh because then they don?t have to sort out all your PAYE and NI ? you have to do that yourself under the guise of your company.

It?s all about saving themselves some hassle, IMHO (well, in OH?s IMHO to be precise?)