Contracting - don't know what I need to know!

[Royalbloo]

Soooo...my current role has been made redundant and I'm on garden leave until mid-August. I've been offered a 3 month contracting role for then, for an accountancy firm who will help me set up a ltd company and ensure tax and NI are paid.

I really want to do it and I think it'll be great experience for me, but I'm well aware there is a LOT I don't know about the contracting/self-employment world and when I try to look up information I get loads of irrelevant info.

Can anyone help regarding vital info I need to know and what I can claim VAT back on (?) please. I have no one to ask in real life!

Many thanks!

Bump in case anyone can help...

Have a look at IPSE which is an association for self employed people. Also see the Being Freelance Facebook group. HMRC have some good videos on FB on this.

Are you a v.high earner because you don’t have to register for vat until you reach 85k turnover, and you shouldn’t have many expenses as a contractor. Do you mean what expenses you can deduct before paying your income tax?

Why are you being advised to set up a Ltd, rather than simply self employed (you can ask the accounting firm to explain this, it may save a tiny bit of tax but is there any reason you need limited liability).

You’ll also need insurance - I use Kingsbridge (I can get a kickback for recommending if you want but this might be part of the package they are setting up).

If you are getting paid in dividends and a PAYE salary you might have to save up to pay your personal tax bill depending how much you are likely to earn. Bare in mind you have to pay ‘on account’ not just what you owe and this can come as a bit of a shock to those starting out.

Are you likely to remain as a contractor beyond 3 months? It's unlikely to be worthwhile to set up a ltd company if it's not a long term thing.

I just do straight forward self employment no ltd company. I have a second current account just for my business. You need to do basic accounts and a tax return. Google cash based accounting. There is a £1000 allowance so although I need to keep a record of my expenses thwy don't actually affect my tax.

I used to do this.
By far the most important thing for a Ltd company contractor at present is your IR35 determination.
This will be done by the client - unless they are so small it falls to you.
If you are judged inside IR35 there is no point in having a limited company unless you plan to get outside IR35 contracts in future.
Previous advice about the VAT threshold is good - as for what you can claim, and also for advice if you might be better using the flat rate VAT scheme, a decent contractor accountant can help.

I recommend www.inniaccounts.co.uk/
but there are others of course. Don't waste time with accountants who don't know contracting.

If this is short term and you are inside IR35, setting up as a limited company is unlikely to be worth it.
When I was contracting, there was an option to contract through an umbrella company rather than setting up as a ltd company, it’s about 10 years since I was doing it so may have changed. I used a specialist accountancy firm for contractors, it is doable to do your our taxes or use a small accountants but they kept me right and told me everything I could claim for as a contractor.

This sounds well dodgy! Are they offering you the same role as you were as an employee?

Yes, you may be inside IR35 unless they have small company exemption
Liability insurance is important as well. As previously mentioned look at IPSE

I’d use an umbrella company to begin with. They will charge but will keep you right and save you a lot of time and hassle for a 3 month contract.

I wouldn't rush into setting up a limited company for a 3 month role; you can likely operate as a sole trader and sort out the tax and NI yourself (or through an accountant) for a lot cheaper. I pay £1000+ a year for my accountant to do the books for my limited company, but I only used to pay £150 for an accountant to do my self assessment return (and did it on my own for the first few years!). Also easier to work out if you go back into full-time work.

Definitely work through an umbrella firm first. Due to ill health I’ve retired but I did contract work for about 18 years. From what I read now IR35 is being enforced on clients who will take a low risk approach and everyone will be “inside”. There are virtually no benefits, financial or otherwise to being self employed and inside IR35. You may as well be an employee and get the benefits, pension, paid holiday, training, sick pay etc. None of which you will get being “self employed” but inside IR35. As it’s an accounting firm I’m surprised they are suggesting going limited straightaway. Are you confident you will be able to find more work once this contract is finished?

As regards Vat, most limited company contractors are on the flat rate Vat scheme but as someone else has mentioned your turnover has to be over a certain amount to pay Vat. Think someone said £85K pa.

A note of caution on Umbrella Companies - they are unregulated and there are some making illegal deductions and some that are using a multiple mini umbrella structure to claim fraudulent small business exemptions/deductions, still others have been pocketing holiday pay that should belong to workers.
It is like the wild west and the government (surprise surprise) recently rejected an amendment to the finance act to stop this.
If you are offered a contract using an umbrella make sure you know exactly what they will be deducting and why.

I personally chose to wind up my limited company rather than take any inside IR35 contracts - as PP have said, an inside IR35 worker pays exactly the same tax as a regular PAYE worker but with NO rights.

Not all umbrellas are awful. I would hope an accountancy firm is using a reputable one.

I’d suggest talking to an accountant who specialise in contracting and I asking them what makes sense based on both the current and likely next situation. I did this as know people who are self employed/sole trader etc and want sure what was right for me. Accountants talked me through the various options and then I decided.

I just did a Google search for ‘contractor accountants’ and this came up as the first (ad) result for me

sg-accounting.co.uk/contractors/contractor-accountants-ppc/?gclid=Cj0KCQjw2NyFBhDoARIsAMtHtZ4IPfxpQ8yaCkeVVxTKw1-5p5vW3P8H5dGTIsXh7uEAh2Xc-dSSA_UaAm7KEALw_wcB

Yes Dynamo is right. Don’t be caught out by any “schemes” telling you you can take home 85% of your turnover or any dodgy loan schemes or umbrellas who tell you you can claim a ridiculous level of”expenses”.

I too am currently dissolving my company now, for different reasons in my case, but lots of people who were dyed in the wool contractors have taken perm roles now. In a lot of sectors there is no flexible worker market to speak of any more.

Of course there are respectable Umbrellas but it can be quite hard to tell the good from the bad and there is zero regulation. Anyone can set up an Umbrella.

www.bbc.co.uk/news/uk-57021128

More than 40,000 people from the Philippines have been recruited to front British companies as part of schemes costing the UK "hundreds of millions of pounds" in lost taxes.

Umbrella companies: Lawyers pursue unlawful deductions

www.personneltoday.com/hr/umbrella-companies-contractors-claim-unlawful-deductions/

@Brown76

Have a look at IPSE which is an association for self employed people. Also see the Being Freelance Facebook group. HMRC have some good videos on FB on this.

Are you a v.high earner because you don’t have to register for vat until you reach 85k turnover, and you shouldn’t have many expenses as a contractor. Do you mean what expenses you can deduct before paying your income tax?

Why are you being advised to set up a Ltd, rather than simply self employed (you can ask the accounting firm to explain this, it may save a tiny bit of tax but is there any reason you need limited liability).

This. You don’t need a ltd or register for VAT unless you’re a high earner or buy a lot of stuff. You just become an unpaid tax collector for HMG. I’ve been freelance/ contracting for donkeys years, done the ltd thing and basic self employed. If you go ltd you end up paying for accountancy fees that you don’t really need to. Go for simple self employment, pay your stamp, do your tax return, that’s it.

I personally chose to wind up my limited company rather than take any inside IR35 contracts - as PP have said, an inside IR35 worker pays exactly the same tax as a regular PAYE worker but with NO rights.

This ^

I made my Limited company dormant last month to take a 12 month Fixed Term Contract. Worked out better for me than being inside IR35. I get good PA rate and all the benefits of being permie. I’ll get paid for the extra BH next year for Queenie

I’ll review in 12 months but reckon I’ll close the company down. Really isn’t worth it these days.

Unless you think there’s a good chance your contact is extended AND is outside IR35 I personally wouldn’t set one up.

In my last role we were outside IR35 but that was on the back of an individual review by the companies solicitors. This isn’t the norm and most companies are just saying everything is inside

@Caffeinefirst

Definitely work through an umbrella firm first. Due to ill health I’ve retired but I did contract work for about 18 years. From what I read now IR35 is being enforced on clients who will take a low risk approach and everyone will be “inside”. There are virtually no benefits, financial or otherwise to being self employed and inside IR35. You may as well be an employee and get the benefits, pension, paid holiday, training, sick pay etc. None of which you will get being “self employed” but inside IR35. As it’s an accounting firm I’m surprised they are suggesting going limited straightaway. Are you confident you will be able to find more work once this contract is finished?

Yep, IR35 is the downside of employment with none of the benefits.

It’s a double whammy. From a tax perspective you will be taxed as if you are employed (in fact worse than that as I think if inside IR35 you have to pay both employer’s and employee NI - could be wrong on that one). However when it comes to claiming any state benefits you will be treated as self employed.

It's quite easy to set up a liimted company. The accountancy firm will do it for you for a flat fee.

You don't need to be VAT registered but if you are you can claim VAT back. IIRC you claim off things like accountant's fees, equipment, stationery, business costs and the like.

I don't get insurance unless the contract demands it.

If the contract is Inside IR35, you need a decent daily rate.

I've not worked through an umbrella company so don't know about those.

Is there any sort of rule of thumb as to how a day rate in IR35 / outwith IR35 compares to full time salary with pension and life insurance, holiday and sick pay etc? I.e. for a job that usually pays £30k / £50k / £80k / £100k (with ) what would you be looking for in a day rate?

I thought you'd just gone into labour from the title 😆 hope you get your work issue resolved.