Freelance writer - 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.

In short, invoicing through a company would be more tax efficient as your friend would be able to choose how much income he draws through salary and how much through dividend. The most common model is... company pays tax at 21% on it's profits. The owner of the company draws out £5,715 as salary (below tax and NI limits so no tax due but still entitling him to state benefits that are related to NI contributions). The rest is taken as dividend. Where his total income doesn't go above £44k he has no extra tax to pay. If the dividend takes him above that then there is an additional tax liability.

As a sole trader he would have to pay 20% income tax and 8% NI. So roughly calculating on profit of about £49,000 (not quite correct but works as an illustration)... as a company he'd pay 21% of tax, as a sole trader 28%.

On the downside - it is a lot more expensive to prepare company accounts. as a sole trader he can do his tax return himself if he's fairly happy about what is and isn't an allowable expense.
For company accounts he should get an accountant. There is various annual paperwork that you need to send to Companies House and HMRC. Therefore any tax saving he makes might get eaten up by the extra costs.

Ohh... forgot about the VAT. He needs to register for VAT if his turnover goes above £68,000. It might be worth doing earlier if his customer is VAT-registered and can claim back VAT as he will then be able to claim back VAT on his expenses (new computer, stationery, mobile phone etc). This, however, is a decision that needs to be thought through properly as it will bring extra admin and paperworks requirements.

The above applies to both sole traders and companies.