Bouncing Turtle
I've been both a self-employed-variety consultant and now I do the ltd company-style arrangement.
It's great that your company have offered you this opportunity - they must value your outputs and are looking to find a way to keep you. You could make this work very well for yourself, and somewhere down the line branch out into consulting for others, either solo, or with a network of like-minded consultants.
Here are some brief thoughts for you:
There's no bar in principle to you being a 'self-employed' consultant rather than a 'ltd company' one - these labels are just designations for tax purposes, essentially.
You might want to start as self-employed and move to being a ltd company later, once you've grasped what's involved with running a successful (profitable, doing work that interests you) consultancy.
I say 'grasped what's involved' because as a ltd company style consultant you become a company director - and have a public legal status as such. You can research what this means in more detail elsewhere - but you will want to take care not to go bankrupt, for example (because this may disqualify you from being a co director in the future), you'll need to understand that your annual company accounts are a matter of public record (so anyone can see them) and unless you're a lot better at managing HMRC paperwork than I am, you'll need an accountant - to file your accounts for corporation tax, to file your personal tax return and to run your payroll. Why do you need a payroll? Because as a solo ltd-company style consultant you will be both company director, taking profits from the firm, and an employee on the company's payroll. Can you begin to see already that there's a little more to this than meets the eye, initially - and the issues I raise above are merely ones of administration.
You won't need to register for VAT until your turnover hits about £65K as someone above explains.
I don't mean to put you off however - there are (some) tax advantages to becoming a ltd co, although since 1997 these have lessened substantially. And I personally think that for those who can do it, consultancy is a great way to work - particularly for parents who are looking for flexibility and so on.
Some co's and organisations sometimes say they are reluctant to deal with self-employed subcontractors (if you choose this path) - but this is generally because their accounts depts worry they'll pay you a gross fee, you won't declare to the tax authorities and then they'll get into trouble. If your company's accounts dept take this view you may need some help from your manager/customer (he's now a client, remember?) - or a letter from your accountant saying you're officially self-employed. But let's not assume there'll be any problems - it may be very straightforward.
So:
*Consider starting off as self-employed
*Consider finding an accountant
*Consider reading some business advice-type books on how to be a successful consultant
*Have a look at www.businesslink.gov.uk - the Govt's small business advice service website
And having done all that, put to one side. Your bigger concerns are specc-ing the job within your old firm, working out your overheads, working out what you're going to charge to cover these and make a profit (ie what will pay your mortgage) and then tweaking as the occasion arises.
I'm expecting to see you back here in a few months asking questions like - 'the firm has asked me to do more work, but I priced the job at X - can I ask them for more money?'. And when you do we will all know you've successfully got a little way down the consultancy road
Good luck.
MrsBaldwin