SJD Contractors Guide

Contractors Guide
To running your own limited company
www.sjdaccountancy.com
Message from the managing partner

Welcome. Here at SJD Accountancy we believe that your accountant should do a lot more than just report on how your business is doing they should help you identify opportunities to improve your bottom line, and then support you in trying to realise them. Our watchword is commitment. We take our clients interests to heart and strive to be proactive, recommending value added solutions whilst maintaining outstanding customer service. Of course we can take care of all of your personal and business tax needs, thereby freeing up valuable time and resources for you to devote to running your business, but we are also committed to going the extra mile. Please accept this Contractors Guide with our compliments - we hope you will find it interesting and informative. We have tried to make it as easy to read as possible, but some of the subjects covered, for example Tax and IR35, can get quite complex. As a client, you will of course have unlimited access to your own dedicated accountant who will be able to discuss any issues with you by phone, email or in free face to face meetings. Please note - rates of taxation are subject to change. If you have any questions about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email: info@sjdaccountancy.com.
Simon Dolan ATII, AT
The Contractors Guide is a unique toolkit which has been designed to help you get more out of your business as a professional contractor. It explains SJD Accountancys experience in supporting thousands of contractors across the UK and covers the following key areas:
Contractor tax - jargon buster About SJD Accountancy Becoming a contractor Deciding how to contract Going Limited as a Contractor Understanding IR35
Value Added Tax (VAT) Tax Accounts made easy Making your business a success Glossary
Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com
CONTENT
4
Message from the Managing Partner......................................................... 3 Contractor tax - jargon buster .................................................................... 6 About SJD Accountancy ............................................................................. 8
Our money-back service guarantee .............................................................................................9 Our services .................................................................................................................................9 SJD Accountancy package.........................................................................................................10 Service breakdown .....................................................................................................................11 Client testimonials ......................................................................................................................13 Benefits of contracting ................................................................................................................16 A few downsides .......................................................................................................................16 Whats in it for your client? .........................................................................................................17
Becoming a contractor ............................................................................. 16
Deciding how to contract.......................................................................... 18

Agency employee .......................................................................................................................18 Self employed.............................................................................................................................18 Working through an umbrella company ......................................................................................18 Working through a your own Limited company ..........................................................................19 What is a personal service company?........................................................................................19 Limited company vs Umbrella company - Take home pay .........................................................19 Limited company vs Umbrella company - Advantages and disadvantages ...............................21 Special Schemes, EBTs and Offshore Schemes .....................................................................22 Getting started ............................................................................................................................23
Going Limited as a Contractor ................................................................. 24
Forming your Limited company ..................................................................................................24 Setting up a business bank account...........................................................................................25 What information will I need? .....................................................................................................25 How to choose a bank? ..............................................................................................................25 Paying yourself ...........................................................................................................................26 Declaring a Dividend ..................................................................................................................26 Dividends for multiple shareholders ...........................................................................................27 Expenses....................................................................................................................................27 Use of company car ...................................................................................................................28 Use of home ...............................................................................................................................28 Contractor insurance ..................................................................................................................28 Professional indemnity insurance ........................................................................................28 Public liability insurance .......................................................................................................28 Contractor pensions ...................................................................................................................29 Contractor mortgages.................................................................................................................29 Accounting and administrative responsibilities ...........................................................................30 What is IR35? .............................................................................................................................31 How would I be classed as inside IR35? ..................................................................................31 Benefits of working through a Limited company, inside IR35 .....................................................31 Expenses when inside IR35 .......................................................................................................32 Travelling ..............................................................................................................................32 Pensions ..............................................................................................................................33 The 5% deduction ................................................................................................................33 How IR35 affects payments to HMRC? ......................................................................................33
Understanding IR35................................................................................... 31
Value Added Tax (VAT) .............................................................................. 34
When to register? .......................................................................................................................34 How to register? .........................................................................................................................34 Registering below the threshold .................................................................................................34 Claiming VAT back .....................................................................................................................35 When to start charging VAT ........................................................................................................35 Submitting a VAT return..............................................................................................................36 The Flat Rate VAT Scheme ........................................................................................................36 How does the Flat Rate Scheme work? .....................................................................................36 The advantages and disadvantages of the Flat Rate Vat Scheme ............................................37 Corporation Tax ..........................................................................................................................38 Employers National Insurance Contributions .............................................................................38 Employees National Insurance Contributions ...........................................................................38 Personal Tax ...............................................................................................................................38 Self Assessment .........................................................................................................................39 Income Tax .................................................................................................................................39 Enforcement of tax liabilities.......................................................................................................39 Important Dates ..........................................................................................................................40 Who are accountants? ...............................................................................................................41 Types of accounts ......................................................................................................................42 Simplifying the terminology ........................................................................................................42 Basic principles of accounting ....................................................................................................43 Your accounts .............................................................................................................................43 Your profit and loss account .................................................................................................43 Your balance sheet...............................................................................................................44 Bookkeeping basics ...................................................................................................................44 Data Protection Act.....................................................................................................................45
Tax............................................................................................................... 38
Accounts made easy ................................................................................. 41
Making your business a success............................................................. 46

Managing to succeed .................................................................................................................46 Time management......................................................................................................................46 Selling tips ..................................................................................................................................47 Pricing for profit ..........................................................................................................................47 How to raise prices .....................................................................................................................48 Justify your prices.......................................................................................................................48 Discounts....................................................................................................................................49 Settlement discounts ..................................................................................................................50 Minimising your costs .................................................................................................................50 Budgeting and forecasting..........................................................................................................50 Credit control ..............................................................................................................................51 Purchasing .................................................................................................................................52 Ways to save money ..................................................................................................................53 Payment .....................................................................................................................................53 Purchased Goods - Checking Quality ........................................................................................53 Getting something for nothing ....................................................................................................54 Professional Contractors Group (PCG) ......................................................................................55 Childcare Vouchers ....................................................................................................................55
Glossary ..................................................................................................... 57 Accountancy Package - Service Summary ............................................. 58
Contractor Tax - Jargon Buster

Bookkeeping
Recording the companys transactions. For most contractors this simply means recording invoices, expenses, salary and dividend payment and payments made by your client.
Certificate of Incorporation
Certificate displaying your company number and details, received once your Limited company has been registered and formed.
Companies House Company Director
Where incorporated companies in England, Wales, Northern Ireland and Scotland are registered.
The person who is in charge of the running of the Limited company.
Company Secretary Corporation Tax Dividend EBT
Following a change in legislation, as of 6th April 2008 there is no requirement for a company secretary.
Tax paid on any profits in the Limited company.
Payments made by a company to its shareholders out of its profits after tax.
Employee Benefit Trusts are used to minimise tax. They are often through an offshore scheme and when used inappropriately HM Revenue and Customs will challenge their use.
Employers Liability Insurance Expenses FRS
Insurance which protects against injury to employees.
Expenses can be claimed provided they are wholly and exclusively for the purposes of your business.
The Flat Rate VAT Scheme is aimed to simplify taxes. Those registered charge VAT at the current rate, but pay it back at a lower rate.
HMRC
Her Majestys Revenue and Customs, formerly the Inland Revenue, is a department of the UK Government which is responsible for the collection of UK taxes.
IR35
Legislation which targets disguised employment, ensuring directors operate their Limited company legitimately.
Limited company
Is a legal form of company that provides limited liability to its owners.
Memorandums & Articles of Association MSC
Documents that show the share capital and terms and conditions of your Limited company.
Managed Service Companies take over the running of a contractors Limited company. There is now legislation in place to prevent their use.
NI/NICs PAYE PCG
National Insurance contributions are made to entitle you to certain state benefits.
Pay as you earn income tax is deducted from salaries before they are paid.
The Professional Contractors Group is an association that protects the interests of freelancers and contractors.
Professional Indemnity Insurance Public Liability Insurance Section 660a
Insurance used to cover a contractor/business for professional negligence.
Insurance to cover any injury or damage caused to a member of the public.
Legislation to prevent income shifting.
Shareholder/Subscriber
Dividends are distributed to the shareholder(s) of the company. With more shareholders it is possible to split the dividend, for example 50:50, 80:20 etc. Each shareholder will then receive that dividend each time a dividend is made.
Umbrella Company VAT
A company that acts as an employer to contractors who work under a fixed term contract assignment.
Value Added Tax is charged on most goods and services made in the UK by VAT registered businesses.
About SJD Accountancy

SJD Accountancy are the UKs largest accountants to contractors and freelancers with over 11,000 Limited company clients. We have been supporting contractors, interims, freelancers, engineers, consultants and small business owners since 1992. We are the only truly national contractor accountants, we have offices in all major UK cities and provide all clients with their own dedicated accountant who they can call, email and actually meet face to face - most, if not all other companies provide a telephone only service. SJD Accountancy also have more qualified accountants than any other firm in our market, covering the following major tax and accountancy bodies: ATII, ATT, ACCA, CA, ACA, FCCA, ACMA. We pride ourselves on our outstanding service levels, which put us far ahead of our competition. For example, we are the only accountancy firm that offers published service level commitments with a money back service guarantee.
SJD Credentials:
SJD Accountancy with 11,000 clients are the UKs largest providers of fixed fee, Limited company accountancy and tax services to contractors and freelancers. Winners of the Accountancy Age Awards for Excellence in 2011, 2007, 2004 and finalists in 2010 and all years since 2003. Voted by visitors to www.contractoruk.com as the Best Contractor Accountant from 2006 - 2011. The only truly national accountants to contractors with offices in all major UK cities. The only contractor accountants to win two national customer service industry awards, as presented by the Institute of Customer Services and the UK Customer Experience Awards. SJD were awarded the Sunday Times Best Small Company to Work For in the UK achieving the highest position ever for a firm of accountants. SJD Accountancy are PCG (Professional Contractors Group) Accredited Accountants and APSCo members (The Association of Professional Staffing Companies), completing their compliancy audit in 2011. Finalists in the 2010, 2008 and 2007 AXA Business of the Year as awarded by the National Business Awards sponsored by Orange.
We offer our clients an all inclusive monthly fixed fee business accountancy package for one of the lowest prices in the market.
Best Contractor Accountant
Our money back service guarantee

SJD is firmly committed to providing measurable service levels to our clients and a personal as well as a highly professional service. To support this commitment we guarantee that if any of the following service criteria are not met in any month, we will make a full refund of that months fee.
1. Emails received by 4pm on any normal working day will be answered the same day. 2. Letters will be answered within two days of receipt. 3. Subject to all the appropriate information having been received from the client, draft Annual
Accounts will be submitted for approval within four weeks. received.
4. All new clients will be contacted by their Accountant within two days of signed contracts being 5. Client/Accountant ratio will be maintained at a constant level to ensure no loss of personal service. 6. All accounting work will be carried out in house by suitably qualified people. 7. Should you be unable to reach your accountant, they will return your call within 24 hours.
Our Services
SJD Accountancy are a respected award-winning national firm with local offices that will provide you with an accountant that you can actually meet, who will take time to get to know you, always take your calls and provide you with prompt and professional advice for what we believe to be one of the lowest comparable fixed monthly fees. We have banned automated call handling so you will never be asked to press one for this or two for that. We provide our 11,000 contractors and freelancer clients with:
Unlimited access to your own dedicated accountant - no call centres, no outsourcing, no automated call handling - simply telephone, email or meet your accountant face to face. Free face to face meetings - tax is complicated, which is why we offer everyone free face to face meetings in any city in the UK. Money back service guarantee - all your telephone calls and emails will be answered the same day, or we will refund your monthly fees. Outstanding reputation - we have won more awards for customer service and accountancy excellence than any other firm in our market.
Our complete business package covers all your company needs and personal tax affairs for a low cost monthly fixed fee of just 110 plus VAT which is one of the lowest prices in the market.
SJD Accountancy Package

Service Breakdown Summary
For those who would like a detailed breakdown of what we do for you, please see pages 11 and 12, for everybody else, rest assured our monthly inclusive package includes everything for you and your Limited company. Essentially we will...
Help you to structure your company in the most tax efficient way possible. Help you to understand the best way to take money out of your company. Understand what you can claim by way of expenses and the impact on your income and taxes. Help you to understand all of your tax liabilities both personal and corporate, these include:
Employers National Insurance contributions Employees National Insurance contributions Personal income tax VAT (Flat Rate Scheme or standard VAT) Corporation tax
Prepare and complete your personal self assessment tax return each year. Understand when, how much and where to send payment for all taxes that are due. Explain the benefits of not taking every penny out of your company along with other tax planning opportunities. Send email and mobile text alerts so you never miss a deadline; we understand that you are busy and may miss one notification this is why we produce several. Preparation of Company Year-End Accounts to be produced within 30 days of us receiving all the relevant information from you.
...in summary, our approach towards our clients is very simple we take care of all of your personal and business tax needs, leaving you more time to concentrate on your contracting career.
10
Service breakdown
Year-End Accounts
Fully reconcile your bank accounts. Analyse other income, sundries, check allowed/disallowed expenses. Provide suggestions for items that are not being claimed. Preparation and submission of Company Year-End Accounts to be produced within 30 days of us receiving all the relevant information from you. Calculate Corporation Tax payable and advise you of the amount and date for payment. Prepare final accounts, CT600 for HMRC and abbreviated accounts for Companies House where necessary. Send final paperwork to you for signature and return. Send email and text reminders to you and, if you send cheques to your accountant, they will make sure they reach HMRC with the correct filing information i.e. corporation tax reference, company incorporation number, company name, accounting period details.
Payroll Bureau
Record P45 details, prepare and submit P46 if necessary. Calculation of gross salary, tax, and NI amounts due to HMRC. Manage your payroll to include: detailed summary with advice of payment to make to HMRC and detailed wages book. If relevant, we will produce end of year IR35 calculations and advice for payment. Salary information provided for the Director and a company secretary if applicable. Prepare and submit end of year P35s and P14s to HMRC. Prepare end of year P60. Add and remove employees from payroll. Manage overpayment and underpayment notices throughout the year. Change of Revenue Office details. Organise HMRC payslip booklets and provide support on their completion. Manage any changes in tax codes. Prepare P11d.
Dividend Administration
Help you to understand the level of corporation tax due following dividends taken from your company.
11
HM Revenue and Customs and Companies House
We will handle all incoming HMRC and Companies House enquiries on your behalf.
Completion of VAT Returns

Send email and mobile text reminders at the end of each VAT quarter. VAT registration advice. Completion of quarterly VAT Returns. Review of spreadsheet for accuracy. Advice with regards to whether you would benefit from the Flat Rate VAT Scheme. Flat Rate VAT Scheme application if necessary. Ongoing VAT advice. Help with any under/overpayment.
Completion of Annual Return

Preparation and completion of Annual Returns.
Personal Taxation
Send email and mobile text reminders throughout the year to remind you to complete your online questionnaire. Prepare and submit your personal tax returns. Calculate any tax due together with payments on account. Review and if possible, reduce the payments on account for the following year.
Direct access to your accountant for all help and advice

Telephone calls, emails and face to face meetings. You will be given your own personal and dedicated accountant with whom you will have direct contact (some companies require you to work through a call centre and only have access to your accountant at year end). We have a very strict service level agreement which guarantees all emails received by us by 4pm will be responded to the same day. Your accountant will support you fully with all HMRC correspondence and contact with regards to VAT, PAYE and other tax related issues.
Free Bookkeeping Software
We will provide you with our specially designed bookkeeping spreadsheet which we will ask you to forward to your accountant each month.
The accountancy package is designed to support you in every instance of running your own Limited company, so you wont need to worry about your tax or accountancy affairs again.
12
Client Testimonials
I have been 100% satisfied... From the beginning of being a client I can only say that I have been 100% satisfied with the service that I have received. Starting a new company for me was quite unnerving and my first account manager Georgie with the assistance of Toby was second to none. They were always on hand to answer my questions and were very professional and prompt in their replies. What wonderful staff you have. Melissa The service has been amazing... Thank you so much again for all your help. The service has been amazing, Nikki has been so lovely, polite and helpful and has given me such quick, clear responses to my questions. I am so delighted at how everything has come together so quickly. Lukesh The staff at SJD Accountancy are a great asset to the company... I wanted to say a huge thank you to Laura who has been so helpful and responsive to my questions. This whole experience is completely new to me, and with setting up my new business, managing that is hard enough, let alone all the information about all the laws and guidelines that comes with running your own company. Lauras patience to help explain each step along the way has been very reassuring to know that there is someone I can always talk to if I have a question. The staff at SJD Accountancy are a great asset to the company and a pleasure to work with. Adam Certainly part of the 98% who would recommend SJD... I would like to state how impressed I am with the service SJD has provided you have been most efficient with processing the company set-up and at no time did I feel that I was out of the loop with whats going on. Im certainly part of the 98% who would recommend SJD to others. Dave Excellent help and advice from day one... The requirement to form a LTD Company could have been both daunting and distracting; SJD have enabled me to concentrate on the job in hand by offering excellent help and advice from day one. From the initial set up of the company SJD have constantly notified me of any actions or milestones I need to be aware of well in advance. They have completed or assisted in completing absolutely everything with regards to paperwork and form filling. Andrew has dealt with all my queries both punctually and efficiently with sound advice given every time. Shaun Starting my limited company very easy and quick... I have found the process of starting my Limited company very easy and quick, thanks to your help and guidance. Throughout this process your communication has been prompt, clear and easy to follow. Thank you so much for your e-mails and a detailed explanation and answer to all my questions. I will certainly be engaging SJD as my chosen accountancy service and I look forward to working with you in future. Maya Impressed with the quality of the customer service... I was impressed with the quality of the customer service that I received, from the simple things such as the phone being answered after a single ring, to being patiently and unhurriedly walked through the unfamiliar ground of contracting via a Ltd company. I didnt feel rushed off the phone, and whilst I wasnt bamboozled by accountancy speak, neither was I patronised - and it made a very pleasant change (from other companies) to be treated like I had a modicum of general intelligence, even though accountancy isnt my area of expertise. Tracey
13
So impressed with Michael and the services provided by SJD... I have certainly been very satisfied with the level of service I have so far received from SJD accountancy. I really appreciate the advice I have been receiving from my accountant Michael. He is very helpful and always responds quickly to emails or calls and has given me excellent service. I have been so impressed with Michael and the services provided by SJD, I will not hesitate to recommend SJD Accountancy for any locum doctor. Mahdi 10 out of 10... Basically - 10 out of 10, I would recommend you to a friend/colleague, and I cant think of anything that could have been improved about the service Ive had. Im really happy with everything youve done. Matt An accountant that actually seems to know what they are doing... It is good to be backed by an accountant that actually seems to know what they are doing and consider my best interests for the long term. Gary Great professional service... Great big thank you to Daniel who did my self-assessment for this year. Great professional service with a smile, he made everything very easy for me. Natasha Everything I know is in very capable hands... Dan has been my accountant since I set up my Limited company. I would highly recommend Dan based on his excellent ability to handle accounts on behalf of my company. I have had excellent support to get setup and everything I know is in very capable hands so tend to not need to do very much... great arrangement! Ross A nice change from not having to chase my accountant... Its such a nice change from not having to chase my accountant! Ive lost time and money with the previous one. Thank you SJD. Sanjeev Always sought to help me the best you can... My relationship with SJD has always been good, and I enjoy the collaborative nature. Youve always sought to help me as best you can whenever I needed help, and I cannot praise Janice and Tina enough they are fabulous. Rachel I tell anyone who listens how brilliant you guys have been... I cant really begin to explain how awesome Sarah and Jasmine have been over the last 12 months!! They are both total legends and if I ever needed accountants again I would definitely be straight back on to you guys! Whenever I get a chance to I tell anyone who listens how brilliant you guys have been. Tom Dedicated accountant to talk to has proven invaluable... Having the same dedicated accountant to talk to has proven invaluable. My accountant can invariably alleviate my concerns immediately and if they need to look into things they always come back quickly. Sophie Helpful, positive, engaging, informative, reassuring... I am delighted with the service I have received so far from SJD. Rachel is outstanding. Responsive, knowledgeable, helpful, positive, engaging, informative, reassuring - I could go on. Overall the speed and response and assistance has been tremendous too, thank you. Gay
14
Knowledgeable, helpful, friendly and an absolute pleasure to deal with... I have to say that having been under your wing for a couple of years now, I find you professional, knowledgeable, helpful, friendly and an absolute pleasure to deal with. I have found that the support staff (if thats the right term) are a credit to SJD and have always been fabulous. I find the service from SJD Accountancy to be excellent and I thank you all for being the same. Gavin Absolutely superb in guiding me through every step of the process... Kiran has been absolutely superb in guiding me through every step of the process; company registration at Companies House, VAT registration, business account setup, company insurance, expenses spreadsheet just to name a few. With the wealth of information provided on setting up a new company a quick conversation with Kiran puts it all into perspective making the overall process easier and more efficient. Dean Simply exceptional is what comes to mind... How can I ask for better customer service. You are really providing me with a service that is far from outstanding. Simply exceptional is what comes to mind at this point. With you potentially dealing with so many other clients, the turnaround to my requests is amazing. Faheem A client of SJD Accountancy since August 2008... Ive been a client of SJD Accountancy since August 2008. Id like to say that Im very satisfied with services and advice provided. My accountant is very patient (this is very important with people who know so little about accountancy as I do) and always ready to help. Kate Superb and exceeded my expectations... Id just like to say that the service I have received so far has been superb and exceeded my expectations. My initial call was dealt with by Rachel who was fantastic in explaining the services and answering numerous questions around a VAT issue I was having. She is a credit to your company! John Staff are always professional, helpful and friendly and really do go the extra mile to help... Your communication both by phone and email is great. The staff are always professional, helpful and friendly and really do go the extra mile to help. Im a very happy customer and will be using your services as long as possible. Pali Im glad I moved over to SJD... The service you provide is excellent and Im glad I moved over to SJD. It gives me great peace of mind to know that you guys will remind me at the right time to get things done! John It is ridiculous how efficient you are... It is ridiculous how efficient you are! To date you have lived up to your promise, the Money Back Service Guarantee is excellent and fills me with confidence that my accounts are in safe knowledgeable hands. I have not had a chance to get my money back yet, which is a shame, but that just goes to show that they have lived up to their promise. Stacey
What next?
If you have any questions about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email: info@sjdaccountancy.com.
15
BeCOMinG A COnTrACTOr
You are a classed as a contractor if you work for somebody else for a fixed period of time to help them complete a project - effectively selling your skills and time - and will usually be paid by the hour/day. Being a contractor is a very different lifestyle to that of an employee as there are more risks, but also many advantages.
Benefits of Contracting
Over the last few years the demand for contractors has been growing and it is fast becoming the choice for many. Some of the most common reasons people choose to go contracting are:
Earn more money contractors on the whole earn more than an equivalent permanent employee. Freedom - contractors can choose when and where to work, when to take holidays and so on. Essentially, you are your own boss, which can be extremely satisfying. Tax planning - contractors who take professional advice can also reduce their tax liability. Variety - contractors can develop varied experience and an impressive CV from working in a number of contracts and companies, making them far more desirable for future positions.
A few downsides
We believe that its only fair to highlight a few points to consider before becoming a contractor. Only you can decide if contracting is the right option, however, most of our clients tell us that the advantages far outweigh the disadvantages. Some of the areas to consider include:
Less security - contractors are not protected in the same way as permanent employees, however, those who decide that contracting isnt the right choice for them always have the option to close their company and return to permanent employment. Uncertainty - contractors are responsible for finding their own work, so there is a level of uncertainty about where the next contract is coming from, however free job alerts and specialist recruitment agencies, has made the burden of ploughing through job sites a lot easier. Administration as a director of your own Limited company there will be forms to fill in, rules to obey and accounts to keep - though appointing a good accountant will lessen the burden and reduce the potential stress levels. Employee benefits while you will no longer have access to employee benefits such as holiday pay, the higher amount you earn should cover this.
16
Whats in it for your client?

There are several reasons why companies like to use contractors. For example:
They are usually more flexible over hours than permanent staff. They are easier to hire and fire. They provide skills which the in-house team may not have.
Contractors can also save the business money. If a company employs you then they have to pay sick pay, holiday pay, redundancy pay and employers National Insurance. If they use you as a contractor, then they dont have to pay any of this - they can therefore afford to pay you more per hour/day and still spend less money.
Further advice
17
DeCiDinG hOW TO COnTrACT

There are four main ways that you can choose to operate as a contractor, these are:
1. As an employee of an agency 2. Being self employed 3. Working through an umbrella company 4. Setting up your own Limited company
Agency employee
This is the easiest option, but in reality it has little or nothing to do with running your own business. It may suit you if you want a flexible career and varied work experience, or if you want to try out the contracting lifestyle without making any major commitments. It may also suit you if you see contracting only as a very short-term option. However, if you are serious about a contracting career, then being an agency employee is unlikely to be the best long-term option for you.
Self employed
This is generally the simplest way of being your own boss. Unfortunately, for many contractors who work through an agency or do a lot of work for the same company, self-employment is not an option. This is because HMRC will often argue that you are actually an employee of the company or agency you are working for, and not a self-employed contractor at all.
Working through an umbrella company

This is where you essentially become an employee of the umbrella company. You submit time-sheets to the umbrella company who will in turn invoice your end client or agency for the work done by you. You will then be paid as a PAYE employee, less the umbrella companys fee. You will usually be allowed to claim some basic expenses, however be cautious of umbrella companies advertising special dispensations or expense policies approved by HMRC, that claim to allow expense claims without the need to produce receipts. This could mean that the company are using an Employee Benefit Trust (EBT) or Offshore Scheme which can be seen as tax avoidance. HMRC has made it clear that they intend to challenge any company considered to be actively encouraging tax avoidance through fraudulent expense claims so it is best to seek professional advice with these types of schemes. For details of SJDs award-winning sister company Contractor Umbrella, please visit www.contractorumbrella.com or call 01206 713680.
18
Working through your own Limited company

This is by far the most common way for contractors to operate in business. Essentially, you set up, own and run your Limited company and will usually appoint yourself as a director and shareholder. In the eyes of the law, the company has a life of its own. For example, it will actually be your company that enters into contracts and not you. In most cases it will also be the company that is responsible for its own debts should there be any. This is because you have what is known as limited liability. What this means in practice, is that if the company gets into difficulty and goes bust, you shouldnt lose your house or other property, which many people find gives them real peace of mind. You will be in complete control of the company, but this position of power also brings with it responsibilities - many of which are not necessarily obvious to a first time company director. For example, if you act dishonestly or recklessly - e.g. buying something you know the company cant afford - your house and other property could still be at risk. Therefore it is essential to take professional advice to make sure that your Limited company is more of an asset than a liability.
What is a Personal Service Company?

Contractors, freelancers, Interim Managers and consultants who work through their own Limited companies are often referred to as personal service companies. The term is somewhat broad, as most contracts dont specify that it is actually them who must perform the work, it is usually their Limited company that is contractually obliged. However, on balance it does seem to be a fair and accurate description for how most single personal Limited company contractors work.
Limited company vs umbrella company Take home pay

If you are a contractor working through your own Limited company, your take home pay can be anywhere between 75% and 80% of your contract value, whereas through an umbrella company your take home will only be around 60% to 65%. The two options compare as follows:
Daily Rate
200 300 400 600
Umbrella Company Monthly Take Home Pay

2,700 3,900 5,100 7,300
Limited Company Monthly Take Home Pay

3,400 5,000 6,500 9,500
Increased Income by Going Limited

700 1,100 1,400 2,200
19
The main benefits of using a Limited company over an umbrella company are around NI and the Flat Rate VAT Scheme. Tax rates based on financial year 2011/2012. With an umbrella company you will pay both employees and employers NI. Employers NI is 13.8% of your salary and employees NI is 12% for the first 816 a week and 2% thereafter - both after tax free personal allowances. On a typical contract of say 350 per day, you will pay around 300 a week in NI through an umbrella company, whereas with your own Limited company you will pay just 30, so the NI savings alone come to about 12,000 a year assuming a 45 week working year. If you are a contractor on 200 per day youll save 9,000, or if on 600 a day youll save 20,000. The flat rate scheme is an incentive provided by the government to help simplify taxes. For example as an IT contractor you would charge VAT on your invoices at 20% but only pay back HMRC in your first year at 13.5% of the gross amount and 14.5% in subsequent years. This provides the following additional income (based on a 45 week working year):
200 per day contract - 1,710 extra per year 350 per day contract - 2,990 extra per year 600 per day contract - 5,130 extra per year
On top of NI and VAT youll also earn interest in your savings (savings put aside to pay for your taxes) plus have access to a broader scope of expenses than using an umbrella company. One way of looking at it is, if you have two contractors both on the same 600 per day, one contractor A uses an Umbrella company and another B trades through their own Limited company, the difference after NI and Flat Rate VAT Scheme are as follows: A - (Umbrella) real value of contract after NI - 115,000 B - (Ltd Co) real value of contract after NI and Flat rate VAT - 138,000 An extra 23,000 on the contract value, thats like billing your clients an additional 38 days per year. The above does assume the contractors are outside IR35, if inside you can still claim: travelling and accommodation expenses, 5% of your turnover, benefit from the Flat Rate VAT Scheme and receive interest on the funds held within your own company. Basically, income tax or corporation tax and personal taxes via an umbrella company or through your own Limited company are roughly the same. There are of course more opportunities for tax planning through a Limited company, but thats something you can discuss in greater detail with your accountant.
20
Limited company vs Umbrella company Advantages and disadvantages

To summarise, the advantages and disadvantages of both options are as follows:
Limited Company
Advantages
The most tax efficient way of working. Claim a wider range of expenses. Access to the Flat Rate VAT scheme. You keep complete control of your financial affairs meaning you do not have to risk your money with any third party administrator. Running your own business isnt difficult; submit spreadsheets to your accountant - just like umbrella time-sheets and expenses. Greater opportunity for tax planning than PAYE Umbrella.
PAYe Umbrella
Advantages
Very easy to use, you simply enter your timesheet and expense details and wait to be paid. All tax and NI is deducted before you receive your money, so you will have no further taxes to pay. Ideal for short term contracts. Ideal for contracts less than 25k per year.
Good if you are unsure if contracting is for you and youre really just in between permanent jobs. Someone else will be doing all the paperwork.
Considerations
There is a certain amount of paperwork involved, usually about 10 - 15 minutes per month.
Considerations
The most expensive way of working. You will receive a salary that is subject to full PAYE Tax and NI, its just like being a permanent member of staff again. You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you.
Can be costly if you contract for a very short period of time, then go back to permanent employment. Not ideal for contracts less than 25k per year.
21
Special Schemes, eBTs and Offshore Schemes

Contractors should be very cautious about special schemes, solutions, short term tax loop-holes, EBTs, LLPs or companies that use complex offshore solutions. Many of these schemes were designed for legitimate purposes, however over time they have been adapted with tax avoidance in mind. The old adage still holds true - if it seems too good to be true, it probably is. Some companies will make claims that they can guarantee you up to 90% of your take home pay, reduce tax payments or offer a generous expenses package. Typically, if you use an EBT provider you will receive a small basic salary (something around the minimum wage level) with the remainder of your income coming to you via a loan or even expenses. HMRC have a check list that may help to ensure you dont get caught out - they state that when forming an EBT scheme, you must avoid the following:
Payment of bonuses via an offshore trust. Payment of remuneration by way of loans, which may be written off before they become repayable. Create an offshore moneybox for director/shareholders of closed companies. Allowing employees to use assets (such as cars) owned by the EBT, the costs of acquiring which would be capital expenditure if they were owned by the employing company. Providing benefits in the form of shares (not in the employing company) whose values can be most easily manipulated before or after they are transferred from the EBT to employees or directors.
HMRC has made it clear that using an EBT, trust or offshore scheme can be seen as tax avoidance and as such should therefore be avoided unless they are being used for the purpose they were intended for. There is no limit as to how far back HMRC can chase for past taxes.
Quite simply, if you work, live, and get paid in the UK you will pay the same taxes as everyone else, whether you work through an umbrella company or a Limited company. If these schemes were safe all accountants would offer them.
22
Getting Started
Making the move into contracting and going Limited can be a simple process:
Form a Limited company - the application just takes five minutes and your company should be set up within a few hours. The cost of formation on the SJD website is 125 plus VAT. We will also help you with VAT and PAYE registration and setting up a business bank account.
Invoice your client/agency - we provide you with a template. Complete a very simple Excel spreadsheet, similar to an expense claim form which should take about 15 - 20 minutes per month to complete.
Appoint an accountant - forward any correspondence you get from HMRC or Companies House to your accountant at SJD Accountancy (if you appointed SJD of course) and we will take care of it for you.
23
GOinG LiMiTeD AS A COnTrACTOr

This section will give you an overview of the process once you have decided to operate through your own Limited company.
Forming your Limited company

It is a legal requirement when working through your own Limited company to register your company name many contractors simply use a variation of their name or initials. Even if you do not begin contracting through your Limited company immediately, you guarantee your company name is secure. You can check the availability of your company name for free on the SJD Accountancy website. SJD Accountancy offers a Limited company formation package, which costs just 125 + VAT. As well as forming your Limited company, this package includes: help organising a business bank account, registering the company for VAT and PAYE and advising on the optimum share structure of the company. Forming your Limited company only takes five minutes on our company website, with your company set up within a few hours. All you need is a credit card to complete the transaction and to decide on a company name. Alternatively, we can form your company for you to do this all you need to do is complete a few details on a simple document. Once you have formed your company, you will receive all the necessary Limited company documentation, along with an application form for free business banking and VAT registration forms. Its worth noting that during the online formation process you will be prompted for the following information:
Director details - this will be you. Company secretary details - if required. Following a change in legislation, as of 6th April 2008 there is no requirement for a company secretary. Subscriber/Shareholder - you will need to allocate shares in the company - dividends are distributed to the shareholder/s of the company, which is how you will take most of your income.
Each new Limited company is incorporated on a particular date, which will appear on your Certificate of Incorporation. Your companys first year end will usually fall on the last day of the month after the anniversary of incorporation - e.g. if your company was incorporated on 15th October 2011, your first financial year end will fall on 31st October 2012. It is possible to extend or shorten financial years, but there are usually no advantages for a contractor in doing so. Shortly after the Company is incorporated, you will receive your Company Statutory Books and these should be filed away for safe keeping.
24
Setting up a business bank account

As a director of your own Limited company, you will be required to set up a business bank account. A Limited company is a separate legal entity from its directors and shareholders, so all funds need to be traceable throughout every stage of any financial transaction. The types of activity going through your account will usually include:
Receiving money from clients for the work you do either by cheque or BACS. Paying your own salary. Paying dividends to yourself and any other shareholders. Paying monthly NI and PAYE tax. Paying annual Corporation Tax. Claiming for your personal expenses. Direct debits for items such as a mobile phone contract or internet connection. Quarterly VAT payments, if you are registered.
What information you will need?

Setting up a business bank account is fairly straightforward. All banks will have to carry out a series of security checks before opening a new business account. You will usually need to present your Certificate of Incorporation as well as a copy of your memorandum and articles, and any share certificates that have been issued. You may also need to provide photo identification, such as your driving license or passport, as proof of your address and identity. Most banks will take around a week to set up your business bank account.
how to choose which bank?

Many contractors will initially lean towards using their own bank. Although this may seem like the most convenient option, as your bank knows you and can easily validate your identity, it is important to look for a business bank account with the best facilities. Whilst your existing bank may be great for personal banking, it may not necessarily be the best option for business banking. Some of the key things to consider when choosing a bank:
Charges and fees - many banks offer great introductory rates but after these expire fees can soon rack up, so its best to choose a bank that provides free business banking. Referrals and testimonials - who do other contractors use? Unlike personal banking where you can
25
easily ask just about anybody what their bank is like, it can be more difficult to find a bank with the right facilities for you.
Telephone banking telephone banking is a hugely convenient service, so its worth looking at what different banks offer in terms of this. Again, it may also be worth asking fellow contractors what their banks offer. Online banking - making payments online saves the hassle of writing and posting cheques, or using telephone banking. Access to things like real time statements is also extremely useful, particularly when reconciling items for your quarterly VAT return! But be sure to check if there are any hidden fees for using online banking. Interest interest rates for business banking can vary widely between accounts, so its always best to do your research.
If you choose a bank which offers free business banking, you shouldnt have to worry about every day banking fees. However, many banks do charge for things like debit card use, transferring money, issuing or paying in cheques and withdrawing cash. This can come as a bit of a shock if youve only used free personal banking before.
Paying yourself
We would always recommend paying yourself a low salary, equal to minimum wage levels, with any other money taken out in the form of dividends. Dividends are a portion of the companys earnings that are returned to shareholders - i.e. you the contractor and are an additional, and alternative, way of paying yourself from the profits available in the company. Once your salary level has been decided you will need to set up a payroll and determine the amount that should be allocated to HMRC for tax and National Insurance, as well as the net amount you can withdraw from the company for your salary. You dont need to withdraw all available funds from your company - you can always leave the money within the company to gain interest, and to reduce your personal tax liability, but this type of tax planning is best discussed with your accountant first. Employers and Employees National Insurance are both payable on any salary taken. However, dividends do not attract tax or national insurance up to the higher rate threshold of 34,370 plus your personal allowance. Any dividends which take you above this figure will be subject to 25% higher rate dividend tax on the net dividend drawn (Financial Year 2011/2012 rate).
Declaring a dividend
Providing the company is trading profitably and funds are available, dividends may be declared at any time during the companys financial year - its entirely up to you when and how much you pay. When you take a dividend you must complete a dividend voucher also known as a declaration form which quite simply is an official record or receipt for each time you are Declaring a Dividend. Your
26
voucher is a way of recording how much and who has received a dividend. It should include:
Limited company name. Name and address of shareholder. Amount of tax credit. Dividend amount paid.
Total number or percentage of shares owned by shareholder. Date. Signature of the company director.
Dividends for multiple shareholders

This is something which is worth bearing in mind if you are considering going into a partnership with someone and making them a shareholder of your business. In this instance, all shareholders receive the same amount of dividend at the same time. For example, two contractors, both with 50% shareholding, will receive 50% of whatever dividend is taken, even if only one contractor did all the work. This is an important consideration if choosing to go into a partnership, as disputes about workload often occur at dividend time. Dividends taken need to represent the level of work that shareholder does. If you have two shareholders both with 50% shares, but only one of these is contracting through the company, HMRC will question that person is doing to justify that amount of shares.
expenses
Any costs you incur that are, as defined by HMRC, wholly and exclusively for the purposes of your business, are classed as expenses and can be claimed for. Expenses include:
Company formation. Accountancy fees. Business travel and accommodation. Postage for business. Stationery for business. Business telephone calls. Salaries. Employers N.I. contributions. Contributions to a pension.
Business entertainment. Equipment purchased for business purposes. Motoring expenses using fixed rate allowances. Computer software. Technical books and journals. Certain professional subscriptions. Use of home as office. Company bank charges and interest.
27
Use of Company Car

We generally recommend that you use your own car for business use, rather than having a company car. This way you can charge the company a mileage allowance for each business mile you travel, which is tax deductible. The alternative is for the company to own the car, but this will mean that you will be taxed on the car as a benefit in kind.
Use of home
Following changes in HMRC regulations surrounding what can and cannot be claimed with regards to use of home; we would advise that you check with your accountant for the most up to date information. Company expenses are tax free, however, remember you cannot claim for something you didnt actually pay for in the first place, or cant provide evidence for. It is advisable to hold onto your receipts and keep a simple record of these items, because although your accountant will not need to see them, HMRC can go back as far as six years should they ever raise an investigation.
Contractor insurance
Most contractors will need to take out insurance; however this does depend on your client or agency. The two main types that contractors may need are Professional Indemnity Insurance and Public Liability Insurance. Both insurances are claimable expenses through your Limited company:
Professional Indemnity Insurance - this meets the cost of defending claims and damages payable should a client suffer financial loss due to any negligent act, error or omission by a contractor. For example, if youre a contractor developing a software programme and you accidentally include a bug into the software which delays its delivery, it is highly likely your client will demand considerable compensation. Professional Indemnity Insurance will cover the cost of such a claim. Mistakes can be costly - The chance of a claim is small, but if it does happen, it may well be a large claim. Therefore, clients are increasingly asking to see proof of Professional Indemnity Insurance before awarding contracts. An agency contract will not protect the contractor in most circumstances. Prices for Professional Indemnity Insurance start at around 165 a year. Public Liability Insurance - this protects you against third party claims for injury or damage to people or their property. Despite your best intentions, accidents do happen and if the accident is as a result of something your business has done, then a client, contractor, or member of the public can claim against your business for compensation. Your public liability can be triggered by something as simple as spilling a drink over a clients computer, or a contractor slipping on a wet surface in your office incurring injury or damage. Prices for Public Liability Insurance start from around 115 a year.
28
Most contractors also decide that the best way of protecting them and their family is to take out life insurance which pays out a lump sum if you die. You might also want to consider health insurance, which pays you a weekly wage if you are unable to work due to illness or accident. SJD Accountancy recommends Hiscox for your contractor insurance needs, who can tailor your business insurance to suit your needs. Business insurance quotes are available by phone on 0845 512 1895 or online.
Contractor Pensions
It is worth remembering that as you are your own boss - nobody else is making any plans for your retirement. So, if you want a comfortable retirement you will have to make your own plans, and for most people this means setting up their own pension scheme. Fortunately, the Government allows you to claim tax relief on your pension contributions. As a contractor working through your own Limited company, you can redirect part of your gross income into a pension scheme. By doing this, you save substantial amounts of both personal and corporation tax. The government is encouraging contractors to invest as much into their pensions as possible, up to a threshold of 50,000 per year (FY 2011/2012) to benefit from a higher level of tax relief. There is also a personal lifetime limit of 1.8m, which will decrease to 1.5m in 2012.
Contractor mortgages
Getting a mortgage as a contractor doesnt have to be difficult. Choosing a good broker is essential to avoid the hassles of dealing with lenders who are not familiar with the contracting market. An experienced broker can make use of the expertise and contacts they have built up over many years, making your life far easier. Most contractors have an employment history that can put-off most high street lenders, and the ones who are willing to lend quite often apply expensive surcharges, so its important to work with a company that appreciates the difference between a contractor and an employee, understanding that the risks are not actually much higher. Our preferred business partner, Contractor Mortgages Made Easy, can ensure that you are making the most of the opportunities presented by your employment status, and will help you avoid the pitfalls that you might face when working outside of a large company employee benefits package. You can contact their mortgage team on 0844 44 88 800 or email sjd@contractormortgagesuk.com. You may also find our Contractor Mortgage Calculator and online instant Mortgage Assessor at www.contractormortgagesuk.com useful. The Mortgage Assessor will tell you how much you can borrow just by keying in your hourly rate, and the Mortgage Calculator will let you know the monthly repayments for any given mortgage amount, rate or term.
29
Accounting & Administrative responsibilities

As a Limited company you are legally obliged to keep proper books and records for at least three years, or six years if your company is VAT registered. These records must be summarised in a compulsory format at your year end, known as your statutory accounts. These statutory accounts must show a true and fair view of the company, and a copy must be sent to Companies House within nine months and one day of your year end. Companies House is a government agency that keeps details of every single Limited company in England, Wales and Northern Ireland, and there are a number of forms which you may have to fill in and send to them - so professional advice is essential. The most common forms you are likely to receive from either Companies House or HMRC are:
Annual Return Reminder (363s) Corporation Tax Return (CT600) New Company Enquiry Form (CT41g)
As a client of SJD Accountancy, all correspondence is handled by your dedicated accountant - simply forward the documentation to them and they will handle the rest. It used to be compulsory for every Limited company to have its accounts audited. The rules have since been relaxed so in most cases, companies with annual sales of less than 6.5m are not forced to use an accountant at all. However, given that there are fines if the Directors make a mess of their accounts, it is probably unwise for contractors to adopt a DIY approach. Larger companies must still have their accounts audited, but this is unlikely to affect most contractors. We provide a pre-formatted spreadsheet to clients to record all income and expenditure, which only takes about 10 to 15 minutes to complete per month. To see what this looks like please visit: www.sjdaccountancy.com/about/resources/downloads.html There are instructions on how to complete the spreadsheet, with an example at the front. The spreadsheet relates to your companys financial year, so month one on the sheet will be the first month of your financial year. We recommend completion of the spreadsheet on a monthly basis and ask our clients to email it to us each quarter to coincide with their VAT period. In addition to figures for your accountant, you should also keep track of your finances on a day to day basis. Accounting information is usually at least a year out of date and is, in any event, prepared for the completely different purpose of satisfying the tax authorities.
30
UnDerSTAnDinG ir35
This part of the guide is designed to give you information on IR35 and how it affects contractors.
What is ir35?
IR35 is legislation brought in by the Government in April 2000, to counter what HMRC class as disguised employment. An example of disguised employment would be if a permanent employee were to leave their company on a Friday afternoon then return to work on the Monday, at the same company, doing the same job role, but as a contractor rather than a permanent employee. The aim of the IR35 legislation is to stop people leaving full time employment and then returning to the same job immediately as a contractor working through their own Limited company, in order to reduce their tax liability and their NI payments.
how would i be classed as inside ir35?

If your contract has the same level of risk, responsibility, liability and control as a permanent employee, then you would be classed as inside IR35. This means you would have to pay full tax and National Insurance contributions (instead of the usual salary and dividends from the profits of your company) and have reduced expenses allowance. This is because HMRC believe that as you arent taking the financial risks, nor have the same level of control as a director of your own Limited company, you are not entitled to the same corporate tax structure. We recommend that all new contracts be reviewed, ideally before being signed. If you are unsure whether your contract falls inside or outside of IR35, SJD Accountancy offers a free verbal IR35 contract review. Alternatively, if you would like a written review, this would be charged at 150 plus VAT.
Are there any benefits working through your own Limited company, inside ir35?
If you are inside IR35 you will pay about the same amount of tax as a permanent employee on the same income would. However, you can still claim: travelling and accommodation expenses, 5% of your turnover, benefit from the Flat Rate VAT Scheme and receive interest on the funds held within your own company so, it could still be worth contracting through your own Limited company from a financial point of view.
31
expenses when inside ir35

When calculating the deemed salary, certain expenses can be deducted from your contract income. To be clear, the following expenses have been mentioned by HMRC in various consultations and FAQ publications:
Travelling (and other expenses deductible under Section 336 ITEPA). Employer contributions to approved pension schemes which attract tax relief in the normal way. Gross salary paid, plus any employer NI contributions on both the salary paid and any deemed payments. 5% of the gross income from relevant engagements to cover running costs. Any other expenses which do not fall within S336 ITEPA, but have another statutory route for deduction, such as professional subscriptions and professional indemnity or personal liability insurance.
Travelling
You are entitled to tax relief on the full cost of any travelling involved in your contract, or any travelling that you have to do to attend a place at which you are to perform your duties, excluding the costs of ordinary commuting and private travel. For the purposes of contractors the following logic applies:
Workplace - travel from home to your permanent workplace is not tax deductible, this is part of the ordinary commuting cost. For many employees their permanent workplace is obvious, and any occasional journeys to other locations will clearly be an allowable expense. However, in the contracting business, which involves travel to the site of the client, care is needed not to fall foul of the rules. The guidance indicates that a permanent workplace is to be interpreted as follows: A place where an employee works is a permanent workplace if he/she attends it regularly for the performance of the duties of the employment. With this definition and the concept of regular attendance, most contract workers would be in difficulty, but they are excused by the exclusion of temporary workplaces.
Temporary workplace - A workplace will not be a permanent workplace if it is a temporary workplace. A temporary workplace is somewhere the employee goes only to perform a task of limited duration or for a temporary purpose. Clearly, this will normally exclude your clients site, as you attend it for a fixed period only and then the contract ends. This means that you are performing a task of limited duration there and travel to the site will be allowable. However, mindful of possible abuses, HMRC has introduced a limitation to the temporary workplace rule, as follows: A workplace cannot ever be a temporary workplace if the employee attends it in the course of a period of continuous work which lasts, or is likely to last, more than 24 months. A period of continuous work is a period of work, throughout which the duties of the employment are performed to a significant extent at that place. For this purpose, significant extent will be interpreted as 40% or more of the employees working time spent at that place. This limits your deductions in respect of travelling expenses when you renew a contract repeatedly. Once you have
32
been travelling to the same clients premises for nearly two years, and the next contract renewal will take you over the two year point, you will no longer be permitted to claim with effect from the renewal date. Note that it is at the point that the contract is expected to exceed 24 months that the deduction is lost, not at the point at which the 24 months is exceeded. Where you decide not to renew immediately at the end of, say, 22 months work, be aware that the 24 month period continues to run (that is any period of 24 months). If you return to the same client site within about 15 months you should not claim for your travelling expenses. This is because 60% of 24 months is 14.4 months, so this is the length of the gap needed to overcome the 40% in 24 months principle.
Pensions
Pension contributions form an extremely important part of remuneration planning when inside IR35. Not only are the contributions allowable for tax purposes, they can also be paid before paying the new deemed salary, meaning that both employees and employers NI is saved. As a contractor who is inside IR35, you not only save on the income tax that you would have normally paid, but you also avoid the employers and employees national insurance contributions. The amount of tax relief can be as much as 45%, meaning that for each 100 invested you pay 55 and HMRC pays the rest.
The 5% deduction
This allowance, being 5% of the total income from relevant engagements, is intended to cover all of the expenses of running the company, including accountancy fees and the Companies House filing fee. In the deemed salary calculation there is no need for the intermediary to show how, and where, the expenditure has been laid out or even whether it has or not. It is sufficient to deduct the 5% in the calculation. Where, in reality, the company bears more or less than the amounts allowed, this may generate a profit or a loss for corporation tax purposes, so there is still a purpose in recording the actual expenditure incurred by the company.
how does ir35 affect payments to hMrC?

If your contract is caught by IR35, and therefore the income has to be distributed as salary, this creates an administration difficulty in terms of timing of payments. HMRC has therefore said that the PAYE can be paid annually - but no later than 19th April. In practice, your accountant will calculate how much deemed salary and PAYE you have to pay at 31st March each year. If your income falls inside IR35 then you will usually not have to pay any corporation tax, but you will be subject to PAYE. The entire section on IR35 is available on the HMRC website at www.hmrc.gov.uk/ir35/index.html alternatively download SJDs comprehensive Plain English Guide to IR35: www.sjdaccountancy.com/about/ir35_advice.html
33
VALUe ADDeD TAx (VAT)

VAT is complicated and often leaves contractors feeling more confused than clarified on the subject. Basically, if you are VAT registered you need to add 20% (FY 2011/2012 rate) to all of your invoices. Registration for VAT is compulsory when the annual turnover of your business, calculated to the end of any month, reaches a set amount and this goes up slightly each year.
When to register for VAT?

Should you expect that your turnover will exceed the mandatory threshold limit in the next 30 days, you must register your company for VAT. This rule could affect you if you are discussing a large contract with a client, and under this rule registration is required immediately so that the large contract in question will be subject to VAT. If you fail to register for VAT at the appropriate time, you will be liable to a penalty. You should keep a copy of your registration notification as postal delays could affect the date on which HMRC receives it as a penalty can be mitigated or cancelled in total if there are genuine circumstances which prevented you from submitting your application on time.
how to register for VAT?

All the required VAT registration forms are available on the HMRC website; however, when forming your Limited company through SJD, all the forms are handled for you. VAT registration usually takes about six weeks, but this will not prevent you from invoicing your end client or reclaiming VAT on expenses
The advantage of registering below the threshold

We generally recommend that you register for VAT even if you are below the turnover threshold. VAT registration means that you can reclaim the tax you have been charged when buying goods for your company. Although there are some expenses which do not incur VAT, most goods or products will. Remember to ask for a VAT receipt, which shows the suppliers VAT number, when you buy goods as they will not automatically be provided every time. You will need this to reclaim the VAT. If you want to register despite not reaching the threshold, you will need to satisfy HMRC that you are
34
running a business, or intending to run a business, and that you are making what is known as taxable supplies e.g. selling products or services for which VAT could be applied. Satisfactory evidence will need to be provided, and a covering letter is also helpful, to pre-empt any questions that HMRC might ask. The last thing to remember is that you do not have to be a Limited company to register for VAT.
Claiming VAT back

Once the company is VAT registered, you are able to claim back any VAT incurred on business expenses. Expenses on which you can usually claim VAT include:
Computer equipment and software. Stationery. Accountancy fees. Legal fees. Telephone calls.
Mileage allowance/fuel and motor repairs, if the vehicle is a company car. 50% of the VAT paid on either the car lease rental payments or car contract hire payments.
Expenses on which you cannot usually claim VAT include: Postage. Technical books and journals. Public transport costs. The purchase of a car by the company.
Road tax and insurance for a company owned vehicle. Payments to the Registrar of Companies. Payments of Directors remuneration.
When do i start charging VAT?

You start charging on the day you register for VAT, not the day you receive your certificate. Whilst waiting for your VAT certificate, you will need to raise your invoices as a total figure, which includes the sale amount and the VAT amount. Then, once you have received confirmation of your VAT number you can add this to your invoices, separate the sale and VAT amounts, and re-issue to your clients - who will then be able to reclaim the VAT which you have charged.
35
Submitting a VAT return

Every quarter you must submit a VAT return to HMRC all clients of SJD have their quarterly VAT returns completed for them. VAT returns can be done online, and as of 1st April 2010, all companies with a turnover of 100,000 or more have to file VAT returns online. The return must show all your output tax e.g. the total VAT your company has charged your clients on products and services which you have provided. It must also include the VAT you wish to claim back against charges you have incurred on purchases for your company for example supplies, equipment, stock and so on. This is known as input tax.
The Flat rate VAT Scheme

The Flat Rate VAT Scheme is usually of benefit to around 95% of contractors. It is an incentive provided by the Government to help simplify VAT for small businesses, especially those who provide a service and therefore do not have large amounts of VAT to reclaim for business purchases. However, if you estimate that your annual turnover, excluding VAT, will exceed 150,000 in your first year, you shouldnt join and if your annual turnover exceeds 230,000 including VAT in subsequent years, you will have to come off the scheme (FY 2011/2012).
how does the Flat rate VAT Scheme work?

With this scheme, you charge VAT on your invoices at 20% (FY 2011/2012), but pay back HMRC at a lower rate of 14.5%. This rate differs depending on your profession or trade and changes every time VAT rates change, so be sure to check this each year. Also, in your first year using the Flat Rate Scheme, you will receive an extra 1% discount. This difference in the rate you charge and the rate you pay is additional income for you. For example, based on an IT contractor who pays 13.5% of the gross amount in the first year and then 14.5% in subsequent years, this provides the following additional income, based on a 45 week working year:
200 per day contract - 1,710 extra per year 350 per day contract - 2,990 extra per year 600 per day contract - 5,130 extra per year
Companies on the Flat Rate Scheme are unable to claim back any VAT on purchased goods and expenses for their business. They can only reclaim VAT on capital asset purchases over 2,000 however; they must all be on the same receipt. You cannot, for example, purchase a PC one month for
36
1,500 then a printer the next month for 300 and a scanner the month after for 200 and add them together. The Flat Rate VAT scheme still requires you to complete a quarterly VAT return form. You will need to charge the standard VAT rate on your invoices, but when you complete the form you calculate your VAT payable on the amount you have invoiced that quarter. The example below is based on a Limited company specialising in IT and paying VAT at 13.5%, which includes the first year discount:
Net amount you invoice your client VAT charged on top to your client (20%) Gross Amount VAT to be paid to HMRC - 13.5% of 6,000 VAT received from client Profit for you - i.e. what you get to keep
5,000 1,000 6,000 810 1,000 190
So, the percentage you pay is considerably lower than that of the standard VAT rate, therefore making you an extra profit.
Flat rate Scheme advantages

The ability to earn money from VAT, you can earn thousands of pounds extra each year simply out of VAT (the government does this as the FRS is simple for them to manage and you are in affect acting as a tax collector). A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC, all you need to do is keep the receipts from your purchases. If you are a new business, using the Flat Rate Scheme in your first year, you receive a further 1% decrease on the overall percentage VAT you pay each quarter.
Flat rate Scheme disadvantages
If you buy lots of stock or other items for your business then you cannot claim the VAT back on these goods.
We recommend discussing all your VAT scheme options with your accountant before deciding.
37
TAx
Sadly theres no getting away from it - tax can be complicated. However, this shouldnt stop you from forming your own Limited company, taking advantage of the tax benefits and pursuing your goals of company ownership. When thinking about Limited company tax, its best to see the company as one entity and you, an employee and owner of the company, as a separate entity. This may seem strange but it will make tax far easier to understand.
Corporation Tax
Corporation tax is tax on your company profits, which are simply defined as net sales less net expenses. All Limited companies have to pay Corporation Tax and the current rate for companies with profits under 300,000 is 20% (FY 2011/2012). So for example, if you invoice your client 100,000 excluding VAT over the year, and have expenses of 20,000, you will pay 20% on the remaining 80,000 profit. Your companys corporation tax is due nine months and one day after the year end.
employers national insurance Contributions

Your company will have to pay NI at 13.8% (FY 2011/2012) on any salary you pay yourself, over the required threshold amount.
employees national insurance Contributions

You will need to pay NI on any salary you pay yourself from the business, which is 12% on anything earned above 139.01 per week - until you reach 817 per week, and then youll pay just 2%. PAYE Income tax/NI is, along with VAT, payable quarterly but your accountant will be able to advise you of these crucial dates. There is no NI payable on dividends.
Personal Tax
This does get a little complicated due to you taking money from your company both as dividends as the owner, and as a salary - as an employee, so always speak to your accountant should you have any further questions.
38
Self Assessment
As director of your own Limited company you will need to register for self assessment which involves completing a personal tax return. This is due on 31st January and should include everything you have earned this financial year.
income Tax
Any income taken as a salary from the business is taxed in the same way as you would be if you were an employee of any company. You will have a personal tax allowance of 7,475 (FY 2011/2012) on which no tax is paid - you will then pay 20% tax on all income up to 35,000, then 40% for anything over 35,000 up to 150,000, then 50% on anything over that. This is based on income received within each financial year and this runs from 6th April to 5th April of the following year. Personal tax is payable annually on 31st January, with potential additional payments on account in January and July. It is also worth mentioning that once you earn over 100,000, your personal allowance will be reduced at a rate of 1 for every 2 of income until it is reduced to zero, so by the time you hit 114,950 your personal allowance will have disappeared, this effectively means that the 14,950 after 100k will have been taxed at 60%.
enforcement of tax liabilities

Should your company default on the payment of PAYE and NI, and claim that limited liability will exclude payment, directors should be aware that there are existing procedures which have been used successfully in the past - to enforce PAYE liabilities on the employee who received the emoluments and, in the case of NI, any Director of a company which fails to pay NI due, where the Director is fraudulently or negligently concerned with non payment. It is also possible to obtain freezing orders over a Directors personal assets to secure payment of NI liabilities. This is not to be contemplated.
39
Important Dates
There are various dates which you must be aware of, both for company related tax issues and for your own personal tax issues. Its worth remembering that both HMRC and Companies House levy fines and interest for late filing of returns and late payment of taxes. These are as follows:
Company
Corporation tax payable Annual Accounts Companys Annual Return
Date due
Within 9 months and 1 day of the companys financial year end Filed within 9 months after the companys financial year end Anniversary of incorporation date
Personal
Personal tax year end PAYE and National Insurance on salary Self Assessment return
Date due
5th Apr 19th Apr Due by 31st Oct if hard copy or 31st Jan if online
40
ACCOUnTS MADe eASY

Understanding accountancy and finance is like driving a car. It fills most people with dread, but once theyve had a bit of experience it becomes second nature and they wonder what all the fuss was about. Accountancy is all about identifying, recording, analysing and explaining the financial implications of business transactions and decisions... quite simply, it allows you to understand how your business is performing and if you are meeting your objectives. The first thing to realise is that many people will be interested in your accounts - for example:
Clients - new clients may look at your accounts to decide whether you are a successful and reliable contractor. HMRC - they need to see your accounts to work out how much tax you owe. Suppliers - may look at your accounts to decide whether you are a worthwhile credit risk. Bank managers - this will help them to decide whether to lend you money should you need it. Mortgage provider - they will need to see your accounts before they give you a mortgage.
Who are accountants?

Unfortunately, there is nothing to stop anybody calling themselves an accountant. This means that it is vitally important to understand the difference between qualified accountants and tax advisors, and those who are unqualified.
Bookkeepers their role is largely to keep the score by recording the financial effects of what a company has done. They are usually the best people to do routine accounting work. Qualified accountants and tax advisers these are experienced professionals who have undergone rigorous training and passed extremely difficult exams. There are a number of leading qualifications - but if you look for the letters ATII, ATT, ACA, FCA, ACMA, FCMA, ACCA, CA or FCCA after the accountants or tax advisers name, you should not go too far wrong. Qualified advisers are best at dealing with the non-routine aspects of your business - e.g. helping you to increase your profits, produce your statutory accounts and pay less tax. Unqualified tax advisers and accountants before deciding to use the services of one, we suggest you ask yourself would I put the health of my family in the hands of an unqualified doctor? If the answer is no, as were sure it would be, why consider putting the health of your business in the hands of an unqualified tax adviser or accountant? Dont be afraid to ask what qualifications and expertise they have - and if you have any doubts, try somebody else.
41
Types of accounts
There are two main types of accounts - Statutory Accounts, also known as Financial Accounts and Management Accounts.
Statutory Accounts - these are compulsory for companies, and must be sent every year to the shareholders in your company and to Companies House. In addition they must follow a standard set of rules and conventions, and show what went on during the financial year. These accounts are mainly used by people outside your business - e.g. bankers, clients, suppliers and of course, HMRC. Management Accounts - these accounts are essential for well-run companies, but are not strictly required by law. As their name suggests, Management Accounts are mainly used by management. In fact it is very rare for them to be shown to anybody outside the company- and companies cannot usually be forced to show their management accounts to anyone other than the auditors. There are no rules that say what management accounts must look like - it is up to each company to decide what format will best help it to understand whats going on, control the business and make better decisions. Management Accounts often predict the future as well as keep track of the past i.e. they usually include forecasts of what is going to happen tomorrow, as well as recording what happened yesterday. In contrast, Statutory Accounts only ever record what has already happened in the past.
Both sets of accounts use the same basic information which they get from the same place your company books.
Simplifying the terminology

We said before that business finance and accountancy are a bit like driving a car. Good drivers use the dashboard to monitor their progress - and in just the same way good business managers use their accounts to monitor their business progress. So, accounts are, in a sense, your business dashboard. The two key instruments on your cars dashboard are probably the speedometer and milometer. These are equivalent to the two key elements in any set of accounts - the Profit and Loss Account and the Balance Sheet.
Profit and Loss Account - in a car, the speedometer shows you how fast you are going. This is equivalent to the Profit and Loss Account, which shows how fast your business is accumulating profits. Both the speedometer and the Profit and Loss Account only make sense when viewed over a period of time. The speedometer shows miles per hour, while the profit and loss account shows profits per year. Balance Sheet - the balance sheet is like the milometer. A milometer records how far the car has travelled and is often used as an important factor in deciding how much a car is worth. In the same way, your balance sheet measures how far your business has travelled. It is a snapshot of where the business has got to and gives some indication of how much it might be worth - but like the milometer, it tells us little or nothing about how, or how quickly, it has got to where it is.
42
Basic principles of accounting

Most accounting is little more than applied common sense. However, there are two golden accounting rules that are not immediately obvious - and so it is worth spending two minutes describing them.
The accruals principle - your accounts should reflect things when they arise or are earned - which is not necessarily the same as when you actually pay or are paid for them. For example, your accountant will include an April sales invoice in your April accounts, even if your client doesnt pay you until August. Revenue v capital payments - some of the things you spend money on will not be regarded by your accountant as reducing your profits. For example, the money you pay to buy a new car or pay off a loan. Accounting conventions say that payments like these shouldnt appear in the Profit and Loss Account - instead their effect is confined to the Balance Sheet. The key distinction here is between revenue payments and capital expenditure payments. Revenue payments are the running costs of the business - the type of expenses that buy goods and services which are used up quickly - e.g. wages, advertising, rent, stationery and so on. This type of expenditure is shown in the Profit and Loss Account and is often referred to as having been expensed. Capital payments relate to things that continue to benefit the company for several years - e.g. computers, cars and so on. They also include paying off loans. This type of expenditure is shown in the Balance Sheet, and is often referred to as having been capitalised.
Your accounts
We have now explained the building blocks of every set of accounts. The following examples are stylised versions of what these building blocks are used to construct - your Profit and Loss Account and your Balance Sheet
Your Profit and Loss Account

Figures for
Sales Less ( - ) Costs Equals ( = ) Profit How much your business has really made. Revenue expenditure costs of goods and services used to generate, supply and support those sales - even if not yet paid for.
Description
Made by your business - even if not yet paid for.
43
Your Balance Sheet

Balance sheets are always presented in two halves. The top half shows the companys net assets and the bottom half shows where these net assets have come from.
Figures for
Share Capital Plus ( + ) Profits Equals ( = ) Net Assets
Description
What your Company OWNS. How much profit you have earned but not spent since the business started. This will be the same figure as in the top half of your balance sheet - i.e. roughly how much your business is worth.
Figures for
Assets Less ( - ) Liabilities Equals ( = ) Net Assets
Description
What your Company OWNS. What your Company OWES. Rough measure of how much your company is worth.
Bookkeeping Basics
Your accounts can only ever be as accurate as the books you keep. In this section we explain the books you will need - and those you wont.
Cash book - this is your single most important book. It records all of the payments made into and out of your business bank account. It is crucial to set up the book appropriately at the commencement of business. SJD Accountancy provides its clients with a bookkeeping spreadsheet. At the end of each month the totals for each column for that month will automatically be calculated. Sales invoice file - it is both very helpful to your business, and reassuring to HMRC, if you issue your sales invoices in strict numerical order. You should also set up a file with dividers for each month and file your sales invoices in strict numerical order. The only exception to this rule is that unpaid invoices should be kept in a special section at the front of the file until they have been settled, at which point you should mark the invoice paid and also write on it the date paid, and then file it in strict numerical order. Purchase invoice file - this would be a file divider for each month and a front section file for unpaid bills. On receiving an invoice, file it in the unpaid section until such time as you pay it. On paying the invoice you should write paid and the date on the invoice itself, and then transfer it from the unpaid section of the file to the section for the month in which you made the payment. You should also, of course, ensure that the payment is recorded in your cash-book.
44
The Data Protection Act

If you use a computer to store information about any individuals then you may be required to register under the Data Protection Act. Non-registration is a criminal offence for which fines plus costs may be imposed in the Magistrates Courts. Further details can be obtained from the Data Protection Registrar.
Further advice
45
MAkinG YOUr BUSineSS A SUCCeSS

This section of the Contractors Guide is designed to show you how to run your company and contains tips and suggestions that could help you to increase your income and productivity, reduce your costs, improve your cash flow and maximise your profits. Obviously, not all of these suggestions will be relevant to your particular business and you must, of course, fully explore the implications, costs and benefits for your own business before deciding which suggestions to adapt and adopt. Our SJD Accountancy website has a full list of guides available in our Free Business Guides section. Everything from managing your business, developing your business online and more, at www.sjdaccountancy.com/about/resources/downloads.html
Managing to succeed
Success in business means mastering the art of management. Of course, most contractors do not have staff or stock, so they are spared the problems of people management and stock control. However, they must still learn how to manage their time and their money - in particular, the money that is owed to them, but hasnt yet been paid to them.
Time management
Time is perhaps the most misused and misunderstood asset of all in many businesses. Since a salary of 25,000 per annum equates to about 24p a minute, inadequate time management can be costly to your business. Poor time management also robs you personally of something totally invaluable - your own time. A large number of time management systems and tools have been developed and a great many books written on the subject. However, the essence of most of them can be distilled into the following three stage approach. Firstly, understand how you currently spend your time, perhaps by keeping a detailed diary over a period of a week. Next, analyse which of those activities add the most value and profit to your business and those that add the least. Then last of all, devise a strategy to ensure that you focus your time and efforts on the former and not the latter. This time management strategy is likely to look something like this:
Use some form of priority action list - perhaps prepared at the end of the day, outlining the tasks which must be accomplished the following day. Tackle priority tasks first take care not to fall into the common trap of doing the most enjoyable tasks first. Persevere at the task until it is finished - constantly stopping and starting a task is a classic symptom of time-wasting.
46
Avoid paper-pushing - deal with each piece of paper and its related action only once. Overcome the natural tendency to believe that I can do it better than anybody else therefore, I must do it - if you have staff, train them and then delegate responsibility and authority to them, delegating as far down your organisation as practicable. Use both telephone and email as much as possible - both involve far less time than face to face meetings and emails also provide proof of anything agreed verbally.
Selling tips
The easiest people to sell to are your existing clients. Dont overlook them as they are probably the biggest asset to your business - be sure that you use them, and dont lose them. Referrals are the cheapest, and usually most potent, form of marketing for a small business and must not be left to chance. Encourage your clients to refer or recommend you to their sister companies, suppliers and contacts. Find out what your clients actually want and, if necessary, adapt your service so that it matches more closely what they want, rather than being just the service that you are prepared to offer. For example, if they want you to work outside normal office hours, to provide your own equipment, or to offer a total satisfaction guarantee, try your best to give them what they want. Youll be streets ahead of the competition, and you may be able to negotiate higher pay. Identify those contracts or clients which are most profitable for you and concentrate your sales efforts on trying to repeat or replicate them. Too many contractors persist with low value contracts, sometimes out of a misplaced sense of loyalty or optimism, but more often because they dont realise that they could be earning more money elsewhere.
Pricing for profit

Probably the most important factor in determining whether a business will succeed or not is whether that business adopts a pricing for profit strategy. What follows in this section is an introduction to the pricing for profit and selling techniques that SJD Accountancy has seen making a very real contribution to small business success. Setting your charging price is probably the single most important, and difficult, decision that you will make for your business. If most of your work comes through an agency you will probably have relatively little scope for choosing your rate. However, if your skills are in short supply and high demand, the agency will need you, as much as you need the contract, and you should be able to negotiate a good hourly or daily rate for your time. Whats more, if some of your contracts are directly with the client and there is no agency involved, then you are really no different from any other small business and so setting the correct rate is critical to your success. Most successful small businesses realise that, as niche players, what they should offer their clients
47
is a high quality product with unparalleled standards of service at a price that is fair - understanding that ultimately, they cannot compete on price. They also realise that they cannot afford to project themselves as being cheap, since that has all the associated connotations of also being undervalued. Instead, they must emphasise and market their quality, service and long-term value for money. Many unsuccessful small businesses believe that, as relatively low cost newcomers to the market, the only way that they can fight for a share of the market is by undercutting their competitors prices. As a result, small businesses often inadvertently adopt pricing strategies that reinforce the undervalued image, preventing them from winning quality conscious clients and ultimately ending up with a low sales and low profit business that will inevitably struggle to survive.
how to raise prices

If you are locked into low contract rates there are a number of techniques that you can use to raise your rate without losing your client:
Be prepared to explain why your prices have risen. Consider some non-price price increases such as charging for travelling, out of pocket expenses, the hire of any special equipment you provide and insurance etc. Introduce a surcharge for any special work, e.g. at anti-social hours, or requiring special tools or skills, or work that requires you to carry out private research or training. If you are paid by the hour, make sure that you have an accurate method of recording all the time you spend on a contract - the best way of doing this is by keeping a daily time-sheet and accounting for every minute between when you start work and when you finish. Negotiate yourself out of having to do those time-consuming tasks that are of only limited value to the client, and for which you are not adequately rewarded, but only pass on some of the time-saving in terms of lower contract price - the net result should be that you get paid more for every hour of effort. Consider charging interest when your clients dont pay you on time.
Justify your prices

You must be prepared to justify your rates. This involves having the following information prepared:
Knowing the rates of your most expensive competitors for the contract. Demonstrating the savings and benefits from using you, rather than other contractors. Demonstrating that your service is hugely superior and therefore slightly more expensive because, for example, you:
- Have a better CV. - Have done identical work before.
48
- Have exactly the right skills. - Work quickly and accurately. - Have impeccable references to prove it.
If your rate does become a key issue in negotiations, emphasise that what you are selling is a highquality service that exactly matches their needs, and not a cheap and cheerful short-term fix that they may live to regret.
Discounts
Most small businesses dont realise that their single largest element of cost is one that probably doesnt even appear in their accounts - discounts awarded to clients. Discounts are a cost in exactly the same way as wages or overheads, and yet even in the biggest companies they are often literally given away, with little serious thought to their true implications for the success of the business. To manage your discount costs properly you should:
Monitor the total amount you actually charge your clients as a % of total sales value you could have earned if you had billed your work at your full hourly or daily rate. If it is more than 95% you are doing well. But if it is less than 85% you are probably giving away too much, or perhaps your full hourly/daily rate is too high - so its best to double check your figures. Use selective discounts as a strategy to attract new clients and to generate additional sales - e.g. in the form of introductory discounts or discounts that are only triggered once a client reaches a set level of purchases, etc. But do not allow your niche business to get locked into low prices because of uncontrolled over-use of discounts. Remember, low prices can spiral and lead to a lower chance of survival. Try to link a clients discount to them giving you a target amount of work, and then present that discount in as favourable a light as possible. For example, a 25% discount on work over and above a target level of 10,000 actually costs your business less when based on a client that you expect to pay you 12,000, than a flat rate discount of 5%. This is because 25% of the difference between 10,000 and 12,000 is 500 - whereas 5% of 12,000 is 600 - so a bigger discount can actually cost you less!
Of course a 25% discount sounds much more impressive - and will certainly help you to stand out in the crowd. It is also highly likely to encourage that client to channel more of his work through your business in order to trigger the higher levels of discount. The key to the success of this strategy is to set the targets at an appropriate level for each client, so that they find the potential discounts attractive and your business finds them profitable as they generate genuine extra work.
49
Settlement discounts
Try not to offer settlement discounts. Not only do they rarely encourage prompt payment, but once established they are frequently claimed and deducted from remittances, even by slow payers. They are also unlikely to be very important in influencing a professional buyer in his decision whether to use your services. This is because buyers are normally evaluated on, and think in terms of, the headline contract price that they negotiate with you, and not the subsequent settlement discount that you give on your invoice. It is, however, sometimes worth offering discounts for cash in advance, since not only does this help you to get paid quickly, but it is often attractive to the buyer. This is because these discounts actually appear on your invoice, and are usually regarded as the buyers responsibility - so they will be able to take the credit for negotiating them.
Minimising your costs

Whilst the precise details of how a business can minimise its costs varies enormously according to the type of contracting work it is involved with, there are nevertheless a number of techniques which can be used to good effect by all contractors.
Budgeting and forecasting

All contractors should prepare comprehensive and up-to-date budgets and continuously monitor their actual performance against those budgets. Variations from budgets should be investigated and the reasons for them fully understood, with corrective action being taken where necessary. A properly designed budgeting process can, in itself, help to reduce your costs if every item to be included in the budget has to be justified initially. The alternative, and wrong way to set your budgets, is to include everything at last years level plus inflation, on the basis that if I spent it last year I must need to spend it this year. Appointing a good quality accountant will also help in minimising your costs as they can advise on cost saving suggestions for your business. The first principles of budgeting involve answering the following questions about every single element of your costs:
Can it be eliminated without significantly damaging the profitability of the business? Is it over-specified for the needs of the business, and could the specification be trimmed to save costs? Does it cost more than the benefit it delivers? Can the same outcome be achieved at a lower cost, perhaps by changing company? Can it be done cheaper by an outside sub-contractor?
50
Can it be done less frequently without harming the business? How do other businesses achieve the same outcome? If you were to start in business again would you still decide to incur this type of cost? Is there any duplication of effort or can the task be combined into one that is already carried out elsewhere in the business? Is somebody responsible for the cost and how do they go about discharging that responsibility? When was the last time that competitive price quotes were obtained? Has the choice of supplier become a matter of habit and convenience rather than sound economic sense?
Whilst such questions should be asked of all costs, it clearly makes most sense to initially concentrate on the largest elements, since they are likely to have the greatest potential for reductions. When combined with sales forecasts, these cost budgets should also enable you to forecast your cash flow to identify whether you are likely to need an overdraft facility. They will also show you when and how much you may need to borrow, and this will in turn help you to negotiate the necessary facility with your bankers well in advance. Not only does budgeting enable more effective business control, it also creates a very good impression with your bank manager, making him more likely to accept your overdraft request.
Credit control
There are a great number of undesirable potential clients in the market who can inadvertently or deliberately cost your business a great deal of time and money by not paying their debts. There is only one thing worse than having no work - and thats having lots of work, but not getting paid for it. To minimise the risk of this happening to you, you should take the following credit control precautions.
In most businesses it is normal practice to make detailed credit enquiries into any new client requiring credit terms. However this is not always politically correct for contractors. Therefore we usually suggest a low-key approach to be the most appropriate. In particular, we recommend contractors to contact a specialist credit reference agency such as Dun and Bradstreet in order to obtain a detailed (and private and confidential) credit reference on every new company they would like to do business with. This reference should then be discussed with your accountants before you make a decision or sign a contract. Here are some key points: In the credit vetting process you cannot afford to rely solely on the apparent size of the organisation (or claims as to its size) or on the qualifications of its representatives. Even the largest companies dont always pay their debts, and these qualifications are not always what they seem. Credit vetting is not a one-off exercise, it should be continuously monitored and re-evaluated, taking account of both the clients payment history with your own business and by regularly updating the externally available information such as that provided by Dun and Bradstreet. Be aware that recovering unpaid debts from clients based in Scotland is considerably more difficult given the peculiarities of the Scottish legal system. Once you have decided to extend a client credit terms, set them a credit limit and notify them of both the limit, and the general terms of trade upon
51
which you are prepared to do business with them. Also, ensure that these terms are stated in your contract and on your invoices.
Withhold further credit from any client who has exceeded his limit or whose account is significantly overdue. Alternatively, make an arrangement to supply him with, say, 500 of extra work for every 1000 that he pays off his account. Always ensure that the details on your invoices are accurate, since mistakes will not only damage your credibility, but will frequently be used by the client as an excuse for delaying payment. Send invoices as soon as possible - not only is this necessary to establish the correct date for VAT purposes, but it also starts the credit-period clock ticking. Ensure that your debtors listing enables the age of all outstanding debtors to be accurately identified and monitored, so that all risky debts can be identified and acted upon at the earliest opportunity. Get to know the person who writes the cheques - and become their friend. Chase overdue debts at regular intervals, keeping a log of all explanations for non payment. Initially, use the telephone to request payment, and after the second phone reminder put your request in writing, progressively sharpening the tone and content of the requests. It is often helpful to bring the problem of the unpaid debt to the attention of the actual user of your services, and quietly suggest to him that you cannot guarantee future service until the account is settled. Be systematic and ruthless over debt collection - it can often require as much effort as winning the original contract. However, without the extra effort the contract is actually worthless, since it has cost you money but has earned you nothing.
Ultimately, if your client persistently fails to pay, it may be appropriate to make a claim through the small claims court - a relatively simple and inexpensive process that frequently earns the desired result. In principle, budgeting and forecasting are fairly straightforward. However, it is usually advisable to ask for assistance from an experienced accountant. They will be able to use their expertise - to accurately and speedily produce your forecast in response to changes in circumstances.
Purchasing
To get the very most out of every pound you spend there are a number of different things that you should do. Firstly, select your proposed purchases after careful research - it can be very expensive to buy the wrong thing. Make full use of independent brokers and advisers if they are available on a nofee basis - as in the case of insurance brokers and independent financial advisers. And in the case of purchasing general equipment, consult publications such as Which? and What PC? Next, select a supplier for your chosen purchase based on a pre-prepared list of criteria such as: price, availability, location, delivery time, credit terms, training, after-sales support and guarantees. If one supplier is ahead of the field in all areas other than price, then point out their price disadvantage and ask them to reconsider, since you would very much like to buy from them today if only they were a little less expensive. This simple tactic has stood the test of time as a method of worrying the seller into believing that a genuine and immediate sale will be lost unless they accommodate the request. It is also a good idea to save one element of your required package to the end of the negotiations
52
and then slip it in almost as an afterthought - e.g. Oh yes, I nearly forgot, we do insist on receiving 60 days credit or we do take a 2% early settlement discount, I assume that will not be a problem? Many sales people, fearful of the lost sale and the associated waste of their time, will not argue the point, preferring to attempt to justify their generosity to the accounts department on their return to the office.
Ways to save money

Other ways to cut the cost of being in business include:
Offering prompt payment/cash in advance in exchange for a discount. Ensuring that all quantity discounts are received. Discussing methods of reducing unit costs with suppliers - many will offer discounts if you order in a batch size that is economic for them, or accept delivery on a day that is convenient. Wherever possible, try to obtain samples, or items on approval, to enable you to fully evaluate their suitability - also try to negotiate sale or return arrangements, even if they are not (yet!) standard practice in your industry. To avoid subsequent confusion, disagreement and unnecessary expense, confirm all orders in writing, stating clearly the product details, price, credit terms, delivery method, and that time is of the essence - the latter statement will usually enable you to cancel the contract without penalty should they prove unable to deliver on time.
Payment
Do not settle your account until the agreed credit period has expired and you are fully satisfied that the supplier has met his side of the contract. In fact, it is now common business practice to consider taking further credit - especially if there remains some small element of dissatisfaction, such as an invoicing error - until the issue has been resolved to your full satisfaction. However, it is important to recognise that HMRC must be paid promptly, since they can, and will, impose legally binding charges and penalties for late payment.
Purchased Goods - Checking Quality

Physically check the quality and quantity of items delivered. Sign any delivery documentation with the words received unchecked if you are not able to fully satisfy yourself of their suitability at the time of receipt. On receipt of the invoice it is important to fully check its contents since, even in the age of computer invoicing, it is surprising how many errors, usually in the suppliers favour, they contain.
53
Therefore you should:
Check the quantities invoiced match those received. Check the price charged matches the price at which you ordered them. Check that no unexpected extras have been added to the invoice for postage and packing etc. Check the arithmetical accuracy of the invoice, including any VAT. Refuse to accept any invoice which includes VAT but does not quote the suppliers own VAT number. Send the invoice straight back if it is wrong.
Getting something for nothing

The following is a selection of free or very low cost training, advice and business resources that are available locally to help small businesses get the most out of their staff, their business ideas and themselves.
Business Link - provides excellent free or low cost training in key business skills such as marketing, selling, negotiating and bookkeeping. They also provide free counselling and support, and are an invaluable sounding board for your business ideas or issues. www.businesslink.gov.uk The FSB - the non-profit making Federation of Small Businesses has a free telephone legal hotline staffed by experienced professionals and which is available to members on a 24 hour a day basis. Annual subscription, which includes a number of other benefits, depends on the number of employees in a business and starts at 130. They can be contacted on 0207 5928100. Free consultations - many professionals offer free consultations - take advantage of free initial consultations offered but dont allow them the luxury of using the meeting merely to find out about you and your business without actually providing any advice. In the case of solicitors, the Law Society will arrange a free consultation with a suitably experienced local lawyer if you ring them on 0207 2421222. Free banking - most banks offer new businesses one years free banking providing they stay in credit. As mentioned, SJD recommends Cater Allen for all business banking, who offers free business banking for the lifetime of the account. Your local bank manager may also be able to offer advice and assistance. However, in our experience, not all managers are equally willing or able to provide cost effective advice and they may occasionally have a vested interest that is primarily in the benefit of the bank. If you have a good bank manager, use them. Free books - local libraries should not be overlooked as a source of reference material and trade directories, etc. It is also worth remembering that the libraries of colleges and universities generally welcome members of the public and often contain extremely good business reference sections. Health & Safety - free advice on health and safety considerations and legal advice on obligations is available from the Health & Safety Executive. Free software - practically free Shareware computer software is available for about 3 per programme for a period of license-free evaluation. All types of business software are available from spreadsheets and word-processing to databases and accounts packages. Magazines such as PC Shareware Magazine containing full details of products and prices are also available.
54
Free accountancy advice - uniquely, SJD Accountancy offer both potential clients and existing clients free face to face meetings in any city of the UK. We are happy to discuss our services and how we can support your business in an initial meeting at no cost - and once you have appointed SJD as your accountants, you can meet with your accountant unlimited times as you want to solve any complicated tax issues.
Professional Contractors Group (PCG)

The Professional Contractors Group (PCG) is a not-for-profit trade association that represents the interests of consultants, contractors and freelancers. It has evolved to become their champion, campaigning on issues that matter to the freelancing community, irrespective of industry focus. PCG members work in a wide variety of sectors including oil and gas, engineering, information technology, management consultancy, marketing, telecommunications, construction and pharmaceuticals. PCG offers them a broad range of services, including cover by its Professional Expenses Insurance (PEI) policy, legal and tax helplines, comprehensive guides, draft contracts and regular workshops, seminars and networking events.
Childcare vouchers
Childcare vouchers are not always well known or understood, and they are commonly viewed as a scheme that only employees can benefit from. Contractors can benefit too, but as the scheme is not very well publicised, a large majority fail to take advantage. Childcare vouchers are a government initiative to help working parents afford quality childcare and can save parents a significant amount in tax each year on childcare costs. Essentially, you pay for childcare out of your pre-tax income. Then all you have to do is to source an approved childcare provider and arrange for your Limited company to pay directly. This means the company receives tax relief on the payments which helps reduce your companys Corporation Tax bill. You can use childcare vouchers for children up to the age of 15, or 16 if they are disabled. The vouchers must be for either your own child, or a stepchild that lives with you and for whom you have parental responsibility. To qualify for the tax exemption, the childcare must be provided through a registered or approved childcare practitioner. Childcare vouchers also can be saved up, for example to meet higher childcare costs during school holidays. To check the definition of a registered or approved childcare provider where you live please refer to the HMRC website:
www.hmrc.gov.uk/taxcredits/start/who-qualifies/children/approved-childcare.htm
55
The allowance is per working parent not per household. Amounts in excess of the exempt amounts stated above are liable to tax and NI contributions, and also have to be reported as a benefit in kind.
Basic Rate
Weekly Monthly Annually 55 243 2,915
Higher Rate
28 124 1,484
Additional Rate
22 97 1,166
Contact SJD Accountancy

We hope you have found this guide to contracting and going Limited informative and helpful. If you have any questions about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email: info@sjdaccountancy.com.
56
GLOSSArY
Form No
AA01 AD01 AP01 AP03 TM01 TM02 CH01 CH03 AR01 64-8 DS01 SH01 CT41G
Purpose
Companies House form to change the year end date of the company Companies House form to change the registered office of the company Companies House form to appoint a new Director Companies House form to appoint a new Company Secretary Companies House form to remove a Director Companies House form to remove a Company Secretary Companies House form to change any details of a serving Director Companies House form to change any details of a serving Company Secretary Companies House Annual Return Form to authorise HM Revenue & Customs to provide company details to your accountant Companies House form to strike a company off the register Companies House form to issue additional shares in the company New Company Enquiry form issued by HM Revenue & Customs shortly after the company has been formed. This advises the Revenue who the directors are etc. Penalties may be charged for late submission Companys Corporation Tax Return submitted annually. The form is due within twelve months of the year end Annual statement of benefits and expenses paid to each director and most employees Annual company declaration that P11ds have been filed Annual statement for each employee provided to HM Revenue & Customs by the employer Leaving statement of payments and tax deducted from an employee Notice to complete if you do not have a P45 P60 Annual statement for each employee provided to the employee by the employer VAT Registration application form VAT Deregistration Form Quarterly VAT Return VAT EC Sales List for reporting sales to EU Customers VAT Flat Rate application form HMRC form to register for self assessment Self Assessment Tax Return
CT600 P11d P11d(b) P14 P45 P46 VAT1 VAT7 VAT100 VAT 101 VAT600 SA1 SA100
57
Accountancy Package - Service Summary

Basically - 10 out of 10, I would recommend you to a friend/colleague, and I cant think of anything that could have been improved about the service Ive had. Im really happy with everything youve done. Matt With over 11,000 Limited company contractor clients, SJD Accountancy are the UKs largest accountants to contractors. We offer an all inclusive monthly fixed fee business accountancy package for one of the lowest prices in the market. For just 110 plus VAT we provide you with:
Unlimited access to your own dedicated accountant who you can telephone, email or meet face to
face. No call centres, no outsourcing, no automated call handling and no offshoring.
Free face to face meetings in any city in the UK. Money back service guarantee. Outstanding reputation - we have won more awards for customer service and accountancy
excellence than any other firm in our market (see our recent awards below).
Free bookkeeping software.

Well take care of all your business and personal taxation needs, including:
Preparation and submission of Company Year-End Accounts. Prepare and complete your personal self assessment tax return. Proactive tax planning. Help you to structure your company in the most tax efficient way possible. Understand when, how much and where to send payment for all taxes that are due. Send email and mobile text alerts so you never miss a deadline; we understand that you are busy
and may miss one notification this is why we produce several.
Understand what you can claim by way of expenses and the impact on your income and taxes. Help you to understand the best way to take money out of your company. Help you to understand all of your tax liabilities both personal and corporate, these include:
employers and employees national insurance contributions, personal income tax, VAT (flat rate scheme or standard VAT) and corporation tax. For a more detailed breakdown of our services please see pages 8 to 12. If you have any questions about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email: info@sjdaccountancy.com.
Best Contractor Accountant
58
59
Freephone: 0500 152500 / 01442 275789 Email: info@sjdaccountancy.com www.sjdaccountancy.com
V.01.12

SJD Contractors Guide

Enviado por

Dados do documento

Descrição original:

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

SJD Contractors Guide

Enviado por

Direitos autorais:

Formatos disponíveis

Contractors Guide

To running your own limited company

Message from the managing partner

Simon Dolan ATII, AT

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

Becoming a contractor ............................................................................. 16

Deciding how to contract.......................................................................... 18

Going Limited as a Contractor ................................................................. 24

Value Added Tax (VAT) .............................................................................. 34

Accounts made easy ................................................................................. 41

Making your business a success............................................................. 46

Glossary ..................................................................................................... 57 Accountancy Package - Service Summary ............................................. 58

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

Contractor Tax - Jargon Buster

Companies House Company Director

The person who is in charge of the running of the Limited company.

Company Secretary Corporation Tax Dividend EBT

Tax paid on any profits in the Limited company.

Employers Liability Insurance Expenses FRS

Insurance which protects against injury to employees.

Is a legal form of company that provides limited liability to its owners.

Memorandums & Articles of Association MSC

NI/NICs PAYE PCG

Professional Indemnity Insurance Public Liability Insurance Section 660a

Insurance used to cover a contractor/business for professional negligence.

Insurance to cover any injury or damage caused to a member of the public.

Legislation to prevent income shifting.

Umbrella Company VAT

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

About SJD Accountancy

Best Contractor Accountant

Our money back service guarantee

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

SJD Accountancy Package

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

HM Revenue and Customs and Companies House

Completion of VAT Returns

Completion of Annual Return

Direct access to your accountant for all help and advice

Free Bookkeeping Software

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

Whats in it for your client?

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

DeCiDinG hOW TO COnTrACT

Working through an umbrella company

Working through your own Limited company

What is a Personal Service Company?

Limited company vs umbrella company Take home pay

Umbrella Company Monthly Take Home Pay

Limited Company Monthly Take Home Pay

Increased Income by Going Limited

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

Limited company vs Umbrella company Advantages and disadvantages

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

Special Schemes, eBTs and Offshore Schemes

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com

GOinG LiMiTeD AS A COnTrACTOr

Forming your Limited company

Setting up a business bank account

What information you will need?

how to choose which bank?

Speak to one of our friendly experts: 0500 152500 | info@sjdaccountancy.com