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08-05-2014 3:46:00

Broadcast Freelancers’ Guide to Starting a Limited Company (and what invoicing and accounting software you can use)

Tom Pammenter|Freelance, News

Why set up a limited company?

Many self-employed broadcast freelancers are starting a limited company (or planning to start one). But why are they making this shift?

The answer, simply, is because they have to.

An EU directive meant that new employment regulations – Agency Workers’ Regulations –were introduced in the UK in October 2011, designed to give temporary workers entitlement to some of the same conditions that their counterparts in permanent positions enjoy, after twelve weeks’ employment in the same role.

Designed to protect the working and employment conditions of contractors, freelancers and temporary workers, this administrative change has led to an increasing number of broadcast freelancers setting up limited companies.

Not surprisingly, it’s financially-driven: employers would rather engage temporary workers from limited companies than those who are self-employed (and operate as sole traders) – essentially to reduce the risk of having to pay benefits avoid having to compensate for holidays, sickness, bonuses and so on.

The regulations don’t specifically exclude those who work under their own limited company. But people who are genuinely self-employed and work without supervision or direction are not regarded as ‘agency workers’…and that includes many broadcast freelancers – hence employers preferring to hire people who have a limited company.

Limited v Self Employed – from a tax and legal perspective

There are many differences between trading from a limited company and working self-employed as a sole trader.

Working as a sole trader is the simplest form of self-employment, requires no registration fees and book-keeping in this kind of operation is relatively straightforward.

However, you are personally liable for any debts you/your business might accrue, which can be a risk.

Limited companies, on the other hand, by their very nature are often regarded as a more serious concern and, as such, they require more detailed and carefully management.

One of the biggest differences between running a limited company and working as a sole trader is that a limited company’s liability is limited to its assets, meaning that if the company were to run into financial difficulties, your personal assets (for example, your home) are safe.

Further details about setting up a limited company are provided below.

From a tax perspective, the savings that can be made by trading through a limited company are among the biggest attraction of making the switch in the first place.

Even when you consider that when you work for your own limited company, you are liable for personal income tax and the company is liable for corporation tax, on the whole you still save on the amount you’d have to pay as a sole trader.

Drawbacks

One of the disadvantages of running a limited company is that your administrative fees increase: accounts typically charge upwards of £500 for their services for limited companies and there may also be an additional cost for filing your company’s accounts annually with Companies House.

Bear in mind, as well, that penalties applied when limited companies miss deadlines (for example, to file accounts at Companies House) are higher than for sole traders.

We should also point out that your accounts, when they’re submitted to Companies House, become accessible by the general public – including your clients (but you’ll usually be able to submit an abbreviated set of accounts which keeps this to a minimum).

VAT

Finally, on this issue, there is the question of VAT rates and registration thresholds. You must register for VAT with HM Revenue and Customs (HMRC) if your business turnover is more than £81,000. You can register voluntarily if it’s below this amount (unless everything you sell is exempt).

Consider, also, the Flat Rate Scheme for VAT, under which you pay VAT as a fixed percentage of your VAT-inclusive turnover. The actual percentage you use depends on your type of business. This is from the HMRC website:

If your VAT taxable turnover is less than £150,000, you could simplify your VAT accounting by calculating your VAT payments as a percentage of your total VAT-inclusive turnover.

Although you cannot reclaim VAT on purchases – it is taken into account in calculating the flat rate percentage – the Flat Rate Scheme can reduce the time that you need to spend on accounting for and working out your VAT.

Even though you still need to show a VAT amount on each sales invoice, you don’t need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase.

If you are newly VAT registered you can reduce your flat rate by 1% until the day before the first anniversary of your VAT registration.

IR 35 – another key piece of legislation

As well as AWR (which you can read more about here), another significant administrative introduction has been IR35, legislation that’s designed to eliminate tax avoidance through the use of intermediaries. Before its introduction, people could avoid being taxed as an employee by providing their services through an intermediary.

They would then receive payment for work, via the intermediary, in the form of dividends – which are not liable to National Insurance Contributions (NICs) (nor does PAYE apply to dividends). This “disguised employment” was targeted by IR35. This post goes into more detail about IR35.

More legislation: new pension contributions laws coming in

New rules governing pension contributions will mean every worker will qualify for a company pension in legislation called ‘automatic enrolment’. Under this scheme, all employers will have to provide workers with a workplace pension scheme by law over the next few years (the biggest employers started doing this in October 2012).

How to set up a limited company – in a nutshell

Overview – you must appoint people to run the company and register it at Companies House. As mentioned above, the ‘limited’ aspect of a limited company refers to its liability – any debts the company incurs are limited to the company itself (specifically, its assets) rather than the people (or person) who own it.

Registering your company – this has to be done (by you or a third party) with Companies House. You’ll need the company’s name and registered address, at least one director, at least one shareholder, details of the company’s shares (known as ‘memorandum of association’) and rules about how the company is run (known as ‘articles of association’).

Company name and address – the names of all private limited companies in the UK must end in either ‘Limited’ or ‘Ltd’ and the name can’t be the same as any other name on the Companies House index of names. Neither must they contain a ‘sensitive’ word or expression (unless you get permission), suggest a connection with government or local authorities or be offensive.

Directors and company secretaries – Limited companies must have at least one director and that person is legally responsible for running the company. The person must be older than 16 and not be someone disqualified from being a director. You can make another company a director but at least one of your company’s directors must be an individual.

Shareholders – When you register a company you’ll need to make a ‘statement of capital’ which details the number of shares the company has, their total value (known as the company’s ‘share capital’) and the names and addresses of all shareholders (known as ‘subscribers’ or ‘members’).

Every limited company must have at least one shareholder. There’s no maximum number. Directors can be shareholders.

Articles of association – these are the rules about running the company that shareholders and ‘officers’ (directors or company secretary) have to agree to, and you must have these when you register your company. Most companies use standard (‘model’) articles but you can change them or write your own as long as the company doesn’t break the law.

Set up your company for Corporation Tax – you must give HMRC specific information about your company within 3 months of starting up and once you’ve got your company’s Unique Taxpayer Reference (HMRC will use this to calculate when your company must pay Corporation Tax).

You must tell HMRC:

  • the date you started in business
  • your company name and registered number
  • the main address where you do business from
  • what kind of business you do
  • the date you’ll make your annual accounts up to
  • if you’ve taken over a business or you’re part of a group

Links

Agency workers’ rights – government webpage

Setting up a limited company – advice from gov.uk

Flat Rate Scheme for VAT

HMRC Factsheet – downloadable PDF

Employed and self-employed tax – HMRC webpage

Business support helplines (Government-backed).

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