When you’re just starting out as a contractor, you’ll need to choose your operating structure. Many are attracted to setting up a limited company as it’s generally considered the most tax-efficient option.
But before you start the registration process, you should know exactly what limited company contracting is, and what it entails. Here, we delve into everything you’ll need to know about this way of operating your business.
Registering as a limited company
In order to set up a limited company, you will need to register with Companies House. This will require a company name, along with a signed memorandum of association and articles of association agreed between any shareholders, directors and the company secretary.
Once the set-up process is complete, you’ll receive a certificate of incorporation. It’s important to note that this means your business data will be made available on Companies House, specifically your name and registered business address.
Salary and dividends
Setting up a limited company means you become the director and can receive a salary and dividends from the income earned. It’s not usually a legal requirement for company Directors to take a salary, but bear in mind that any salary needs to have Income Tax and National Insurance Contributions deducted from it.
Dividends can be paid from company profits after corporation tax has been deducted and will be distributed between the shareholders, based on the company shareholding, so if you appoint another shareholder, they will receive them too. These are taxed at a lower rate than income tax on salary and can be distributed at any time, providing the profit is available. You’ll need to consider the total tax due before you take any dividends and any company taxes should be considered before dividends are paid from company profits. An accountant can help you figure out how much is owed.
Despite the benefits of limited company contracting, there’s also a higher volume of administration work involved. Both this operating structure and being a sole trader require you to invoice clients in order to get paid. You’ll need to manage the entire process, from sending invoices out to chasing them if they haven’t been settled on time. If you work through an agency, it might be that you invoice them instead of the client, and submit timesheets.
You may also have to register for VAT and charge for this on your invoices. This will be the case if your business provides VAT taxable supplies and meets the current threshold (£85,000 in 2018/19). Using the standard VAT scheme, you’ll also be able to reclaim the VAT your limited company is charged for purchases it makes, meaning you will need to keep evidence of these. There are a number of different VAT schemes, such as the VAT Flat Rate Scheme, so you can pick the one that suits your business best.
A major benefit of registering as a limited company is that you can claim on more expenses than if you were to operate under an umbrella company. These include costs such as a business mobile phone, insurances and business travel costs, though you can’t claim for any travel that’s classed as commuting to a permanent workplace. If you work from home, you may be able to claim for expenditures that are business-related.
You should hold on to evidence of these expenses. On top of this, you’ll need to know which ones you can claim. HMRC has specific criteria around what counts as an allowable expense, with the basic definition being that they must be wholly and exclusively used for business. You should consider appointing an accountant who can help in determining the ones that are allowable and calculating the proportionate amount for those that include both business and personal usage.
IR35 legislation can determine whether it’s beneficial for you to opt for a limited company operating structure or not. If a contract is deemed to be inside of IR35, then you will be classed as an employee for that specific one, and any earnings will need to have Income Tax and National Insurance Contributions deducted.
As there will be other taxes deducted from your pay too, this may make another structure (such as the umbrella solution) more suitable for you. You can still have your limited company for any contracts outside IR35, or it can be made dormant until you have an assignment that doesn’t fall within the legislation. It’s a good idea to speak with your accountant to work out the best course of action.
If you operate via a limited company, you will still need to complete a Self-Assessment tax return. All your company transactions should be recorded, including income, outgoings, assets and stock owned, as well as any outstanding debts, whether it’s you or a client who owes them.
The correct amount of tax will need to be deducted from your earnings. You’ll also be required to submit a corporation tax return and, if you’re VAT registered, quarterly VAT returns. Additionally, you’ll need to think about payroll if you have any employees. An accountant can prove extremely useful in helping you figure out what your accountancy requirements are, as well as crunching the numbers for you.
Making Tax Digital
As your limited company is a business, you’ll be required to submit all your accounts digitally on a quarterly basis – though only once Making Tax Digital comes into force. This is currently due to happen by 2020, so it’s best to make sure you’re prepared for it.
You can do this by making use of cloud-based software sooner rather than later, such as FreeAgent. This allows you to see all your business’ finances in real time and from multiple devices – so you can do your accountancy on the go, like submitting expenses via your smartphone. By getting to grips with this new software ahead of time, you’ll be ready for when the digitalisation of tax eventually comes around.
Outsourcing your accounting
Whilst cloud accounting software helps you calculate the numbers, many limited company contractors still choose to outsource this part of their business. The expertise of your own, dedicated accountant can save you time, stress, and the worry about under or overpaying your tax.
At Gorilla Accounting we can help you maximise your tax efficiency. We’ll take care of your limited company’s tax and accounting, so you can get on with running your business without any hassle.
We also provide the best way to deal with your tax depending on your sector and the services you offer. The limited companies we help are across a wide range of industries; engineers, software developers and vets have all benefitted from our specialist knowledge.
To discover more about how we could sort your limited company’s finances, speak to a member of our team today.