Advice on setting up a limited company

Hi Jonathan,

A good solicitor should be able to take a shell company and alter it to your requirements. They will guide you on the various requirements - articles of association etc. and keep you in the straight and narrow.

AIRC, the IR looked closely at limited companies some while ago with IR35 - in essence they were concerned about sole traders setting up as limited companies for the purpose of accessing a more tax beneficial manner of trading. The acid test is the number of clients/contracts a company had - their view was that if you have only the one contract source i.e all your contracts were with IBM they could deem you not to be a true limited company and tax you as an employee - an expensive exercise.

It would pay you to have a chat with a solicitor who specialises in this area - my understanding is based on what was current when my wife set up her company about 7 years ago, so some things may have changed.

Hope this helps.

Brad

You could buy one off the shelf, costs about £100, there are Solicitors firms who set up companies for you, it only takes a couple of days and most of that is waiting for the stuff to come through the post.

Also VAT registration, there is a flat rate scheme which works well, it cuts down on tedious paperwork as the VAT you pay over is related to your turnover rather than the difference between sales and purchases.

Alternatively, if it is a short term thing then an umbrella company may be a better idea. They are run by contractors for contractors. For a fee or a percrentage of your income they do all the paper work for you.

Either way you should find some using Google.

quote:

Originally posted by Yeldarb:
The acid test is the number of clients/contracts a company had - their view was that if you have only the one contract source i.e all your contracts were with IBM they could deem you not to be a true limited company and tax you as an employee - an expensive exercise.

Brad

In some ways you are right but there was a recent test case where a contractor had done work for one company alone for a number of years – the IR lost that case because the wording of the contract (and no doubt some other factors) put the contractor outside IR35. We therefore now have a test case that proves that the length of a contract (or series of contracts) in no way makes you a ‘disguised employee’.

You do have to tread carefully, and there are things you should and shouldn’t do in order to place yourself outside IR35. Having your own website (advertising your companies services), having PI and employer’s liability insurance all help but the key is the wording of the contract – if it says you’ll turn up from 9 ‘til 5 and do what you are told to do then you’re screwed. IR35 investigation insurance is a good idea too.

There are various groups that can help and advise – the PCG (Professional Contractors Group) and the Shout99 website are good.

Best bet is to speak to an accountant who understands the IT contractor market i.e. one who has a number of IT contractors as clients – asks contractor colleagues for a recommendation.

I would say though that if you are only doing this for a limited period then it might be worth considering an umbrella company who take away all the hassle for a not too big cost. A contractor friend of mine has just stated using http://www.giantgroup.com, having run his own Ltd company for years – he reckons it’s less hassle and his net income is no different!

Hope this helps.

Matt.

Guys,

Many thanks for your help. Good news is that I got the contract to start 22nd August and have also been offered a sim ride with BA. I am looking at the umbrella options and reading up on the subject. If I wanted to buy a car during the period can I offset that against tax even if using an umbrella organisation or would that require me to operate as a limited company?

Just interested in views on the best way to go.

Much appreciate the replies.

Take care,

Jonathan

Jonathan,

Congratulations that's great news - a real double-whammy!

Best of luck with the sim test!

Cheers,

Jon

Jonathan,

You will need to get a good accountant, then contact Companies House (http://www.companieshouse.gov.uk/) to obtain the company registration forms (form 10 and 12). Also obtain a "Memorandum and Articles of Association" from a legal stationers. These forms will be needed to be submitted to Companies House.

You will then need to contact Inland Revenue within a month of registering in order to register for income tax and VAT.

Andrew

Folks,

Many thanks for the advice given so far. It seems that I have essentially three choices for how to go about being an IT contractor. At present one is far more attractive in taxation terms than the other two but I'd welcome views on whether exploiting existing tax loopholes is a wise idea.

Option 1 is to establish a limited company and pay an accountant around £1200-£1400 a year for helping me administer it. Doing it this way seems to mean I would retain around 55% of my gross earnings, perhaps a little more if I offset some of my income by buying a new car etc.

Option 2 is to operate under an umbrella organisation who will handle all my accounts in return for an administration fee of around £100 a month. Doing things this way would leave me with around 50% of my gross earnings

Option 3 is to become an employee of a consultancy company based in the isle of man - Their quotation to me would enable me to retain around 84% of my gross earnings by paying me a moderate salary and then distributing the excess profits via an untaxed employee benefit trust based offshore. I do have a friend who has been using them for 5 years and says it has been wonderful for him. However I certainly do not want to do anything illegal or which could leave me stuck with a hefty tax bill on top of their already high charges of 10% of my gross income.

If there are any contractors or accountants here with a view I'd be glad to hear it.

Many thanks,

Jonathan

Jonathan,

I'm astonished - whichever way you go it looks like you're having to give up an awful lot of your gross earnings...unless you're including the potential tax liability in your figures?

Cheers,

Jon

Jonathan has taken account of his potential tax liability.

Re Jonathan's questions:

A quick but no means exhaustive over view.

Option 1 - company formation is inexpensive. If you want a hassle free route for company formation engage local accountant/solicitor. Must register with Inland Revenue for Corporation Tax purposes. Should register for VAT. Should consider registering a PAYE scheme to pay a salary (even at modest levels to maintain NIC record). Open bank account. You will need to maintain the books on a regular basis, make quarterly VAT returns, operate payroll. You will be required to prepare annual accounts for filing at Companies House. These will form basis for Corporation Tax computation and return. Beware of filing deadlines otherwise penalties apply. Company will pay Corporation Tax on it's profits. You will need to complete personal tax returns and put aside sufficient to pay personal Income Tax liabillty particularly if you draw dividends. To minimise the risk of IR35 implications you will need a proper contract between the company (include certain key clauses eg rights of substitution, etc) and customer, consider initial shareholding in your company carefully in order to avoid settlements implications. Advice - see a local accountant. Tip - the better & more accurate your record keeping the lower the accountant's fees.

Option 2 - far less hassle than option 1 although theoretically you will not be quite so well off as under option 1. What does the administration fee of £100 per month cover - at face value that looks good value for money.

Option 3 - I have doubts over the validity of this option, particularly from the consultancy company's point of view. In which case what does their agreement with you provide for in the event of IR challenge. BTW the Inland Revenue are actively looking at abuses of EBTs. It may be that they have a sound scheme but without seeing their promotional literature and looking at the mechanics of their scheme I would tread carefully and I would rather comment no further.

If I were in your shoes I would seriously consider option 2 because of the ease of administration. It would be advisable to clarify what all their charges are. You will still need to allow for the preparation of personal tax returns and to allow for Income Tax on dividends. I say this because umbrella organisations often distribute income by way of a combination of salary and dividend.

Car - as a rule do not buy a car via the limited company otherwise binks will apply. There are still some scenarios where company cars do work out better. Outline what vehicle you have in mind, your total expected annual mileage and the business element and I will provide you with my thoughts! If you go via option 2 or 3 then you may make a claim for mileage (useing tax free rates of 40p per mile for first 10,000 business miles and 25p thereafter) within your tax return. Beware - you must maintain a record/log of trips undertaken in the event of enquiry by Inland Revenue.

Hope this helps.

Mike

Jonathon,

Have a look at JSAgroup.co.uk. They'll provide a complete service wether you want your own Ltd. company or to run under one of their umbrella companies. Have used them for 9 years now (and my brother for 8yrs) and can highly recommend them.

Willy.

Mike/Willy,

Many thanks for the considered replies. I have asked a HIgh Street accountant who has some IT contractors on his books to givve me an idea of take-home going the limited company route. I don't think my take-home will be much higher though unless I can justify being outside IR35 and apparently the contract with Computerpeople isn't really negotiable and isn't favourable in that respect. We will see what he says but I am leaning towards the umbrella route because it's so much less hassle.

I have ruled out the Isle of Man EBT option on the grounds that it seems dodgy and I don't want any comebacks. At the end of the day I don't want to be greedy. My take-home is still more than double my old BA salary so I can't really complain although the IR making me pay both employees and employers NI sticks in the craw a bit!

Jonathan