For medium term contracts where the turnover is above £50,000 per annum a limited company would be the most tax effective way for the contract to be operated and would also give a number of commercial benefits. A company can be incorporated on-line very quickly.
You will need to decide on a company name; a registered office address (generally your home address); the company director (normally yourself) and the company shareholder(s) – again normally yourself.
The most common way to pay yourself as the director of your limited company is using a mixture of salary and dividends. Keeping your salary low minimises the amount of NICs you have to pay, as dividends do not attract National Insurance (which are due on a sole trader's profits and payments to employees). Therefore most directors take a small salary to cover their tax-free personal allowances and the remainder of their company’s profits as dividends as this is the most tax-efficient payment method. To avoid tax issues with director’s overdrawn loan accounts, the salary is normally paid monthly via the PAYE scheme and a monthly submission is made to HM Revenue & Customs (HMRC) in accordance with the Real Time Information (RTI) regulations.
Any remuneration paid via dividend will need to be documented by creating a dividend voucher. This is a legal document that all companies that issue dividends create and issue to shareholders and most good contractor accountants will normally do this for their clients.
The dividend voucher should detail the date, company name, names of the shareholders being paid a dividend and the amount of the dividend. Once a dividend voucher has been created, you can then actually pay a dividend.
As of April 6th 2016 limited company contractors no longer receive their notional 10% tax credit on dividends. Instead they have been given a £5,000 tax free allowance on dividend income, which is in addition to the £11,000 personal allowance for the 2016/17 tax year. Any dividends that you draw out beyond this limit will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers, which will need to be paid using the self-assessment system.
Even if the company’s turnover is less than £85,000 (the VAT registration threshold) it is possible to register for VAT voluntarily. This can be an advantage if the company’s customers are also VAT registered (they generally are).
It is beneficial for contractor companies to be registered on the Flat Rate Scheme. However the company’s turnover has to be less than £150,000 to qualify for the scheme. This is a more straightforward way of accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases. So, while you continue to charge clients the standard introduced 20% VAT rate, you can potentially give a smaller percentage to HMRC. The FRS rate differs from sector to sector but for IT contractors for example the norm is 14.5%. This is applied to gross sales.
The FRS helps to simplify VAT calculations and record keeping. This is particularly helpful to smaller organisations that may not have the time or expertise to conduct their accounting in the traditional way (and, bearing in mind the increasingly severe penalties that can be charged for errors, this can only be a good thing). It shortens the process, removing the need to keep a record of VAT charged for each individual sale or that paid on purchases. However, you do still need to show a VAT amount on each sales invoice.
The company will need to prepare annual financial statements which are submitted to HMRC along with a corporation tax computation and return form CT600. This has to be done within 9 months of the company’s accounting reference date (year-end).
The company will also need to send accounts to Companies House which are on public record. It is better to send abbreviated accounts which only show limited balance sheet information.
Corporation tax is payable 9 months after the company’s year end and is calculated as 20% of the company’s income less allowable business expenses.
If you’re a contractor working through your own Limited company expenses can be claimed provided they are wholly and exclusively for the purposes of your business. This means you can claim costs like: company formation fees, accountancy fees, business travel and accommodation, postage, stationery, telephone calls, employer’s National Insurance contributions, subscriptions, insurance, contributions to an executive pension plan, business entertainment etc.
You can claim actual meal costs whilst you are working at a remote site, away from your normal place of work, or when staying away from home overnight, but daily, round sum claims for meals are not permitted.
You can claim the cost of travel to and from your temporary place of work. Mileage rates are 45p per mile for the first 10,000 miles in any fiscal year and then 25p per mile thereafter. This allowance is to cover fuel and running costs of the vehicle. You can also claim for parking and the congestion charges, but you may not claim for parking fines or speeding fines. The cost of travel by public transport can be claimed, but you must have a valid receipt.
As a Limited company contractor you can claim accommodation expenses when you are staying away from home due to work purposes. The only qualifying factor is that you have a permanent principal residence.
The cost of hotel or bed and breakfast accommodation can be claimed as an expense, as can the reasonable cost of additional meals taken in conjunction with overnight accommodation. There are no set allowances for accommodation but the cost must be deemed to be 'reasonable'; this also applies to the cost of meals.
Providing that the training course is wholly and exclusively relevant to the performance of your duties under your existing contract then you can claim this as an expense.
As well as submitting a corporation tax return for the company you will also need to submit a personal self-assessment tax return before 31st January each year. This will show your salary and dividends from the company along with any other income such as rent or interest received. You will have a personal tax liability on any dividends over £5,000 and your personal tax is payable on 31st January and 31st July each year.
Accountancy fees vary from contractor to contractor depending upon the number of transactions, the size of the business and the quality of the accounting records. However a general guide is as follows (all fees quoted are exclusive of VAT):
Company set-up, registration for corporation tax and PAYE - £200 Registration for VAT (FRS) - £100 Quarterly VAT returns - £75 per quarter Annual accounts, corporation tax, personal tax - £1,000 per annum Monthly PAYE submissions under RTI = £150 per annum
