[Closed] Setting up a Limited Company for contracting?

Is this usual?

Yes, although not strictly necessary. I'd suggest its not a bad idea anyway - it provides you a little protection if you screw up professionally or financially at work.

It seems pretty straight forward to do but also seems unnecessary and adds accountancy complications further down the line.

Some people use it to their advantage to avoid some tax. You build the costs of the accountancy, liability insurance etc into the rate you are charging.

Ex contractor here - it's pretty simple, but google IR35 as you're likely to be deemed to be within it if working for a single client.

It may be worth using an umbrella company to avoid the accountancy hassle. Keep your claims for expenses within the IR35 limits and avoid any fancy tax avoidance schemes as HMRC have been cracking down retrospectively.

It's a doddle and, to be honest, you don't really need an accountant as assuming you're a one-man band drawing an income through salary and dividends and claiming legitimate expenses, your 'books' are really simple and there's things like FreeAgent and Xero that will pretty much do it for you. I'm just winding my company up now as I've taken a permie position, but if I went contracting and LtdCo again I'd probably not bother with an accountant.

Or, an accountant is about £150 a month (payable out of the LtdCo and, as above, should be factored into your rate), and will do everything for you.

IR35 is the big thing at the moment though...

Have a look at contractoruk.com, but the two main options outlined above.

If you are IR35 caught, you only get 5% of your income to cover your business running costs.

As above be wary of the ir35 legislation if you only have one client as you might be classed as an employee of the company your are providing a service for.

It also helps if you will be working from home and using your own equipment rather than the clients office and PC's.

I've had to look for extra clients and now have 4 different ones. So that should see me outside of ir35.

As above be wary of the ir35 legislation if you only have one client as you might be classed as an employee of the company your are providing a service for.
It also helps if you will be working from home and using your own equipment rather than the clients office and PC’s.
I’ve had to look for extra clients and now have 4 different ones. So that should see me outside of ir35.

I think you need to look into the IR35 rules, as multiple clients doesn't cut it any more; your IR35 status is assessed per client, by the client. You could well be deemed inside IR35 by one and outside by another, at the same time.

Thanks for all the advice.

The majority of the work will be offshore with possibly some project documentation stuff at home.

At the moment I have 1 client lined up but hopefully will be picking some more work up in the next few months.

That Free Agent and Xero software looks interesting. I don't think I need an accountant as it should be pretty straight forward, invoicing client and a few straight forward expenses, PPE, medical, safety training etc. The client sorts flights, hotels etc.

Is there some other software options worth looking at?

I think you need to look into the IR35 rules, as multiple clients doesn’t cut it any more; your IR35 status is assessed per client, by the client. You could well be deemed inside IR35 by one and outside by another, at the same time.

I was going to ask this, I currently do a few days a month for a company, paid PAYE, but there's no contract, holidays, pension, or all that good stuff (but the pay per day is very good). And about to start a 2nd job working in a classic car garage (more likely to be minimum wage but more fun and zero stress).

Is it worth it? Anyone got a link to an honest calculator, google just throws up a load of accountants saying "we can get you upto 86% of your gross" or similarly unrealistic figures.

I feel a bit aggrieved by IR35, seems a tradesman spends £10k on a van and some tools and is outside IR35 as a result. An engineer spends £40k on a degree and is inside IR35 because they work on a £250 PC provided by someone else.

The fact is that a lot of contractors were paying themselves the absolute minimum, f all in the way of tax, and scooping the rest up in dividends. it's not really any wonder that HMRC felt they should do something to put a stop to it, is it? there are good arguments for a flexible workforce and the lot of a contractor is not all sunshine and lollipops i know but some guys were kicking the absolute arse out of it.

Agreed some contractors have screwed over everyone else.
A mate of mine tried to get a carpet on his stairs through his business as he said it was leading to his office. Just little things like that are taking the p##s.

I've completed the HMRC CEST test and have landed outside ir35 for now.

But that could all change tomorrow so who knows.

I've also got liability insurance and professional indemnity insurance which helps as it shows you are a business. I know a lot of contractors who don't have these.

The fact is that a lot of contractors were paying themselves the absolute minimum, f all in the way of tax, and scooping the rest up in dividends.

They paid tax on the dividends. In fact they paid tax on the dividends twice; firstly in their LtdCo as Corporation Tax on the profits that allowed the dividends (dividends being a distribution of profit after tax) and then again personally on the dividend amount they received.

They paid tax on the dividends

And corporation tax on profits. There's a big difference in having a LTD 'shell' company and actually operating as a limited company. The problem the OP has come up against is many customers have procurement rules mandating you must by a limited company.

If you are limited, then my view is you should have the appropriate insurances. We get asked to provide them by most universities I work for.

Going the Ltd route is more about avoiding National Insurance. Minimal salary, tax on dividends but NI can be avoided.

Is there some other software options worth looking at?

I just use excel. Pretty easy to just chuck the numbers in, give everything a code and some notes in other columns then at the end of the year it's a simple job to shuffle it round and add up each bit for the tax return.

Warily looking at IR35. Have been off the radar as could provide good case for doing my own thing, and there's a one year reprieve, but not looking so good - the test says I'm an employee.

I don't see much prospect of other clients, the client is unlikely to take me on permie, so worst case is I stop working. And re-enter the job market. Lovely.

Surely the "worst case" is that you pay the correct tax and carry on working for your current client/"employer".

Surely the “worst case” is that you pay the correct tax and carry on working for your current client/”employer”.

Not if he decides he doesn't want the hassle of PAYE for what is at the end of the day a very freelance arrangement. Not sure what you suggest - I do pay the correct amount of tax thanks. The arrangement is not designed to minimise tax, not sure where I stated that. Pay NI and calculated tax. No clear guidance yet on whether it comes under IR35 or not. Happy to take specialist advice though.

That's where an umbrella (accountancy)company comes in, they handle your payroll and expenses, and pay you PAYE.

Basically you become an employee of the umbrella for a fixed fee, and they sub you out to your customer.

Surely the “worst case” is that you pay significantly more tax than the correct tax you were already paying and carry on working for your current client/”employer”.

whilst having none of the rights that come with employment, like sick pay, holiday pay, paid maternity/paternity leave, employer pension contributions etc etc etc

Mmmm there's someone I know about to start a contract at HMRC on an outside IR35 contract 🤔

Agreed some contractors have screwed over everyone else.

It seems more often the employer than the (disguised) employee that is most motivated - for instance in the OP

it seems that they want me to be registered as a Limited Company for the contract.

they’re not giving him friendly advice they want him Ltd Co for their benefit.

while it may well be that there are tax savings for the employee its often the employers that are gaming the system - if the employee is bringing in enough for the tax savings to be meaningful then the employer is saving a fair old whack too.

Warily looking at IR35. Have been off the radar as could provide good case for doing my own thing, and there’s a one year reprieve, but not looking so good – the test says I’m an employee.

I don’t see much prospect of other clients, the client is unlikely to take me on permie, so worst case is I stop working. And re-enter the job market. Lovely.

Unless the client is a "small business" then it will be their responsibility to do the IR35 assessment, and also their liability if later disputed by HMRC.

@paul0 - as it happens I would imagine they are classed as a small business. Looks like I might need to have a decent chat with my accountants (and the client). I’m a bit stuck in the middle but unless advice is to crack on someone will have to budge significantly.

You will also need liability insurance - check to see what level of cover they require you to have

And run a credit check on the company you'll be invoicing as well as checking when they intend paying you

On the IR35 front, there are some fairly simple things you can do to make sure you are outside it in the eyes of HMRC, mainly around what your contract stipulates and how you conduct yourself. As has been mentioned, your client will assess whether they believe you are under IR35.

The important change that is happening is that your client will have to take the liability (I.e. any fines, etc.) from the next financial year. That is one of the reasons they have to do the assessment; to manage their own risk.

If they are offering you a Ltd company contract, they should be fairly certain that you will be outside IR35. Get a contract off them, get it checked by a decent lawyer and follow the basic rules on how you conduct yourself (google contractors unlimited).

I was a ltd company contractor for 20 odd years up to just before COVID and liked the way it worked. I would plump for Freeagent from your description of what you're about to do but I'd also recommend employing an accountant for help / advice when setting up and when submitting your yearly accounts. It should be about £500 a year for someone half decent.

Final bit of advice, pay yourself a decent base salary (about the 40% tax band) and take the rest in dividends. This at least shows willing to HMRC that you're not avoiding NI excessively.

I am an accountant with clients that do this. Happy to have a chat if you want. Send me a PM.

IR35 can be an issue, but depends on the client organisation. I don't have direct experience of someone that has fallen foul of the rules. If thr clint co is paying for training, flight, etc on your behalf, that may be more problematic becuase you're more like a member of staff.

The break even point for ltd co vs paye is about £50k a year, but would depend on the type of contracting you are doing and industry you're in.