Tax and Accounts Advice for Freelancers
OK, so PAYE employment is behind you, you're now a free spirit, working when & where you want, and for who you want.
Unfortunately, this now means you need to act like a business owner, and deal with your various responsibilities.
Not least of which is keeping HMRC and potentially Companies House informed as to what you are doing.
You'll also need to get into the habit of saving some of your income to pay your taxes. Gone are the days when your employer takes the correct amount off you before you see it. You'll now effectively be paid by your clients gross, so bear in mind when you get a big cheque that it's not all yours, some of it should be squirreled away for the taxman.
What legal setup should my business?
Your two main choices are being a sole trader, or incorporating your own Limited Company.
Registering as a sole trader is quicker, easier, and cheaper to set up. It also involves significantly less annual admin. If you're unsure what the near future holds for you work-wise, this is often the best way to go, due to its flexibility.
Also, many sole traders will prepare and submit their own personal tax returns without needing to appoint an accountant. If you decide to go down this route, make sure to do a bit of research into what expenditure is allowable, you may be surprised at how many things you can claim.
Incorporating a Limited Company will typically work out significantly more tax efficient if you'll be making profits in excess of £20k per year. This is mainly because you can choose how to pay yourself often making most payments to yourself as dividends which don't suffer National Insurance. It therefore tends to be worthwhile making this step if you'll be doing this full time for the foreseeable future.
Limited Companies also benefit from limited liability. This means if things go badly and you end up owing lots of businesses money, you can potentially walk away. In the current climate, this is of little benefit as it is unlikely many businesses will give you credit in the first place, and the banks will insist on personal guarantees in respect of any borrowing.
Google "company formation" and you'll see there are lots of businesses offering to incorporate companies for you. Be sure to fully consider your options before pressing ahead though, as once incorporated, it's your responsibility.
The legal requirements of statutory accounts, and the combination of corporation tax, as well as personal tax and normally payroll tax submissions typically mean an accountant is essential for all but the most savvy/confident.
Should I register for VAT?
If your turnover (ie total income before considering any costs) exceeds £70,000 (based on 2010/11 tax year), you have to register for VAT. Whilst your turnover is below this threshold it's optional.
The key factor in determining whether you should register for VAT (when you have the choice) is who your typical customers are. Do you mostly work for:
Medium to large corporations - they will certainly be VAT registered themselves, so having to add VAT onto your prices will be of no consequence to them, as they can reclaim it.
Individuals/micro businesses - charging them VAT will make you more expensive, as they will likely not be able to reclaim it.
The benefit of being VAT registered is you can reclaim VAT on all your purchases, your mobile phone bill, those business cards, that shiny Macbook Pro you've been wanting for ages... Alternatively, if your purchases are low, it may be worth looking into the flat rate scheme.
What about keeping my books?
If you anticipate your affairs to be very simple, with not many sales invoices or purchases, and you're not registered for VAT, a simple spreadsheet should suffice. Keep a track of your income, and all your expenditure, broken down by categories (eg travel, phone, stationery etc).
If you're likely to be sending out quite a few invoices, buying lots of things, and perhaps wanting assistance with quarterly VAT returns, then you should probably look to get something a bit more powerful. We personally recommend FreeAgent for freelancers and contractors, as it assists you with so much more than just bookkeeping and is the perfect accompaniment for a one person service business.
It can all seem quite a lot to take in when you're used to your employer doing everything for you. However, as long as you don't ignore it all and stick your head in the sand, you'll be fine.
Film Crew Pro would like to thank Maslins Chartered Accountants for providing us with this helpful article. Maslins Chartered Accountants are specialists in freelancers, contractors, and micro businesses, for more information visit their website: www.maslins.co.uk