first steps guide to running a limited company

FIRST STEPS GUIDE TORUNNING A LIMITED COMPANY

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Contents

Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .031. Company Set Up . . . . . . . . . . . . . . . . . . .042. Bank Account . . . . . . . . . . . . . . . . . . . . . .063. PAYE/NIC . . . . . . . . . . . . . . . . . . . . . . . . . .084. VAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105. Corporation Tax . . . . . . . . . . . . . . . . . . . .126. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .157. Accountant . . . . . . . . . . . . . . . . . . . . . . . .178. NixonWilliams . . . . . . . . . . . . . . . . . . . . . .189. Testimonials . . . . . . . . . . . . . . . . . . . . . . .2010. Invoicing . . . . . . . . . . . . . . . . . . . . . . . . . .22

11. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .2512. Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2613. Dividends . . . . . . . . . . . . . . . . . . . . . . . . .2814. IR35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3015. Tax Returns . . . . . . . . . . . . . . . . . . . . . . . .3116. Timetable . . . . . . . . . . . . . . . . . . . . . . . . .3217. Premier Plus Service . . . . . . . . . . . . . . . . .3418. Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . .3519. Detailed Guide to Expenses . . . . . . . . . .3620. Detailed Guide to IR35 . . . . . . . . . . . . . . .4521. Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . .51

FIRST STEPS GUIDE TORUNNING A LIMITED COMPANY

FIRST STEPS GUIDE TO RUNNING A LIMITED COMPANY | 03

WelcomeI am pleased to provide you with this First Steps Guide to Running a LimitedCompany with the compliments of Nixon Williams. Nixon Williams are one of theleading accountancy groups who specialise in providing accountancy services andsupport to contractors, consultants and freelancers.

You have taken the first step with the successful formation of your own Limited Company;the aim of this guide is to take you through some of the legal and financial matters thatyou now need to consider. This guide is only intended to provide a brief explanation ofwhat is involved and aims to deal with the main issues. If you need more details, pleaserefer to our website www.nixonwilliams.com or call one of the team on 01253 362000.

All you have to do is send us copies of invoices, expenses, company bank statements andany forms you receive from HMRC etc - we take care of the rest!

Alan Williams ACMA

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One. Company Set Up

Congratulations on the formation of your company. Itwould be a good idea to now check that it has beenformed as you wanted, the main areas to check are:

1. The company directors are as you requested, there must be at least one director.

2. Company Secretary - small companies no longer need to appoint a CompanySecretary, if you do have one, now is the time to check that it is who you requested.

If you decide that you no longer wish to have a company secretary, simply complete a288b form and post to Companies House.

3. Registered office - this is the legal address for your company. Check that the companyhas been set up with the address you want.

4. Shares - the allocation of shares is normally done when the company is formed, checkthat the shareholder(s) are as you want.

You can download an 288b form from our website, www.nixonwilliams.com - look under Online Resources and then downloadable forms.

NIXON WILLIAMS


Nixon Williams willarrange anychanges to your‘company set up’ aspart of the servicewe provide to ourclients.

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Two. Bank Account

One of the first actions after thecompany has been formed is to open acompany bank account. There arenumerous banks, all very keen to openan account for you, however for simplicityand a great deal, it is unlikely that youwill find a better option than using ourrecommended bank, Cater Allen.

Contact the office for details – we can do this even if you are not a client.Call us on tel: 01253 362000 or email: [email protected]

NIXON WILLIAMS

* Cater Allen and the flame logo are registered trade marks


Cater Allen’s deposits are fully and unconditionally guaranteed by AbbeyNational plc, which is part of the Santander Group, one of the 10 largestbanks in the world.

KEY FEATURES:

• Operated by telephone, post and online

• In-branch deposit taking available at Royal Bank of Scotland branches.

• 30 free day-to-day banking transactions per statement month.

• VISA Deferred-Debit Cards available

• Monthly statements by post as well as downloadable transaction listings by Internet

• View balances, pending credits and payments online

• Set up and manage Standing Orders, Direct Debits, transfers and payments online

• Attractive tiered interest rates on balances over £5,000

• Interest is calculated daily and credited quarterly

• Full cheque book and banking facilities on Sterling accounts

• Can request interim or duplicate statements.

Due to our special relationship with Cater Allen, there is no minimum balance and no charges payable (providedyou do not exceed 30 transactions per month) if we arrange the account for you.

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Three. PAYE/NIC

If you intend to pay a salary, then you will need to set upa PAYE (Pay As You Earn) scheme with HM Revenue &Customs (HMRC). Nixon Williams offers this registrationservice free of charge to all new clients.

HMRC will allocate a reference number to your company and the company will berequired to deduct tax and National Insurance from any salaries paid to directors andemployees.

There are several PAYE responsibilities you have as a director, the main ones being:

1. Deduct & pay to HMRC, Income Tax and NIC from salary payments.

2. File Annual Returns to HMRC by 19th May after the end of the tax year.

3. Report benefits & expenses paid to directors and employees by 6th July after the end of the tax year.

It is important that you get this right from the start; there are various penalties that can beincurred for not getting it right.

Contact the office for detailsCall us on tel: 01253 362000 or email: [email protected]

NIXON WILLIAMS


“Thank you for sorting out my accounts so promptly.Already, I have confidence that moving to you was a verygood decision and I can understand why my previouscolleagues were so forthcoming in recommendingNixon Williams.” Daniel R - Surrey

BASIC FACTS FOR 2009/10

1. The tax free allowance is £6,475 – so tax is not payable on the first £6,475 of earnings.

2. The next £37,400 of salary is taxed at 20% - any salary above this (i.e., above £43,875), is taxed at 40%

3. The NIC free allowance is £5,715 – so NIC is not payableon the first £5,715 of earnings. Different rules apply to Directors and if you start part way through a tax year.

4. The next £38,160 of salary has NIC deducted 11% - any salary above this (i.e., above £43,875), has NIC deductedat 1%

5. The employer (i.e., your company!) will have to pay NIC at the rate of 12.8% of any salary above £5,715

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Four. VAT

VAT is a tax that is normally added to the value of yourfees, currently the rate is set at 15%. So, if the invoicefor your services is £2,000 you would add £300 (£2000 x15%), making the total invoice £2,300.

You must register for VAT if the annual turnover of the company will exceed £68,000(2009/10) – although we would recommend that you register, even if your turnover will notreach this threshold. An additional benefit is the VAT Flat Rate Scheme – this is a schemeto simplify the operation of VAT and, in most cases will save you money. The typicalannual savings are in the region of £1,000 to £1,500. To join the scheme, your turnovershould not exceed £150,000 per annum.

Nixon Williams offers this registration service free of charge to all new clients.

There are several VAT responsibilities you have as a director, the main ones being:

1. Complete a VAT return every 3 months – the blank VAT return is usually issued at least6 weeks before it is due.

2. The return is due at the end of the month, following the return period. So, if the returnis up to 31st December, the return is due by 31st January.

3. Pay any VAT due at the same time as the VAT return, so you have at least 4 weeks afterthe return period to make the payment.


It is important thatyou get this right fromthe start; there arevarious penalties thatcan be incurred fornot getting it right.Nixon Williams arehappy to take care ofall this for you.

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Five. Corporation Tax

Soon after your company has been formed atCompanies House, HMRC will issue a form“Corporation Tax - New Company Details” – this will be sent to the registered office, so if this is not at your address, check that this has beencompleted.

By completing this form HMRC will register your company for Corporation Tax; this is the tax payable on the company profits.

Corporation Tax is currently charged on profits at 21% for small companies, although this is due to increase to 22% from 1st April 2010.

Company profits are generally calculated by taking away the business expenses (salaries, travel expenses etc) from the turnover.

Nixon Williams offers this registration service free of charge to all new clients.


NIXON WILLIAMS


“May I take this opportunityto say thank you for yourhelp and professionalassistance & services thisyear, it has made my firststeps in business go a lotsmoother than I could everhave hoped for.” Mark C -Hampshire

There are severalCorporation Taxresponsibilities youhave as a director, themain ones being:

1. Complete a Corporation TaxReturn every year – this is filedwith HMRC together with a set ofannual accounts, within 12 monthsof the period end date.

2. Pay any Corporation Tax due – thisis payable 9 months (+ 1 day) afterthe period end date.

It is important that you get this rightfrom the start; there are variouspenalties that can be incurred for notgetting it right.

Nixon Williams are happy to takecare of all this for you.

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You may wish toconsider joining theProfessionalContractors Group(PCG); they representcontractors andconsultants withHMRC etc.


Six. Insurance

Generally there are three types of insurance that you need to consider.

Employer Liability Insurance - this covers the employer against claims by an employee for injury etc. This cover is no longer required if you are the only employee and you own at least 50% of the shares.

Public Liability Insurance - to insure you against claims from third parties that may sue if they have suffered because of your actions.

Professional Indemnity Insurance – to insure you against any claims made against you, for example, if software written by you does not work.

There are several insurance providers, many of whom offer special packages for contractors and consultants. One of the top providers is QDOS – there is a link to their site at the bottom of our website homepage,www.nixonwilliams.com

A combined Employer/Public liability can be purchased from £93 and a Professional Indemnity policy from £132

PCGYou may wish to consider joining the Professional Contractors Group (PCG); they represent contractors andconsultants with HMRC etc. Their website is www.pcg.org.uk - if you decide to join, you can get a 15% discount if you quote “nixwil”.

Contact the office for details – we can do this even if you are not a client.Call us on tel: 01253 362000 or email: [email protected]

NIXON WILLIAMS

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Nixon Williams areone of the fewaccountancy firmsthat have neveroffered MSC orumbrella options.


Seven. Accountant

Take care to choose an accountant that you can work with, they can bevery useful in steering you through the tax and reporting issues thatyou will encounter. Some factors you may want to consider are:

Contractor Specialist – Using a specialist firm can be a good decision; they tend to have detailed knowledge ofthe special tax issues that concern the freelance market. Nixon Williams have specialised in providingaccountancy and tax advice to contractors, consultants and freelancers since 1995.

Qualifications – anyone can call themselves an “accountant”, so check that the firm you deal with has qualifiedstaff. At Nixon Williams, 1 in 3 staff has an accountancy qualification, and a further 1 in 3 are training for one.

Communication – speak to a few accountants, choose one that you feel comfortable with and can speak to you ina language you understand.

History – many accountancy firms who specialise in the contractor market have converted from the provision ofManaged Service Companies (MSC’s) and/or umbrella companies. Nixon Williams are one of the few accountancyfirms that have never offered MSC or umbrella options.

Fees – accountancy fees can vary widely and it can be hard to distinguish between different options. There aresome firms who will charge as much as they think they can get away with; at Nixon Williams we charge a verycompetitive fee for a fully inclusive service.


NIXON WILLIAMS

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Eight. Nixon Williams

What our Premier Service covers:

• PAYE & VAT registration• Assist with opening a company bank account (subject to status)• Operation of the payroll system• Monthly calculation of profits so you can choose the amount of dividends• Advising when PAYE/NIC payments are due• Calculation of VAT Returns• Submission of the annual PAYE Returns (P35, P14 & P60’s) online• Annual P11d preparation from your records• Prepare Annual Accounts and any Annual Returns• Prepare business tax returns• Mortgage/tenancy references• Personal Tax Return (provided it is received by 31st July each year)• Free Fact sheets and Guides available on our website • Regular News Updates emailed direct to you • Unlimited Helpline• NO spreadsheets to complete!• Direct telephone number of your Account Controller

All the above Premier services are covered by our fixed fee of £75+VAT per month (just £900+VAT per annum).


“Thank you for allyour very helpfulinformation – just as afeedback, yourmanner and emailsare exactly perfect forwhat I would expectfrom an accountancyfirm, and youanswered all of myquestions from myfirst email, which noother firms I’ve madeenquires with havedone.” Peter O - London

Nine. Testimonials

“I’ve recommended Nixon Williams to many colleagues and will continue to. Thanks very muchfor an excellent service!” Ashley M - London

“It was refreshing to speak with somebody that actually had an interest in helpingcustomers, a rarity I’ve found recently.” Andrew T - North Yorkshire

“Thanks for that; you have been very helpful. I think I should have gone withNixon Williams from the start.” Steven P - Lancashire

“Great talking to you today. Feel like I’m in capablehands for a change, quite refreshing actually.” M C - West Yorkshire

“May I take this opportunity to say thank you for your helpand professional assistance & services this year, it has made my

first steps in business go a lot smoother than I could ever have hoped for” Mark C - Hampshire

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“Could I just say once again how fantastic the services are from Nixon Williams. You have been so kind and good to me. It’s really great.!” Paul K - Newcastle upon Tyne

“Thank you for sorting out my accounts so promptly. Already, I have confidencethat moving to you was a very good decision and I canunderstand why my previous colleagues were so

forthcoming in recommending Nixon Williams.”Daniel R - Surrey

“I’ve just had a visit from a VAT lady togo over my accounts. She said it wouldtake most of the day. I got a call from her1 hour later as she was leaving, sayingeverything was in order and said it was

unusual to find accounts in such good order.She said your accountant keeps your records

in an excellent state.” Gary S - Merseyside


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You can download an invoice template from our website, www.nixonwilliams.com – look under Online Resources and then templates.

NIXON WILLIAMS

Ten. Invoicing

So that you can receive payment for your services youwill need to issue an invoice to your client.

Legally, an invoice must contain the following details:

1. Company Name, address and registration number2. VAT number3. Invoice date 4. Invoice number - this should be a consecutive number, although a prefix

can be used if you wish.5. Itemised breakdown, showing the chargeable period, rate etc.

“Thank you once again for the prompt response – I’m glad I chose yourcompany - you instil confidence in people like me who have neveroperated a limited company before!” Stephanie D - Hampshire


Self-Billing - If you source yourassignments through an agency, theymay operate a “self-billing system” –this will generate an invoice for you,so there is no need for you to issueone. In fact if you use a self-billingsystem, HMRC regulations prohibityou from issuing your own invoice.

Expenses – if you invoice forexpenses incurred, remember to addVAT on top of the expenses, VATshould be added even if the expensedoes not have any VAT.

There is no legal need to strip outthe VAT although some clients insiston this, so that they are not chargedVAT on VAT – call our office if youneed clarification.

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If you are unsureabout any expenses,please contact the Nixon Williams officefor advice.

Eleven. Expenses

One of the most common questions is often, “What expenses can Iclaim?” There is no easy answer to this as all expenses must be“wholly & exclusively” for the business. However, typical expenses that may be claimed include:

• Salaries

• National Insurance Contributions (Employer’s)

• Employer pension contributions

• Business travel (including mileage and public transport)

• Accommodation whilst away from home on business

• Subsistence whilst working away from home

• Accountancy Fees

• Mobile telephone costs

• Postage and stationery

• Home office costs

• Business computer equipment and software

• Internet connection

• Technical books and publications

• Business entertaining

• Subscriptions to approved professional bodies

• Bank charges (if you are paying bank charges you need to change banks!)

You can find ourdetailed guide to

expenses on page 36


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Twelve. Salary

What level of salary to pay is a something you need tomake a decision on. Assuming that the IR35 rules donot apply to your contract, the two main options arewhether to pay at the level of the tax & NIC freeallowance (£5,715 for 2009/10) or a salary at the level ofthe National Minimum Wage (NMW).

Currently, the NMW is set at £5.73 per hour, so based on a typical 37.5 hour week, thiswould equate to an annual salary of £11,174. Paying an extra £5,459 as salary will meanthat you will pay PAYE of £940 and employees NIC of £600, adding in the employer NIC of£699 makes an extra £2,239 payable to HMRC.

However, paying a higher salary would attract Corporation tax relief of £1,293, so the netextra taxes payable would be £946. (940+600+699-1293)

Clearly there would have to be good reasons why you would opt to pay an additional £946in tax each year.

Contact the office for details Call us on tel: 01253 362000 or email: [email protected]

NIXON WILLIAMS


The NMW applies to all employees although HMRC have statedthat they would not seek to enforce it for directors of a company.So this appears to be an option to pay a salary at just £5,715.However, where there is a contract between the director and hiscompany, the NMW would apply. Whilst few clients have acontract between themselves and their company, remember thatcontracts do not necessarily have to be in writing, there could bean implied contract!

Our view is that the HMRC exemption for directors would onlyapply to “director’s duties” – this covers the duties of a director,dealing with accounts & legal aspects of being a director. Mostclients and contractors spend most of their time doing the work togenerate fees for the company, work that would be covered by theobligation to pay a salary at the current NMW rate.

All of our clients are free to choose the rate they wish to have as asalary, but clearly we would recommend that a salary at the currentNMW rate should be paid.

Whilst few clients have acontract betweenthemselves and theircompany, rememberthat contracts do notnecessarily have to be inwriting, there could bean implied contract!

“Thanks for the analysis – it is great to havesomeone deal with these matters so quicklyand professionally.” Mark C - Hampshire

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Thirteen. Dividends

Dividends are a portion of post tax profits paid to theshareholders, the owners of a Limited Company.Dividends are always declared and paid net of notionaltax at a rate of 10%.

This 10% tax credit is not actually paid by the shareholder or the company – it is treatedby HMRC as a deemed payment of tax. Before declaring a dividend the company shouldensure that there are profits available to support the dividend payment. Once this hasbeen satisfied the company holds a board meeting to declare the dividend.

There are no limits to how many dividends that a company can declare; however in realityone a month is usually sufficient.

Taxation of Dividends

Provided that the recipient of the dividend is not a higher rate tax payer then no furthertax will be due on the dividend. The dividend received would be treated as tax paid.

Higher rate tax payers will be liable for an additional charge on any dividends that exceedthe higher rate threshold.

Nixon Williams will calculate the profit and prepare the dividend vouchers on your request.Call us on tel: 01253 362000 or email: [email protected]

NIXON WILLIAMS


Example

Net Dividend £900 90%

Tax Credit £100 10%

Gross Dividend £1,000 100%

Basic rate and non-taxpayers willreceive £900 with tax fully paid – thereis no further liability.

Higher Rate Taxpayers will be liablefor additional tax as follows:

Gross Dividend £1,000

Tax @ 32.5% £325

Less Tax Credit £100

Net Additional Tax Due £225 (=25% of net dividend)

Net Dividend after tax £675 (=75% of net dividend)

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Fourteen. IR35

IR35 was introduced in April 2000 and is designed tocombat what HMRC call “disguised employment”. Theaim is to increase the tax paid by people who set uptheir own company instead of working as a normalemployee.

Where a company provides the services of a member of staff to a client (either via anagency or directly) and the terms are such that without the intermediary (company), theindividual would be an employee of that client, then the IR35 tax treatment is triggered.

The deciding factor is to establish whether you are classed as “employed” or “selfemployed”. There is no statutory definition of employment; however HMRC will look atseveral factors to help decide which side of the fence the engagement lays.

Contact the office for details Call us on tel: 01253 362000 or email: [email protected]

NIXON WILLIAMS

You can find ourdetailed guide to IR35 on page 45


Fifteen. Tax Returns

As a director, HMRC willexpect you to complete apersonal Tax Return each year.

The Tax Return will include details of all yourincome, such as salaries, interest, dividends etc.Allowable deductions such as pension andcharity contributions are also declared.

The Tax Return is normally due with HMRC by31st January after the end of the tax year, this isalso the date any outstanding taxes are due.

Nixon Williams can complete the tax return foryou as part of our service, provided we receive itby 31st July after the end of the tax year and it isrelatively straight forward, failing that our normalfee for clients is £79 per return.

Tax Returns are normally issued by HMRC in theApril each year, if you have not been issued withone, you should contact HMRC to request one.

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Sixteen. Timetable

This is a summary of the various dates you should beaware of:

Companies House - Abbreviated Annual accounts to be filed at Companies House within9 months of the year end. (Earlier dates apply to the first year).

Annual Return (363) is prepared at the anniversary of the company’s incorporation, it isthen due 28 days after this date.

HMRC - Full Annual Accounts & Corporation Tax Return (CT600) to be sent to HMRCwithin 12 months of the year end. (Earlier dates may apply to the first year).

Corporation Tax - payment of Corporation Tax is due 9 months after the year end.(Earlier dates may apply in the first year).

VAT Returns and payment are due at the end of the month following each quarter. As an example:

Quarter ending 31st March Due by 30th AprilQuarter ending 30th June Due by 31st JulyQuarter ending 30th September Due by 31st OctoberQuarter ending 31st December Due by 31st January


NIXON WILLIAMS

FIRST STEPS GUIDE TO RUNNING A LIMITED COMPANY |33

PAYE

P35 & P14’s are due after the end of each tax year. They shouldreach HMRC by 19th May after the end of the tax year.

P11d & P11d(b) are due after the end of each tax year. Theyshould reach HMRC by 6th July after the end of the tax year.

PAYE/NIC deductions from salary should be paid 14 days afterthe end of the period. Assuming that the company is eligible forquarterly payments they will be due by:

Quarter ending 5th April Payment due by 19th AprilQuarter ending 5th July Payment due by 19th JulyQuarter ending 5th October Payment due by 19th OctoberQuarter ending 5th January Payment due by 19th January

Class 1A NIC - this relates to National Insurance on certainbenefits in kind such as company cars. If this applies thispayment is due by 19th July following the end of the tax year.

“I would like to say, howimpressed I am with thelevel of service I havereceived so far: with thefriendliness of those Ihave spoken to on thephone and the speedand ease with which ithas been to set up.”Kim H - Surrey

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Seventeen. Premier Plus Service

You may wish to consider our Premier Plus service thisprovides some additional services that some clients finduseful. The services covered by the Premier Plus serviceincludes:

• All of the Premier services listed previously• Dedicated Account Manager• Priority Service• Priority Pre-Paid envelopes to send your details to us• Email/text alert service – we will email/text you on receipt of your paperwork and

when we have processed it for you.• We will email and post your payslips, monthly calculations and other paperwork • Quarterly Management Accounts• Companies House Annual Return filed online• No time limit for submission of your Personal Tax return (other than HMRC limits)• Contract Status Assessments for IR35 (upto 3 per annum)

All of the above Premier Plus services are covered by our fixed fee of £95 + VAT per month (just £1,140 + VAT per annum)


aEighteen. Checklist

1. Check over the company formation documents

2. Open a company bank account

3. Arrange to have your contract reviewed

4. Register a PAYE scheme with HMRC

5. Register for VAT

6. Apply to join the VAT Flat Rate Scheme

7. Register for Corporation Tax

8. Purchase any relevant insurance policies

Appoint Nixon Williams as your accountant to take care of points 1 to 7

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Nineteen. Detailed Guide to Expenses

We have detailed some of the common expenses thatyou may wish to consider. Please take a few minutes toread through this guide and check that you arecomplying with any conditions for claims that you maybe making.

Background

Expenses are allowed for expenditure that you need to incur to run your business. Theexact type and level of expenses can be very complicated and it is important to read thisguidance and act accordingly.

Expenses incurred by the company must be “wholly and exclusively” for the purpose ofthe business. Where the non-business purpose is merely incidental to the businesspurpose, a claim is still possible.

If any expenditure has a dual purpose, then this expenditure will generally not beclaimable. An example is clothing, you need to wear clothing whether you work or not, sothe dual purpose prevents a claim.


Nineteen. Detailed Guide to Expenses (Continued)

Salaries

A salary paid to the director (assuming they are the fee earner for the company) will be an allowable expense, togetherwith the National Insurance Contributions (NIC).

If the contract is not caught by the IR35 regulations then you are free to pay whatever level of salary you wish. We wouldadvise that a salary is paid at least equal to the National Minimum Wage rate, currently £5.73 per hour. On average thisworks out at around £10-12,000 per annum.

Salaries to the Company Secretary/Partner

Whilst in theory this is possible, in reality this can be quite hard to justify. You can pay the going rate for secretarialsupport etc but this generally will not amount to very much.

Typically, the support work for a contractor’s company will be minimal, say 1 hour per month. At a rate of say £10 perhour you are looking at an annual salary of just £120!

Our advice would be to leave this; the new Companies Act has removed the requirement to have a Company Secretaryfrom 6th April 2008.

Home Office Costs

The easiest method to claim for this is to claim the flat allowance of £156 per annum, no receipts are required and this isallowed by HMRC if you use part of your house as an office. Simply claim on your expense form and it will be includedin your accounts.

38

Nineteen. Detailed Guide to Expenses(Continued)

Travel Costs

Tax relief is available for travelling/accommodation expenses, which involve two types ofjourney:

• Journeys which you have to make in the performance of their duties; and• Journeys, which you make to or from a place they have to attend in the performance

of their duties - but not journeys which, are ordinary commuting or private travel.

Relief is available for travel between home and a temporary workplace.

A temporary workplace is where you go there to perform a task of limited duration or for a temporary purpose.

Whether you can treat their workplace as temporary depends upon how long you arebased at one particular site or expect to spend at one site, the amount of time spent at aworkplace is also considered.

In most cases a temporary workplace will be one were you do not, NOR expect to be at the site for more than 24 months.



Example

If you sign a twelve month contract (at a new location), then you will be able to claim for most of the travel/accommodation costs involved. If, at the end of this contract you extend it for a further twelve months, at this stage youexpect to be at the site for a total of at least 24 months and so any claims for travel/accommodation would cease at thedate you sign the contract. If you extended for just 11 months, you could continue to claim, because at this stage you donot expect to be at the site for 24 months.

There are some special circumstances that may affect any claims, please contact the office if you require further details:

• If you are only based at one site whilst working through your company and then you close the company, i.e. you only ever work at one site whilst working through your company.

• If you work at more than one site on the same contract• If you generally work at various sites within a defined location (e.g. City of London)

Mileage Allowance Payments

The following rates can be claimed for business journeys:

Per Tax Year First 10,000 miles Miles over 10,000

Cars 40p 25p

Motor Bike 24p 24p

Cycle 20p 20p

Other forms of travel (train, bus, plane, etc) are also eligible, however ensure that you obtain receipts for the journeys,overuse of taxis are not generally accepted so please avoid excessive use.

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Accommodation

Hotels & Guesthouses

Where an employee stays in a hotel or guesthouse, relief is permitted in full for the costsactually incurred. As always the invoice should be in the company name and suppliedwith the expense claim form.

Rented Flats

In many cases furnished accommodation (e.g. flats) can be obtained as a cheaper andmore convenient alternative to hotel accommodation. Provided that the total cost of theaccommodation is appropriate to the business need and is reasonable and not excessivetax relief should be allowed.

The cost will be accepted as reasonable where the total cost of providing theaccommodation does not exceed the cost of hotel accommodation of an appropriatestandard.

In all cases (hotels/guesthouses/flats) you may also claim for the provision of breakfast andan evening meal. The cost of a sandwich etc purchased on the way to a temporaryworkplace can be claimed, although this does not include lunch prepared at home etc.

If you are staying away from home due to business commitments you may also claim for asubsistence allowance of £5/night (£10/night overseas). This is intended to cover smallincidentals such as laundry, newspapers etc.



Mobile Telephones

The provision of one mobile phone is exempt from any tax charge. The exemption covers the telephone itself, any linerental and the cost of private calls paid by the employer on the telephone.

Notes: • The number of phones provided for private use is restricted to one;• Mobile phones provided to members of your family and household are excluded;• To qualify, the contract must be in the name of the company and paid from the company bank account.

Internet Access

You can claim for the cost of Internet/Broadband access at your home subject to the following:

• There is no separate billing or record of access connections (if there is, then you can only claim for the business connections);

• No breakdown is possible between work and private connections;• Private use is not significant;• The contract must be in the name of the company and paid from the company bank account.

Computer Equipment

If you require the use of a computer/laptop in order to carry out your duties then you can claim for the cost of providingone. If you are on the VAT Flat Rate Scheme (as we recommend) then you will only be able to reclaim any VAT if the totalcost is in excess of £2,000.

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Pension ContributionsPension Contributions made by your company to a pension scheme will no longerautomatically be allowable for tax relief.

From 6th April 2006, pension contributions can only be claimed if it can be shown that thecontributions have been incurred “wholly and exclusively” for business purposes.

HMRC may try to establish whether the pension contribution has been paid for a “nontrade purpose”, i.e. does the contribution benefit the person far more than the business?

HMRC have stated that they will not challenge an overall remuneration package and itssplit between salary and pension contributions. Provided the overall contributions do notexceed the annual allowance of £245,000 – there should not be an issue with makingcompany contributions in excess of the salary paid.

We would advise you to consult with your pension advisor prior to making any pensionarrangements. Nixon Williams Limited are not authorised to offer advice regardingpensions and other investment products.

It would seem that HMRC would accept pension contributions as part of an overallpackage made up of salary and pension contributions. Remember that personal taxrelief (for pension contributions) is capped at 100% of the salary paid.

Currently there is not much difference in the tax benefit between contributions paidpersonally or by the company, although there is a marginal benefit for personalcontributions in most cases.



Training Costs

Work-related training costs can be paid by your company provided that the purpose of the training is to upgrade orenhance your current skills. If the purpose of the training is to gain new skills, the cost will be treated as capitalexpenditure and your company will claim Capital Allowances.

Notes: • The training must be designed to impart, instil, improve or reinforce any knowledge, skills or personal qualities which are likely to prove, useful when performing your duties.

• Costs associated with the provision of the training are allowable, such as travel and hotel accommodation.

Insurance

By law, every employer must take out a policy for employer’s liability insurance, which covers the employer against claimsby the employee for injury etc. This cover is no longer required if the company only employs its owner and they own atleast 50% of the shares.

Other insurance’s that you may consider taking out include:• Public Liability Insurance – to insure you against claims from third parties that may sue if they have suffered from your

actions.

• Professional Indemnity Insurance – to insure you against any claims made against you, for example, if software writtenby you does not work.

Medical InsuranceThe company can pay for medical insurance (e.g. BUPA, PPP) however this would always be taxed as a benefit in kind,and the company would pay NIC of 12.8% on the cost. The policy must be in the company name or you will also beliable for personal NIC payments.

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Christmas Party/Annual EventAn annual event, commonly a Christmas Party, is an allowable expense for the companyand you will not be taxed upon it providing you meet the following conditions:

• The total cost must not exceed £150 per head – if the cost is just 1p over then thewhole cost will be subject to tax and NIC, not just the amount over £150;

• The event must be open to all staff, although in reality that will just be you!• You may invite a partner, but if partners are invited, all staff must be entitled to invite a

partner – invited partners will count for the £150 per head allowance.

Business EntertainingBusiness entertaining is not an allowable expense, whilst you can claim for any suchentertaining the cost will be disregarded when calculating the taxable profits of yourcompany.

Miscellaneous ItemsOther costs that can be paid by your company will include:• Accountancy Fees• Postage costs• Stationery and computer consumables

IMPORTANTTo avoid potential problems with anything you wish to claim for, it is vital that it is yourcompany that makes the contract and pays for the expense you wish to claim for. This isparticularly important when claiming for a mobile phone, internet connection, computerequipment and training costs. Where possible, obtain the receipt in the company name.


Twenty. Detailed Guide to IR35

The main relevant factors to consider are:

Direction and ControlThe right of direction and control should be considered. It is not necessary to prove that the person carrying outthe work is doing so under very detailed supervision because even professional persons can be operating under ageneral and overall framework of control from the end client.

a) What is done - the right of a client to move the worker to different areas of higher priorities will be a strongindicator of employment.

b) When it is done - control over when the work is done may be an indicator of employment.

c) Where it is done - when you are required to work on your client’s premises this can be an indicator that therewill be other control aspects to the engagement. If you can do the work wherever you like, this tends to indicateself-employment.

d) How it is done - this is a very strong indicator of employment; it permits the client to prescribe the way inwhich the work is to be carried out. However, the absence of this level of control does not necessarily indicateself-employment, it is unusual for someone of a particular skill to be told how to do their work, but this does notmake them self employed.

Suggestion – to avoid being caught out, the contract and the actual working arrangements should be asfree as possible from aspects of control. Being able to work from your own office (even if only part of thetime), be relatively free to decide your own working hours/days will help towards this area being a non-IR35pointer.

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Twenty. Detailed Guide to IR35(Continued)

Right of SubstitutionPersonal service is an essential element of a contract of employment. A person who hasthe freedom to choose whether to do the task themselves or hire somebody else to do it(on a reasonably unfettered basis) for them, is probably self employed.

Suggestion – a right of substitution written into all contracts, including beingacknowledged by the end client and that your company would pay any substitutewould help establish your right to substitution.

Provision of equipmentA contractor engaged to undertake a specific piece of work using his or her own toolsand equipment will be a strong pointer to self-employment. If the contractor wereprovided with equipment this would be a pointer to employment.

Suggestion – provision of your own tools, equipment and office facilities can pointtowards self-employment and show certain financial risk.



Financial riskAn individual who risks their own money, such as buying assets, bearing running costs and paying for overheads, isprobably self-employed. The risk of not being paid for an invoice would not qualify; this would be viewed as bad luck.Financial risk could also take the form of quoting a fixed price for a job, with the consequent risk of bearing theadditional costs if the job overruns.

Suggestion – working for a fixed price, agreeing to correct defective work (at your cost), providing your owninsurance cover will support a case for self-employment.

Basis of paymentEmployees tend to be paid by fixed rates, paid weekly, monthly etc. and may also be paid for overtime. Self-employedcontractors tend to be paid a fixed sum for a particular job.

Suggestion – if you cannot charge a fixed price, try to issue your own invoice rather than relying on timesheets,steer away from using terms such as “overtime” and try to get any expenses included in the rate. If you mustcharge for expenses, include on the invoice and do not use the client’s claim forms.

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Length of engagementLong periods working for one client may be typical of an employment but not conclusive.Regular working for the same client may also indicate that there is a single and continuingcontract of employment.

Suggestion – ensure that the contract does not contain any clauses that preventyou from working for other clients at the same time. Having more than onecontract on the go will strengthen the case towards self-employment.

Mutuality of Obligation (MOO)Mutuality of Obligation would normally appear in all contracts, i.e. an obligation on eachparty to provide something. The internal guides for HMRC staff suggest that they ignorethis test when considering the IR35 status of a contract. This is quite a complex test but aJudge was critical of HMRC’s instruction to ignore it.

This tests if any obligation exists between the client and the contractor. Contracting viaan agency would not result in an actual contract between the client and the contractoralthough this test sees if there is an imaginary one. If the client simply pays the contractoror agency for services then it may be that MOO does not exist and so not an“employment” situation.

Suggestion – ensure that the contract clearly sets out what is expected and noadditional work is done. Longer, continuous contracts would have a harder timeovercoming a self-employment test.



In Business On Your Own AccountTo show if a person carries out business on their own account, it is necessary to take account of all aspects of thebusiness form an overall view. If your business looks like a real business this will strengthen your case.

Suggestion – aspects that would help towards showing that you are a genuine business include, having your ownoffice and equipment, more than one client at a time, business telephone, stationery, other sources of income etc.

Day to Day workingIf HMRC investigates your contract they may contact the end client and seek information on how you actually work. Ifyou are seen as an integrated part of the organisation this can weaken your case for self-employment status.

Suggestion – try to avoid acting similar to employees of the client, such as:

• Using staff facilities and benefits such as car parks, canteens etc.• Appearing on internal phone lists & email addresses• Joining in on staff events such as social events, Christmas parties etc.• Managing employees of the client• Similar work patterns/holiday leave as employees of the client

If your contract and your actual working practice points towards self-employed status then the IR35 rules will not apply.

You should be targeting the points in the Suggestion boxes above to ensure that self-employed status and exemptionfrom IR35.

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Effect of the IR35 rulesOn the assumption that the engagement falls under the IR35 rules, the “deemed salary”will have to be calculated. Certain expenses can be deducted from the income arisingfrom relevant engagements, as follows:

• Travelling and other expenses covered under Section 336 ITEPA 2003• Employer contributions to approved pension schemes• Employers National Insurance Contributions• A flat rate 5% of the gross income from relevant engagements – receipts will still be

required for Corporation Tax purposes - the 5% deduction will be allowed in all casesto calculate the deemed salary.

• Professional indemnity insurance• Professional subscriptions

We would recommend that you have all your contracts reviewed, we recommend theservices of QDOS Consulting – visit their website via the link on the home page of ourwebsite.


Twenty One. Glossary

225 Companies House form to change the yearend date of the company

287 Companies House form to change theregistered office of the company

288a Companies House form to appoint a newDirector or Company Secretary

288b Companies House form to remove aDirector or Company Secretary

288c Companies House form to change anydetails of a serving Director or CompanySecretary

64-8 Form to authorise HM Revenue & Customsto provide company details to youraccountant

652a Companies House form to strike a companyoff the register

88(2) Companies House form to issue additionalshares in the company

CT41G New Company Enquiry form issued by HMRevenue & Customs shortly after thecompany has been formed. This advises theRevenue who the directors are etc. Penaltiesmay be charged for late submission

CT600 Company’s Corporation Tax Returnsubmitted annually. The form is due withintwelve months of the year end

P11d Annual statement of benefits and expensespaid to each director and most employees.

P11d(b) Annual company declaration that P11d’shave been submitted to HMRC

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P14 Annual statement for each employeeprovided to HM Revenue & Customs by theemployer

P35 Annual company summary of all employees P14’s

P45 Leaving statement of payments and tax deducted from an employee

P46 Notice to complete if you do not have a P45

P60 Annual statement for each employee provided to the employee by the employer

VAT1 VAT Registration application form

VAT7 VAT Deregistration Form

VAT100 Quarterly VAT Return

VAT600 VAT Flat Rate application form

Twenty One. Glossary (Continued)


Notes.

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first steps guide to running a limited company

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