Tag Archive | "expenses"

Employees don’t understand their firm’s expenses policy

The majority of companies do have an expenses policy in place, but apparently employees do not know how to interpret it properly.

Research by Concur, the travel and expense company, found that £9.85 out of every £100 spent on expenses last year was outside that firm’s expenses policy. Staying at non-preferred hotels and flying business class for short distances are prime examples of instances where company policy was ignored.

Contractor accountants may like to keep an eye out for examples of this as only 1.2% of expense submissions were rejected as outwith company policy last year.

David Vine, one of Concur’s senior directors said that companies do understand that it is important to have an expenses policy in place but some of them are having problems making sure it is understood and implemented correctly.

Last year companies spent £692 million on expenses that should have been rejected. However, 95% of VAT recoverable expenses were backed up with a valid receipt in 2011; in 2010 the figure was 89%, so there has been some improvement.

Employers have been focusing on persuading employees to back up their mileage claims with a valid VAT receipt, and to a certain extent it is working. 74% of mileage claims submitted last year were backed up by a VAT receipt; up from just 59% the year before. However, this does mean that a valid receipt is missing in 26% of cases.

Mr Vine finished off by saying that the VAT increase in January last year has encouraged firms to make sure expenses are covered by valid VAT receipts but mileage is still a problem child.

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Reed loses long running battle with HMRC over salary sacrifice

You may have been following the recent tax case involving HMRC and specialist recruiter Reed.

The long running battle revolved around the travel and related expenses incurred by temporary job candidates.

Reed’s agents made expenses payments to about half a million temps between 1998 and 2006. The daily “allowance” covered travel expenses up to £11.45 and up to £6 for lunch. These were supposed to be included in a salary sacrifice arrangement, but it turned out that no such agreement covered the period in question.

HMRC argued that the temporary workers were engaged in job-by-job contracts and not a continuous contract as claimed by Reed.

The recent tax tribunal judgement implies that Reed manipulated salary figures to make it look as if a part had been sacrificed when in fact the temps actually received their full payment. The tax tribunal also said that although there were signs that Reed received initial approval for their scheme, there may have been a ‘cock-up’ at HMRC and it was entitled to claim backdated tax.

Reed’s problem is that it is unable to reclaim the total of £158 million in National Insurance and income tax from the temporary workers. Reed Global, the owner of the company, is disputing the figure and intends to appeal the tribunal’s decision and ask for a judicial review into the treatment it has received from the Revenue.

However, the tribunal ruling sounded emphatic. The judges said they were satisfied that the allowances constituted Chapter 1 earnings, and even if that was incorrect, they classed as Chapter 3 earnings that should have been declared for tax and NICs.

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Why is Tony Blair hiding behind a limited partnership?

Accountants for contractors might be interested to learn more about the recently published accounts of former PM Tony Blair.

Once he left his job as Prime Minister in June 2007, Blair adopted an opaque business structure, channelling millions through a complex network of companies. The net result of this tangled web was that it looks like he paid only a fraction of the tax he should have done.

Tony Blair managed the majority of his business affairs through Windrush Venture, a management services company. Last year the company posted income of £12 million and expenses of £10.9 million. Blair paid corporation tax on the £1.1 million profit at the rate of 28%.

However, questions have been raised about the sheer size of the administrative expenses. After paying for salaries, rent and office equipment and furniture, almost £8 million remains unexplained.

Blair set up his corporate structure as a limited partnership and he is keeping this as a tightly guarded secret. Nobody knows how much money is contained in the LP. But why is he operating a totally secretive organisation?

Tony Blair has exploited legal loopholes to ensure the limited partnership does not need to file public accounts. The Windrush accounts, on the other hand, are prepared according to accounting and regulatory guidelines, and audited by KPMG.

Conservative MPs recently supported calls for a new tax avoidance rule, and Ed Milliband, the Labour leader, is calling for responsible capitalism. Under his current accounting regime, it doesn’t look like Mr Blair would fit into the category of responsible capitalist!

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My 8 step guide to a multi-billion pound business

After a lot of study and reading all kinds of authoritative sources I think I’ve worked out a business idea that lets you build a multi-billion pound business over the course of a few years. Like all projects it has a logical plan to make sure everything happens as it should. It goes like this:

First, you need to have a workforce based in a lower-cost economy than ours, which isn’t actually that hard to achieve these days. Even our expensive European cousins are trying very hard to drop down to a third world economy rather than accept the Euro is doomed. However, basing it outside Europe is preferable.

Then you need to reinterpret the meaning of the phrase “business specific”. Make it mean “works for you and can read”. This is important; if you want to deploy your workforce over here they need to be able to get in (not that hard to do, apparently) and be permitted to work here. That needs a Visa, but luckily you can use the ICT option. That allows you to import workers who have particular knowledge of your business. Hence the need for reinterpretation; if you don’t, they won’t qualify as ICTs and you can’t use them.

These valuable workers need paying of course, and there are rules about that. For less than a year’s stay, for example, they have to be paid £24,000. Not a problem, it only says you have to pay them that, what they actually get is a different matter. After all, you are paying for the travel and accommodation, so let’s offset that against the £24,000. That way you can pay them a little bit more than they get at home and spend the rest on their expenses. Or even yours.

Ah yes, accommodation can be expensive. Best way to economise is to share it among as many people as possible. After all they’re only here temporarily so can rough it for a while.

Better make sure the workers never ever let anyone see their pay slips while we’re at it. Wouldn’t want to disclose our margins, would we?

Right, so now we have a skilled workforce in place at roughly a third the cost of the locals. Time to drum up some work for them to do. So let’s sell them to UK businesses as a cheaper alternative to using the expensive workers they normally employ. With the money saved earlier we can afford to put them out at two thirds the usual charge, so the client must be making a big saving. Easy.

Then, once we have control, we have other options to maximise revenue. If there’s a bug in something, don’t try and fix it, that’s just a fudge. Rewrite it properly, from scratch. Much more work for your workers to do, not only re-writing it but testing it and releasing it and re-training the users.

More work means more people; don’t really care how good they are. Better get some more ICTs organised then. Advertise back home that you’ll sponsor an ICT for a mere £1000, no actual job offer required. That will get the applicants flooding in.

And when the locals kick up a fuss, persuade some senior politician – ideally one who is rapidly approaching sainthood – that the skills don’t exist locally and you have the only alternative. Make sure the skills don’t exist locally, of course, by only advertising roles at non-viable rates that only your workers can live with.

And the final bonus point: in only a few years you will have killed off the local industry totally and have it all for yourself.

Brilliant plan, isn’t it? Guaranteed to succeed. Wonder why nobody’s thought of it already…

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

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Accountants speak out against BIS cash accounting proposals

Will contractor accountants suffer if the latest cash accounting proposals from the Department of Business, Innovation and Skills are written into law?

The latest plans to reduce red-tape for micro-businesses were drawn up in conjunction with the Financial Reporting Council and if approved would mean the UK’s smallest entities would produce simplified trading statements and annual returns.

It has also been suggested that these businesses adopt cash accounting rather than the traditional accruals method of recording transactions. Cash accounting is seen as a simpler way of book-keeping as it records income when it is received and expenses when they are paid. Despite this, accruals accounting is still considered to give a better reflection of the financial status of a company.

If the new proposals were adopted, smaller businesses may not be so reliant on accountants. The mid-tier firms have been putting on a brave face and saying that they would be able to tailor their services to meet the needs of micro-businesses.

However, questions have been raised as to whether the cash accounting proposals would be acceptable under EU law. The European Commission proposed to exempt micro-businesses from some of the regulations governing the preparation of company accounts back in 2008, and although the European Parliament accepted the motion, the Council of Ministers did not. Therefore BIS would be in contravention of EU law if it implemented its cash accounting proposal.

Meanwhile, the majority of accountants seem to be against the proposal. John Davies, the head of technical at ACCA, said cash accounting reports would be inferior to those of other companies, whilst the Accounting Standards Board’s chairman, Roger Marshall, said small businesses need the picture provided by accruals accounting in order to assess whether they are running at a profit or a loss.

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IoD favours OTS proposals for cash accounting for SMEs

The Institute of Directors has come out in favour of cash accounting for small and medium sized enterprises, saying the system more closely reflects the way non-accountants understand profit.

The OTS recently published its discussion paper about creating a simpler income system for the UK’s smallest business. In it, the Office pointed out that a lot of SMEs probably use cash accounting already, without HMRC noticing.

Some contractor accountants have squashed the proposal, saying that we are so used to accruals accounting that it would be too complicated to change to a simpler way of doing things.

Danielle Stewart, from Baker Tilly, pointed out it doesn’t make sense to switch to cash accounting because all accounting software is geared towards the accruals method.

However, Richard Baron, the head of taxation at the IoD said cash accounting is the leading option and the OTS paper is a step in the right direction. It’s nonsensical to continue the way we are going, with thousands of small business owners struggling to get to grips with the technicalities of accountancy.

We already have a cash accounting scheme in place for VAT, whereby businesses can use cash accounting if their taxable turnover is between £1.35 million and £1.6 million.

The IoD did question the suggestion that small business owners and freelancers could claim fixed allowances for expenses, such as running an office at home. The Institute felt thus could lead to large differences in the tax charged and the amount that would be due if such expenses were worked out accurately. Baron said that profits are still the most sensible basis for calculating taxation.

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Good contractors are worth every bit of their day rate!

Regular readers will know I have never had a lot of respect for the average agency, thinking that most of them exhibit a degree of professional casualness totally at odds with their advertising. Today, for example, I got another email offering me work as a support technician in the Midlands at a whole £20k a year. Be still my beating heart.

But this week, one of them has managed to surpass even that fairly mediocre level of success.

Someone in Hays thought it a good idea to remind the people contracting through them to RBS to complete their timesheets prior to the bank holiday weekend. So they sent out an email, with, for some reason, an attachment. Followed very quickly – but not quickly enough, needless to say – by a recall of the email.

Why? Because the attachment contained a list of 3000 contractors, their day rate, the day rate to Hays and a few other interesting details. It seems that some of these contractors are on really quite juicy rates. Oops…

OK, so perhaps that’s the rate for a senior HR manager in charge of a multi-million pound restructuring programme, but needless to say the ignorati rapidly jumped on the bandwagon, demonstrating a total lack of knowledge of several fairly key areas.. The meeja started it, shouting about excess salaries for temporary staff. A spokesman from Unite – who, let us not forget, are representing workers and so might be expected to have at least a working understanding of the labour market – started banging on about “overpaid contractors” taking work from “permanent staff”. Assorted comments in a range of newspapers picked up the baton. A shadow Treasury Minister came out with the same line. OK, so he’s a politician of course, so we shoudn’t expect too much wisdom perhaps.

The thing is, to a man they were going on about excessive salaries. Nobody can possibly be worth that much (well they can, actually, work out the cost of employment of a permie on an £80k salary plus bonus and package). And what is more, as ony fule kno these aren’t salaries, they’re payments to companies for services rendered. To convert them into salaries, you have to knock off the long list of expenses that contractors have to cover for themselves – employers NICs, holiday pay, sick pay, pensions, expenses, bench time funding, corporation tax and all the rest. And even then you probably haven’t got to a salary since you don’t know how much the contractor is taking back out of his company.

Or perhaps these deluded souls actually think that the fitter from British Gas charging you £80 an hour to fix your boiler is on £166,000 a year salary? I suppose that’s quite likely, given the state of our education system…

The really sad thing is that we have a unique and highly effective contractor workforce in this country. Its end clients – like RBS – recognise its worth and understand the economic realities that make a contractor a very good use of money. One recent client of mine paid £60k for a contractor’s services over several months, but he left them with a £430,000 saving. Which I, and they, think is actually not a bad return.

Good contractors are worth their day rate. Such a shame that people who probably understand that perfectly well prefer to distort reality in the pursuit of cheap, and very hypocritical, political point scoring.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

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Who said we need to import skills to ensure success…?

I was somewhat taken aback this week to read that someone in government had had a fit of the vapours and said something sensible. Even more confusing was that this was from the Labour side of the House. Although, just to restore my faith in human nature, he’s been shouted down by the rest of his side.

This was Lord Glassman, who has said that we need to put a freeze on immigration. Not a cap or a phased reduction, but a total stop, with the sole exception of the small number of skilled people we actually need to encourage to come over.

Of course none of this would be an issue if we had a better history of controlling who’s coming in, but we are where we are. At least we have some much more effective rules in place to bring a bit of sanity to the ICT system these days, which is the bit that really concerns us IT people. And for which, let us not forget, we owe a debt to the work the PCG has been doing over the years.

But as usual, nothing is as it seems.

There’s a bit of a debate going on about the new rules, centring of all stupid things on payable expenses, that well known fiddle factor beloved of the umbrella companies and assorted MPs…

But I digress. The rules set a minimum salary for the ICT candidate. However, with the usual stunning clarity of purpose, they haven’t actually defined how that salary should be made up. So you can include, for example, the costs of bringing your worker over here and giving them somewhere to live while they’re here.

Then we get into the Kafkaesque realms of do we include expenses paid for travel and accommodation while working somewhere else? I mean, let’s just think about that for a moment. You ship someone into the country, pay for their accommodation and give them a living wage. Then they have to go somewhere else on your behalf, for which you are paying the bills (or damned well ought to be). So how can that be part of their gross salary? Because I’m willing to bet that they never see any of it; if they did, their payslips wouldn’t be subject to the same level of secrecy as those nice people at GCHQ.

And just to pile on the ineptitude, the rules are being arranged so that “the taxpayer is not disadvantaged”. Excuse me? Taxpayer? The taxpayer, to the man on the Clapham omnibus, is someone who has a life here, a permanent address, is known to the gentlemen at HMRC. He’s not just popped over to perform a limited engagement (much of which seems to be to learn how to do the job so he can take those skills back home). And since his prime purpose is to take away work that could be done by someone who does live here, I’m afraid I’m not all that minded to be fair in how he gets paid.

Other countries have twigged this. Canada, for one, is taking positive action. How typical of our team that we try to treat them fairly and actively assist them in their efforts, less we tread on someone’s toes.

Talking of treading on toes, let’s give a small Hurrah for the PCG. Actually no, let’s make that a very large one. They have won not one but two trade awards, for electronic communication and membership success, against some much bigger (and older) organisations. Bearing in mind this is a very small team, the impact their work is having where it matters is out of all proportion.

Who said we need to import skills to ensure success…?

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

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Do employees really show dishonesty with their expenses?

Employee expenses are a major cause of concern for nearly 80% of SMEs and accountants for contractors, according to a new survey.

Concur, the online expenses management business, also found that 27% are concerned that employees claim for things they are not entitled to. A quarter of employers believe staff might be spending too much and 31% think some expenses are not necessary but they do not have the time to check.

On average, small and medium sized enterprises spend 13 working days every year managing expenses. This takes up more time than investigating new markets or thinking about their firm’s future.

Furthermore, the research discovered that 20% of employees spend up to £270 per year but do not claim it back. Lawrence Gold, the presenter of the BBC programme Bank of Mum & Dad, says there appears to be three main reasons for this. Firstly, they thought it was too much hassle; secondly, they felt too embarrassed; and finally, they felt guilty.

It seems strange that we switch utility providers in order to save between £200 and £300 a year, but do nothing when spending our own money for the benefit of our employer, Gold commented. So maybe laziness should be added to the list as well.

The research also discovered that nearly 5% of workers spend about £600 every year on work expenditure.

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Do contractor accountants abuse the company mobile?

Research conducted by MDS has shown that SMEs run the risk of breaking the law because they do not monitor staff telecoms usage effectively.

28% of firms struggle to distinguish between personal and business mobile calls when it comes to accounting for VAT. Almost 60% of telecoms managers said that if employees believe they will get away with it, they will let the firm pay for their personal phone calls.

The CEO of MDS, Drew Rockwell, said that businesses that provide mobile phones for their employees could get into trouble with the VAT man if it is found that employees use their work mobile for personal reasons. They are potentially liable if they have been claiming back VAT on a phone bill without first deducting the cost of personal calls.

42% of businesses now provide their employees with mobile phones and this has led to an increase in rogue telephone usage. In many companies there are seen as a perk rather than an asset belonging to the firm and 79% of employers think their staff abuse the privilege by failing to disclose personal calls. Employees are also becoming increasingly choosy over the nature of the perk. 87% want to choose their own handset and 66% want to select a particular network.

Employers must share part of the blame for this situation. Less than 50% have produced a detailed policy document on responsible telecoms usage, 48% have broad guidelines and 5% do not have a policy at all.

The problem doesn’t only exist with mobiles either. 90% of companies also report that employees make personal calls on the firms’ landline phones.

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Will HMRC really show leniency towards iXBRL failings?

Contractor accountants will probably be wondering whether the taxman is going to stick to its word and be lenient towards businesses that were unable to file their corporation tax returns using iXBRL.

HMRC has sent letters to software developers promising sympathetic treatment for the next two years due to iXBRL software packages that are unable to handle the new Minimum Tagging List requirements.

However, the letters also warn that the Revenue expects companies to progress towards full compliance before the 1st April 2013.

Accounting software giant, Sage, are still having problems meeting the tagging requirements laid down by HMRC. Software solutions provider, IRIS, pointed out that Sage customers could be approached by the Revenue after submitting their returns. IRIS’ product director, John Pattenden, welcomed the news that HMRC will not immediately reject returns that do not comply with MTL, but customers will need to rely on the goodwill of the Revenue in order to go on operating and submitting returns.

Meanwhile, accountants and tax advisers have been warned that the cost of implementing the necessary iXBRL software could lead to expenses rocketing. The system is meant to highlight key information automatically but experts claim that 20% of tagging will still need to be done manually.

Donald Drysdale, the assistant director of tax at ICAS, said UK advisers will see an increased administrative burden due to iXBRL. The profession is already trying to help struggling businesses and they now have the dilemma of whether or not to pass on the additional costs of iXBRL reporting to their clients.

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Fiddled expenses cost the UK more than £1.3bn in 2010

It’s not only MPS who falsify their expenses if the latest report from GlobalExpense is to be believed.

The Employee Expenses Benchmark Report 2011 claims that over-inflated and fraudulent claims cost UK companies over £1.3 billion last year. Almost £1,000 million of that was made up of claims that were outside company policy, the report states.

Some of the questionable claims included school fees of more than £4,000, over £58,000 for entertaining clients and a sundry expense of £26,000 for a holiday in Las Vegas. Other highly suspect claims included £1,200 spent on lap dancers and the hire of a porn film whilst in a hotel.

Expense-claiming employees in the UK made an average 33 claims last year with an average claim of £62.08. The report also discovered that the largest amount paid out to a single employee was £333,000. Spending on entertainment was the only category that increased over the past year with financial services employees being the highest spenders.

Although managers enforced tougher compliance rules on their employees, their out-of-policy spend increased in 2010. Managers were 30% more likely to make non-compliant claims than their employees.

Nigel Meyer from the Hogg Robinson Group suggests that data management could help companies cut down on their travel expenses bill. He pointed out that business travellers often amend their bookings, with changes made to connections and interchanges. In order to set an efficient travel budget, all the data should be collated, consolidated and analysed, he advised.

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I am Not an Employee, I’m a Freelance

Good to see the Coalition coming good on their promise of reviewing IR35. The announcement of the creation of the Office for Tax Simplification was rapidly followed by the publishing of its Terms of Reference. This made really good reading since they contained a specific statement of IR35 as a prime target for their review.

Needless to say this has prompted an immediate flurry of speculation about how IR35 would be replaced with something more draconian. For example, the new head of the OTS, John Whiting, mentioned 80/20 when talking about their proposed plan of action, which some have immediately translated into meaning the OTS would resurrect the failed and discredited Australian idea that to be a real freelance, no more than 80% of your income should come from a single client. Heigh ho…

As I’ve said before, there is a real difficulty distinguishing between genuine one-man companies and those who use a Limited Company purely as an artificial tax avoidance vehicle. But however the OTS suggests we square that particular circle, I’m fairly sure the 80/20 rule will not be part of it.

Meanwhile this whole (and rather premature!) debate has prompted some other thoughts.

Key to any resolution to the IR35 question is defining a freelance worker. While the traditional model in UK economics defines everyone as either employer or employee, in reality there is a third category of “none of the above”. If that third way was properly enshrined as a working model, consider the many areas where things would become much clearer.

Firstly, there is the vexed question of business expenses. As we know, travel and subsistence expenses for a temporary workplace cease after two years. While this makes perfect sense for a permanent long-term employee, it is nonsense for someone like me who takes work wherever it may be found. Why should I personally be penalised if my company’s client base happens to be based in the same approximate geographical area?

Secondly ID checking and the right to work in the UK, while important, is the responsibility of the employer. My clients are not my employers; in fact most of my contracts go to great lengths to prove they are not. If we allow me to be an independent worker, that checking becomes unnecessary since my company can make the necessary declarations and accept legal responsibility for their accuracy.

Thirdly, liability for payment of taxes could go down to the individual and not, as at present under S44-47, up to the intermediary company (which in most cases would otherwise be the agency). That would step around a huge amount of contractual debate of who is an employee of whom, which incidentally would only help resolve the IR35 “problem”.

Finally there are a raft of current and future issues with the Agency Workers Directive and the Agency Regulations that would cease to be of any relevance. For example, we have to go through the nonsense of opting out of the Agency Regulations when, as any fool knows, the way this is routinely done means you are in fact opted in anyway.

And, looking a bit further over the horizon, it is clear that the EU has no concept of the UK model for the freelancer worker. If we can establish our legitimacy up front right now, we would avoid a whole new set of problems.

The UK Freelance is a hugely valuable factor in the UK economy. There are around 4.8 million of us. Why is it so hard to get that fact recognised in law?

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As a contractor, what is a reasonable mix of salary, expenses and dividends?

Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

If you are in business on your own account and working through a limited company, how you take money from the company to pay your bills is entirely up to you. There are no set rules you need to adhere to about how you do it.

However, how much tax you pay will depend very much on how you structure the payments from your company to you. This can get complicated, especially if there is more than one shareholder to consider, so it is best to get professional advice at first and to review that advice as the taxation landscape changes. However, there are some broad guidelines.

You can take any salary you like or none at all. You need to think about your personal tax-free allowance though; this is the amount you are allowed to earn before tax becomes due and is set by your Tax Code.  Therefore you can take that amount of money as salary and not pay any income tax on it. You should also remember that a range of state benefits depend on you paying National Insurance contributions. These are due once you exceed the earnings threshold (currently £110 a week). So the absolute minimum to pay yourself is £5720 a year, or your personal tax-free allowance, which ever is the higher.

Dividends are payable from net profits after Corporation Tax. You can take them at any time, and as often as you need to, provided the financial status of the company is such that it can afford to pay them. Because dividend payments attract a tax credit – to offset the Corporation Tax already paid by the company – dividends up to the upper-earnings limit – the point when the higher rate of income tax kicks in – will not be liable to further income tax. Once you go over that limit, tax is due at the higher rate less the tax credit; at the time of writing this means an effective tax rate of 22.5% (this is because the tax rates for dividends are 10% and 32.5%, both reduced by the 10% tax credit; hence zero extra tax at lower rate and 22.5% at the higher). Dividends are not liable to NIC payments.

Despite what some umbrella companies claim, expenses are not income. In fact, if properly calculated they are income neutral. Provided you have actually spent the money and that you spent it wholly and exclusively as a result of your work, you can reclaim it tax free. It is not, however, tax-free income, and if you are making money on expenses you are probably doing something wrong.

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Image: Inside-out Lego brick by oskay

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