Setting up on your own

[Shez]

Morning folks,

 

This kind of thing has been touched on in other threads but I'd like to set up this one as seeking specific advice on this question...

 

My situation: I have a day job which pays the bills but work as a casual at a couple of theatres as well; these jobs are also pay-roled. I also have my own PA and recording equipment which isn't really paying its way at the moment as it tends to get used for "mates rates", beer etc. I've been engineering for several years and would consider myself good at what I do; the kit is all decent quality too so I'd like to punt out my services in a more commercial manor.

 

Question - what are the advantages / disadvantages of going freelance or of setting up as a small business? I'm not ditching the day job (yet...) so this would run along side it.

 

Broad question I know. I'm thinking ownership of current / new equipment (would my business own it or would I?); financial implications (any tax advantages either way? In general are there any issues with managing personal income from both PAYE sources and others?).

 

Any advice from anyone who's been there would be much appreciated ;)

 

Shez

[gareth]

To be honest, the best person to ask would be a good accountant - they really are worth every penny you pay them.

 

Personally, I left full-time employment to go freelance early in 1999. For the first few years I operated as a sole trader, with no distinction between my personal finances and those related to my work. In January 2004, I set up a limited company through which to run all of my work activities - all my 'freelance' work is billed via the company, which then pays me a salary each month. It costs a little bit to set up, but I think it was worth it. Also, there are minor expenses to be dealt with each year (company returns, etc.), but speaking personally the financial advantages of operating this way outweigh the additional expenditure. One of the main advantages for me is that I was able to register for VAT - meaning that I can reclaim the VAT on any expenditure made via the company (travel, hotels, subsistence expenses, tools, equipment, kit hire, etc.). Of course, this also means adding 17.5% VAT onto all of my invoices, but as pretty much all of my clients are VAT-registered themselves and can claim it back it doesn't make a difference.

 

I'm now back in full-time employment once again, but still doing the odd bit of freelance work on the side - as such, the company still exists so that the freelance stuff can be run through it, and I still have my personal public liability insurance in place.

 

Like I said, take the advice of an accountant or other financial adviser - if you can find one who understands the rather peculiar circumstances which come with working in the entertainment industry and can advise accordingly, you can't go far wrong.

[lightsource]

One thing to do, is to try to work with real numbers / figures. Do a paper costing to see how much it will cost to operate your business over a year, and look at weather you would get the business required to make an income.

 

Look at the following expenses:

 

Public Liability Insurance,

Pat testing of equipment,

Repairs /renewal of aged equipment

Accountancy / banking charges

Vehicle wear & tear, maintenance and taxes

Self employed National Insurance

Medical loss of income insurance

Depreciation of the value of your equipment through age

Your day to day living expenses, including mortgage, bills council tax etc.

Advertising your business

Anything else missed above

 

Will you be able to make a profit? Enough to live off?

 

This is the main disadvantage of being self employed.

 

Broad question I know. I'm thinking ownership of current / new equipment (would my business own it or would I?); financial implications (any tax advantages either way? In general are there any issues with managing personal income from both PAYE sources and others?).

 

As a sole trader, you are the person that would own the equipment. One advantage of being self employed, is that you can depreciate the value of your equipment and offset the amount against your tax bill.

 

If you are seriously thinking of doing this, start keeping receipts now, some expenses are back datable.

 

I am NOT an accountant, just someone who's been self employed since 1987.

[Shez]

Thanks for the replies.

 

As I said, this won't be my sole source of income; I'm just wondering how best to legitimately manage the work that I do that's invoiced rather than pay-rolled (with an eye on future expansion...) At the moment it wouldn't even be enough income to pay an accountant - what kind of expense are we talking (ballpark) to use the services of an accountant?

 

If I started out as a sole trader, is it essentially a case of keeping records of all relevant income & expenditure and paying the appropriate amount of income tax each year?

[Pete McCrea]

If you work for someone as a Freelancer there can be issues with the whole employee/Self employed status. However if they subcontract your company to do the job, there is a clear distinction, and means that your company is responsible for the PAYE and NIC etc, removing the possible grey area from things. I believe there are one or two companies out there that tried to get their Freelancers to go this way- Possibly Bandit Lites is one IIRC.

 

Setting up a company is easy. You can buy ready made companies (Cost about £100), or buy the forms from t'internet, fill them in and send them off for about £20 IIRC. Then it's a case of a few other bits and peices which can be done online for £15 or via snail mail for £30. Obviously there are other things such as corporation tax PAYE etc etc. The advice of a good accountant will go a long way here though, and I would recommend getting their view ASAP.

[lightsource]

Thanks for the replies.

 

As I said, this won't be my sole source of income; I'm just wondering how best to legitimately manage the work that I do that's invoiced rather than pay-rolled (with an eye on future expansion...) At the moment it wouldn't even be enough income to pay an accountant - what kind of expense are we talking (ballpark) to use the services of an accountant?

 

If I started out as a sole trader, is it essentially a case of keeping records of all relevant income & expenditure and paying the appropriate amount of income tax each year?

 

YES you need to keep records of ALL transactions. It's called proof, when you need to prove anything :huh:

 

As this is an additional source of income, you need to inform Inland Revenue. You will at least need to pay Class 2 National Insurance contributions. At the end of the tax year IR will send you a self employed sheet to fill in which will determine the amount of tax payable (or not :( )

 

As far as the 'paying the accountant' goes, there is no set figure, however, the more work you do, the 'less your accountant has to do' really counts. I paid a chartered accountant £ 175.00 last year for doing my tax return. And tha included VAT

 

One point that I feel is worth stating here (United Kingdom). If you have a Chartered Accountant, rather than a Bookeeper or Accountant, Inland Revenue are a lot less likely to investigate you, because they mainly trust the Chartered Accountants because they're audited.

 

Edit........

Sorry Little DJ, but don't even consider purchasing anything, anywhere, you don't need to do it. Just simply inform IR of your intensions, and they'll sort it out. Even if you do want to go it alone, just use a company name that is not being used by anyone else and that's all you need. You don't have to buy anything. If you think you can buy a ready made company for £100, then what are you paying the £100 for?

[Ben Langfeld]

If you think you can buy a ready made company for £100, then what are you paying the £100 for?

 

Surely this covers registration as a limited company and a few other initial paperwork bits and pieces?

[Frag_Me]

These "ready made" companies often have a few other bits and bobs in place, maybe a basic bank account or a spot of webspace.

[Pete McCrea]

£100 gives you a company name of your choice, all registered and all the paper work done (Shares, Memorandum of Association and Articles of Association and they submit it all). Alternatively you can buy the forms as word documents, and fill in the blanks, do the paperwork yourself and then submit it directly to companies house as I did. It can be a pain because if you get one small thing wrong, the forms come back and you have to resubmit.

 

If your going self employed then Lightsource is right, you don't need to buy anything, but setting up a Ltd Co is different.

[paulears]

There is a big drawback to becoming a limited company compared with sole rader status. Paperwork - quite a bit, actually. If you are a sole trader, apart from the liability issues covered in quite a few threads on the BR, you simply keep all your receipts, all your invoices and then produce a simple profit and loss account - when your turnover increases a balance sheet is usually asked for. Your accounts can simply be a case of giving the accountant a simple spreadsheet, a big box full of receipts and then sitting back and waiting for them to tell you if you've made a profit or a loss.

 

If you set up one of these off-the-shelf or even ready made companies you need an extra body straight away - 2 people are required. Now the bad bit. you have to be an employee of the company if you want any pay. So you have to set up employer status with the revenue. Actually, quite simple.They send you a nice CD rom which calculates the tax, national insurance, student loan deductions. You have to send the revenues payment promptly or you get a nasty letter. You have to send the paperwork even if you don't draw any money. Each week or month you fill in a huge document, keep it safe, then at the end of the year transfer some of the data to another. I hated it! You need to get the accounts prepared by an accountant and they charge more because there is more work to do. The accounts mustn't be late or you then get hassled by companies house and they post a nasty little note informing everyone your accounts are late. If you ignor their requests they add other unpleasant, but accurate notes.

 

Being a limited company does make many of your dealings public, things that could be kept private if you operate as a sole trader or partnership.

 

If your accountant sets up a limited company for you, it costs a lot more than £100.

 

Limited company status doesn't really suggest any form of professionalism, as people sometimes think. I have been told a couple of times that I was selected to do a job because I wasn't Limited - suggesting that they could take action against me and stand some chance of getting results, instead of a ltd company with £10 worth of security!

 

Unless you really need to be Ltd - it is difficult to really see the advantage. Much is personal choice - I know a few freelance BR members who have become Ltd companies - it seems to work for them, just not me (yet)

[Shez]

As this is an additional source of income, you need to inform Inland Revenue. You will at least need to pay Class 2 National Insurance contributions. At the end of the tax year IR will send you a self employed sheet to fill in which will determine the amount of tax payable (or not :( )

 

Having looked around the HMRC website, it does seem to rather complicate things if you have more than one job. From what I can gather, it appears that I could get a small earnings exemption certificate which would mean I wouldn't have to pay class 2 NICs. Which would be nice :huh:

[Ben P]

I went through the pro's and cons of all this last year, when leaving full time employment. I can suggest that company route is the better way to go especially if you have kit and you want to make more money from it. You will probably do better as it will present a more proffesional image. Even if you set up as a company you can still do jobs away from it. The company pays you a wage, but other than you are director your just like any employe. As long as you keep your personal work seperate, and record this on your self assesment its all fine.

 

As others have said get an accountant ASAP. I have paid about £2000 this year on my accountants fee's and costs to set up LTD company and VAT etc... but I reckon that he has saved me paying about £2500 worth of tax, and he has sorted out the papers, made sure the correct figures are filed, knows the loop holes, knows where things can be claimed and not claimed. He's also likely to have saved me from possible fines or penaltys for putting the wrong info on forms.

 

£2000 sounds a lot of money for the year (depending on what you earn) but for me its been worth every penny.

 

Ben