How will the Pre-Budget Report 2008 effect freelance contractors? 

Churchill Knight and its advisors have analysed the detailed Pre-Budget Report (PBR) 2008. Below you will find an overview as to how the PBR 2008 is likely to affect contractors and freelancers. 

It would appear that most contractors’ worst fears about the PBR containing harmful changes to shifting income (limited company), and expense dispensation policies (receipt free expense claims through umbrella companies) have not been fully realised. However as the details emerge it is possible these subjects could be buried in the detailed PBR report. If we discover anymore relevant information you can be assured that you will hear from us. 

The bad news (for most umbrella companies) 

You may or may not know that HM Treasury recently stated its apparent intention to stop contractors being able to claim expenses while working through umbrella companies. There appears to have been a ’stay of execution’, with the PBR saying:

“The government is concerned at the growing use of structures, such as “umbrella companies” or overarching contracts of employment with employment businesses, to obtain tax relief for travel expenses that would not be available to other workers. It will monitor the use of these structures and, if necessary, consider action in the future.” 

In our opinion it is only a matter of time before HMRC decide to investigate in much greater detail the use of expense dispensation policies by umbrella company contractors. 

The good news (for limited company contractors) 

The shifting income proposals have been delayed for another year. The PBR states:

“The government firmly believes it is unfair that some individuals can arrange their affairs to gain a tax advantage by shifting part of their income to another person who is subject to a lower rate of tax. The government considered the responses received to the recent consultation and believes that a further period of consultation will ensure that the legislation in this area provides clarity and certainty for businesses and their advisers. The government now intends to introduce legislation through Finance Bill 2009 and will not enact legislation effective from 6 April 2008.” 

This is clearly good news for ‘husband and wife’ limited companies as it was fully expected that shifting income would not be an option as of April 2009. 

Other announcementsThe greatest potential damage to the contracting sector appears to have been averted. The PBR 2008 appears to contain a very neutral affect to contractors:

• Changes to VAT will not affect limited company contractors who have standard VAT registered companies. Limited companies that are registered for the Flat Rate Scheme could have a slight impact, positive or negative, depending on the business sector of the limited company.
• The planned National Insurance increase in 2011 will affect some contractors, but for those with limited companies the effect will be far less significant than those working through an umbrella company.
• Income tax rising to 45% in 2011 for those earning more than £150k will affect a small number of contractors, and even that higher rate will only be applicable to the proportion of their income over £150k
• Another positive for the limited company contractor is the fact that the 1p rise in Corporation Tax has been postponed.

Some contractors when looking for an accountant for their limited company choose the accountancy services of their local accountant. We often find that a lot of the contractors with limited companies begin to re-enquire a few months after deciding to take that route. 

We are NOT saying that local accountants offer a bad service to those with a limited company, but we would recommend being aware of certain differences that have been brought to our attention. Listed below are the main reasons why these contractors with a limited company re-enquire with Churchill Knight: 

·         Too much paperwork – Some local accountants assure the contractor/s that there will not be a lot of paperwork involved with running a limited company. However, having offered accountancy services to limited companies for over 10 years that include most of the administration work, we can categorically state that you will spend a substantial amount of time on paperwork.

·         Is the local accountant cheaper? – It is quite common that a local accountant will provide a quote for the limited company’s year end accounts. However a lot of contractors did not realise that their limited company would be charged for extras, such as VAT returns, PAYE returns, Payroll, advice by the hour and registered office provision. One of Churchill Knight’s service levels offers you a very cost effective way to receive an all inclusive service with no additional fees.

·         Need more of a personalised service - Most contractors only meet with their accountants once a year and some have experienced problems getting in contact with them. Churchill Knight can offer your limited company continuous and unlimited support, whether by email, phone, or face to face at no extra cost.

·         Would like specialist accountancy services – Some contractors come back to us claiming that their current accountant does not offer enough contractor specific advice to their limited company. Churchill Knight has specialised with limited company accountancy services for over 10 years. As a result of our experience we can advise your limited company of all the contractor specific rules; legislations, expenses etc. We will also recommend and give you options with regards to maximising your take home figure.

·         Regular take home payments – One of the most common causes of dissatisfaction is that a local accountant fails to offer the contractor regular take home pay calculations. This means that money being taken out of the limited company’s account is always an estimate.

With Churchill Knight, as soon as your limited company receives its payment you will receive your net amount by text and email on the same day.

We strongly urge you to consider the above, due to the following: 

1. Mistakes in processing your Tax, VAT etc can be costly to you. You will spend time correcting mistakes. Your limited company could be fined by HMRC. Your limited company could pay additional fees to the accountant for any corrections.
2. In the vast majority of cases you will be charged to set up your limited company.
3. In the vast majority of cases you will be charged to close down your limited company (which is often the accountant’s yearly fee).

With Churchill Knight we will not charge you to set up your limited company. You will not be tied in to a minimum contract term and you will not be charged to close down your limited company (except a £10 fee to Companies House). 

If you would like to discuss your options further please call Churchill Knight & Associates Ltd on: 01707 871622 or visit www.churchill-knight.co.uk.  

Should you use an Umbrella Company or set up your own Limited Company? This is the question of all questions for most contractors in the UK. Our consultants at Churchill Knight have been consistantly asked “should I use an Umbrella Company or set up your own Limited Company?” for over 10 years.

 The answer is that it depends on your own individual circumstances and preferrences. So how do you know which is best for you? The bottom line is most of our direct competitors (with a few exceptions) only offer either umbrella company or limited company accounting. Churchill Knight has offered both an umbrella company solution and accountancy services to those with limited companies for over 10 years.

Below you will find our opinion on the differences between using an umbrella company compared with running your own limited company.

The structure and your status 

Umbrella company

If you use an umbrella company, legally you will be seen and paid as an employee. This means that all your taxable income is subject to full PAYE tax and national insurance (including employers national insurance).

Limited Company

In most cases when a contractor sets up a limited company they are the shareholder and director. Before legislation was changed recently your limited company required a company secretary, this is no longer the case. If you are the shareholder of your own company, legally you are employing yourself (not self employed) through your limited company.

The Benefits to you

Before I comment on the benefits I must point out that the below is my opinion based on the majority of service offerings I am aware of. Not all umbrella companies and accountants provide the same service and benefits.

Umbrella company

If you talk to a sales person at an umbrella company you will soon realise that they have three main selling points.

1. You are not at risk of IR35.

2. Your administration is minimised.

3. You can claim receipt free expenses.

Most umbrella companies will offer you insurances, a fee that is payable only when you work and holiday pay (please see below for explanation).

Basically an umbrella company is cheap, simple and IR35 risk free.

Limited company

There are two main benefits to using your own limited company.

1. In most cases it’s financially the most rewarding option (LEGALLY available).

2. You are your own boss and therefor in control. This control offers flexibility in the way you handle your finances.

Most other benefits received by running your own limited company could be dependant on the accountant that you hire.

Basically a limited company can offer the highest take home pay legally available to you and control of your finances.

The Facts

Umbrella company

In our opinion there are lots of very good umbrella companies, but equally some bad umbrella companies. Unfortunately it appears to us that some sales people working at umbrella companies try to give contractors IR35 advice when they are not qualified to do so, they purely scare monger. Also we speak with a lot of contractors that are mis-sold the benefits of using an expense dispensation policy.

To set the record straight, an expense dispensation policy dispensates the umbrella company’s need to display expenses on the P11d for it’s employees. This also means that the umbrella company it not required to present receipts to HMRC at the end of the tax year. So in short an expense dispensation policy is an administration saving device for the umbrella company.

Unfortunately we speak with far too many contractors that have been mis-sold the dispensation policy by their umbrella company. The myths that we are detailed below.

1. “I do not have to keep receipts”. This is NOT correct, HMRC have the right to ask to see the receipt and you must comply or there will be negative consequences.

2. “I can claim £21 per day for food and drink without a receipt”. This is true BUT only if you spend £21 per day on food and drink.

3. “The 24 month rule does not apply because I had a few weeks break in my contract”. It is highly likely that HMRC will enforce the 24 month rule (no expense claims after 24 months work at one site) even if you have a break in employment.

Some umbrella companies do not explain the reason why you are allowed to claim expenses. An employee is allowed to claim travel related expenses against tax if it relates to travel to a temporary work site. The part that is not explained properly in some cases is what’s a temporary work site.

Some umbrella companies will explain that a temporary work site is a site that you work at for less than 24 months. However the legislation states that a temporary work site should not be your normal place of work. If you work at a site for 5 days a week do you think this is your normal place of work? There is certainly a chance that HMRC could view a site you work at for 5 days a week as your normal place of work.

Limited company

With a limited company you could end up doing more administration. Also you must do everything possible to ensure your limited company works compliantly with IR35. Even if you work inside IR35 you can still benefit from tax relief on expense claims and from VAT registration.

The limited company option is generally considered the best option for the long term (career) contractor as it offers the flexibility and potentially the financial rewards. Some contractors are put off by IR35 and by the administration of running a limited company.

At Churchill Knight we specialise in both umbrella company and accounting services for limited companies. If you would like to speak with us about your best option please call us on 01707 871610.

Limited company or Sole Trader   At some stage during your career the question that most contractors have to deal with is whether or not to form a limited company. Churchill Knight’s specialist accountancy service for contractors will help you. Firstly you will need to decide which business set up is right for you, either sole trader or limited company.  

You will find below an overview of 2 accountancy services we can offer you. 

Limited company 

Advantages·         Flexibility with expenses claims compared with umbrella company·         You have options, flexibility and control·         Could have a higher net return than umbrella company (dependent on your IR35 status) and sole trader·         Our unique Profit and Loss calculations on Demand (weekly etc)·         FREE to start up and close down·         Advice from a specialist contractor’s accountant, established 1998·         A simple monthly fee with no minimum fee 

Disadvantages·         Risk of IR35 investigation IF you choose to work ‘Outside IR35’·         Higher accountancy fees than sole trader.

Sole trader 

Advantages·         Lower accountancy fees·         Higher net return than umbrella company·         Low administration·         Easy to set up·         No business bank account required·         No need to provide Companies House with information·         Flexibility with expenses claims compared with umbrella company·         Advice from a specialist contractor’s accountant, established 1998. 

Disadvantages·         Unlimited personal liability for business debts·         Most recruitment agencies will not deal with you as a sole trader (check with your agent). 

You could receive financial benefits from VAT registration, interest on the funds held in your business’s bank account (unlike a standard umbrella company) and the ability to ‘off-set’ any legitimate business expenses.  Churchill Knight will provide your business with accountancy services to help you reach tax efficiency legally and free of administration. Having your own business is about you having control and deciding how to handle your affairs to suit you. 

Churchill Knight has offered specialist accountancy services to contractors and Freelancers in the UK since 1998. Our vast experience of dealing with contractors and Freelancers allows us to offer you tailored advice on your personal circumstances.    If you decide you would like a limited company then part of controlling your own limited company allows you to decide whether you’d like to run each contract inside or outside IR35. As part of your company’s compliance we can advise on where to get specialist independent tax status advice. 

If you’re not sure which option is best for you call Churchill Knight on 01707 871610 or email enquiry@churchill-knight.co.uk. 

Expenses guidelines for Limited Company - Outside IR35

For all receipted expense claims we recommend that your limited company’s name is on the receipt. In our opinion expenses over £250 must display your limited company’s name on the receipt or invoice. 

If you would like to put through expenses through your limited company below you will find a set of rough guidelines. Business expenses processed through your limited company are open to interpretation by HMRC.

1. Temporary accommodation.  

• Hotel, B+B, room rental and apartment (etc) rental can be claimed. While in temporary accommodation (only) you could claim for food and (non-alcoholic) drink. You could also claim £5 per night for Personal Incidental Expenses (PIE’s) which can be claimed without receipts. You cannot claim personal expenses like prescriptions, toiletries and dry cleaning.

2. Travel.  Mileage

• Cars - Claimed at 40p per mile for the 1^st 10,000 miles, then 25p per mile thereafter.
• Motor cycle - Claimed at 24p per mile.
• (Push) Bicycles - Claimed at 20p per mile. 

No receipts are needed for mileage but you must keep a mileage log. Public Transport, Buses, trains, tube, taxi, planes, ferries and trams (etc) can be claimed. 3. Mobile phone bill. 

• You can only claim your mobile bill if your limited company’s name is displayed on the actual bill. Speak to you service provider for more information.

4. Stationery. 5. Training. Due to a recent court case there are some very specific guidelines for claiming training expenses.

• The fee paid to the trainer must come from your business bank account. You will need to deposit the funds for payment into your business account.
• The receipt for the training MUST be addressed to your limited company’s payroll department. E.g. Payroll Department, My Company name Limited.

6. Professional subscriptions (must be detailed on the HMRC’s ‘List 3’). 7. Hardware, software, Peripherals and Equipment. 8. Home office. 

• This can only be claimed if you spend the majority of your working time from home.

Any items purchased over the value of £500 will be considered as ‘capital items’. Please contact your accountant to discuss the specifics of each item. 

VAT – If you want to reclaim VAT from an expense, the receipt must be in your limited company’s name. VAT cannot be claimed back from expenses if your limited company is registered on the Flat Rate Scheme (Horizon). 

Please be advised that the above is only to be used as a rough set of guidelines. All of the business expenses that you put through your limited company must be ‘Wholly, exclusively and necessarily’ in relation to your limited company’s business. If you claim back expenses that are questioned by HMRC Churchill Knight & Associates Limited will not hold any responsibility. You are solely responsible to ensure the expenses that you claim are legitimate business expenses.  

Expenses related to a work site must adhere to the 24 month rule. In short as soon as you know you’ll work on one work site for 24 months or greater you cannot claim back expenses relating to that work site. For further information you can visit www.HMRC.gov.uk.  If you would like our opinion on whether you can expense a certain item through your limited company, please contact us first on 01707 871610. 

The myth At Churchill Knight we receive a steady flow of enquiries from clients and potential clients that would like clarification of the 24 month rule. In particular a lot of clients with limited companies believe the 24 month rule relates to IR35. If you have a limited company IR35 should always be considered.

Churchill Knight is a specialist IR35 accountancy firm (Freelancers accountant or Contractors accountant) but we cannot provide IR35 status advice. Accountants by trade are not qualified to advise you whether IR35 affects you. However Churchill Knight has worked as a Freelancers accountant or Contractors accountant to those with Limited Companies for over 10 years. We hire two IR35 tax status specialist firms to advise us on IR35 compliance. From the advice we have been given the 24 month is not applicable to IR35.

The Truth If you travel from home to your place of work you’re entitled to claim travel expenses subject to ‘the 24 month rule’. The ’24 month rule’ applies to anyone looking to claim back expenses relating to working on a temporary work site. So if you are a sole trader, permanently employed or have a limited company the ‘24 month’ rule applies. You can only claim back the cost of travel from your permanent residence to a temporary work place. However as soon as you know you’ll work on the work site for 24 months or more it is not deemed as a temporary work site. This means that you will no longer be able to claim back expenses related to the work site.

Examples Contractor A has a limited company. He travels to his clients’ site on numerous occasions during a 12 month contract. In this example the travel cost can be expensed as non tax deductible. However Contractor A’s limited company signs for a 12 month contract extension which requires travel to the same work site. He can no longer claim back the expenses as he knows he will travel to this work site for 24 months or more. There are other things to consider, such as the 40% rule. For further information look up HM Revenue and Customs clarification on the 24 month rule Tax Bulletin 74.

Always keep in mind, it does not matter if you are a sole trader, run a limited company or work through an umbrella company, the same rules apply to all.

If you would like to speak with Churchill Knight please call us on 01707 871610.

What makes Churchill Knight’s limited company accountancy services so popular amongst contractors and freelancers?

1.     We have been specialising in freelancer accounting and contractor accounting since 1998 – This means you will benefit from our vast experience of servicing freelancers and contractors. Unlike some of our competition we never offered Composite companies or off-shore schemes, you’re in safe hands. We offer specialist accountancy services to freelancers and contractors that want to be self employed, are self employed, want to run a limited or have a limited company.

2. You will not be charged to set-up as self employed or a limited company – With most accountants you will have to pay an upfront fee to set-up a limited company or register as self employed. You will not pay a penny to Churchill Knight to set up as self employed or a limited company.

3.    You will not pay charges close down your limited company – Most other accountants will charge you a year’s worth of fees to close down your limited company, or you can leave for free but you will still have to go to another accountant and pay £600-£800 (estimated example only) to close your limited company down. 

4.    You can expect higher service levels than most other accountants – Our goal is to provide the highest possible service to our clients. We do not outsource any of the work that you pay us to undertake. If you have a query you will be able to speak with a specialist in the relevant field. Whether you’re self employed or have a limited company we offer unlimited advice at no extra cost.

5.    You can receive specialist financial advice and mortgages for self employed and limited company contractors – Elsewhere you could struggle to obtain a low rate mortgage or be forced to self certificate. With our fully independent mortgages for self employed and limited company contractors we could secure you the right mortgage for you. 

     You can also benefit by saving further tax on tax efficient savings vehicles.

6.    Greater understanding and support for the self employed and limited company contractors - You will be offered specialist accountancy services that offer ease of use and high communication levels. We will help you as much as legally possible.

7.    We can offer an all inclusive service (amongst others) – If you are/ want to work as self employed or to set up your limited company most accountants will charge for any extras including;·         Running Payroll·         PAYE returns·         VAT returns·         Advice·         References·         Set up and close down 

8.    Our new business team will support you during your self employed registration or the set up of your limited company – This is a huge benefit for contractors that have not been self employed or ran a limited company before. The team will help you with the administration and educate you early on as to what’s involved.

9.    Never worry about your Tax bill – You will be informed of your options and offered advice so that you can give us your instructions. We will calculate how much your tax bill will be on each payment your limited company receives. You will then receive a text and an email to advise you of what you could take out the company account. As long as you take our advice your tax bill will sit in your company account.

     When your tax bill is due we’ll send you advice by text and email as to what and where to pay. As long as you follow our advice you will never pay any fines for late payment of tax.

10. You could receive a special deal on your limited company’s bank account – We have arranged for a business bank account with Cater Allen (Santander Group) that offers our clients no bank charges. Most banks that offer bank accounts to limited companies will charge you for the privilege.

Excellence through understanding and knowledge

The flat rate scheme is designed to help small businesses (Limited Company, Sole Trader and Limited Liability Partnerships) by letting you calculate your VAT payment as a flat rate percentage of your turnover. The percentages are decided according to the trade sector your business is in. Under the scheme you will not be able to reclaim any of the VAT your business pays, as this is taken into consideration as part of the percentage calculation.

Who can use the scheme?

You can apply to use this scheme if:

• You have a Limited Company or Limited Liability Partnership or you are a Sole Trader.
• Your annual turnover (excluding VAT) will be £150,000 or less.
• Your annual total turnover (including VAT) will be £187,500 or less.

For the second test above, ‘total turnover’ is the value (including VAT) of all your business supplies, including any exempt and non-business income. Non-business income is only included for deciding whether you can join the scheme. It will not be used to work out how much VAT you need to pay once using the scheme.If you have received a calculation from Churchill Knight, please see the ‘Horizon bonus’ for your estimated weekly saving as a result of your company being registered under the Flat Rate Scheme.

In summary

If you are a Churchill Knight Sole Trader client or a client with a limited company then you should look at your estimated yearly expenditure that is VAT applicable. If the VAT on your expenditure is likely to be higher than the VAT claimed back via the Flat Rate Scheme, then standard VAT is likely to be your best option and vice versa.  If you have any further questions please feel welcome to contact Churchill Knight on 01707 871610, the Sole Trader and Limited Company specialist accountancy firm.