Guide to Freelancing - PCG

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SOLE TRADER A sole trader, or sole proprietor, is defined as a business that is owned and controlled by one person who takes all the decisions, responsibility and profits from the business which they run. Sole traders were previously referred to as „schedule D workers‟. The schedule system no longer exists so sole traders are now technically known as self-employed. Operating as a sole trader is more straightforward than a limited company because there is less paperwork. You pay tax and NIC‟s on the business profit, regardless of how much you draw, so the accounting side of your business is very straightforward. As a sole trader you are protected from the risk of IR35 because, if HMRC decides that you are „deemed employed‟, they will hit your client with the tax bill, not you. However, for precisely that reason, clients might refuse to engage you, so you could be limiting your market. In some industry sectors this is more of an issue than others – it‟s a good idea to compare notes with other freelancers in your field. Another potential disadvantage of the sole trader route is if you work via an agency and the agency settles your bill then they must by law pay you as an employee. This can be problematic because you pay tax under PAYE as an employee but without receiving employee benefits such as holiday or sickness pay. This makes it harder to build the financial buffers required to weather the risks of being self-employed. Finally, be aware that personal assets, including your home, are potentially at risk because you are personally liable for any business debts, including lawsuits – it‟s advisable to mitigate these risks with suitable insurance cover, such as Professional Indemnity. Sole traders pay tax twice a year under the self-assessment system known as „payment on account‟. If you do decide that the relative simplicity of being a sole trader is the way to go then you must register as self-employed. This can be done online at the HMRC website: http://www.hmrc.gov.uk/selfemployed/register-selfemp.htm. You must register within three months of the commencement of business or you will be fined! SOLE TRADER IS A GOOD CHOICE IF... You‟re working on your own You don‟t want the responsibility of being a company director Your actual or prospective clients don‟t mind working with an unincorporated business Your fees aren‟t paid by a recruitment agency Your activities aren‟t likely to put your personal assets at risk You protect your personal assets by taking out adequate insurance cover, for example Professional Indemnity in case of a lawsuit. To set yourself up as a sole trader, visit http://www.hmrc.gov.uk/selfemployed/register-selfemp.htm Copyright PCG September 2011 Guide to Freelancing Version 7.0 22
PARTNERSHIPS A partnership is a simple way for two or more people to work together. There are two types of partnership that you can set up: 1. Ordinary partnership 2. Limited liability partnership Ordinary partnerships Like a sole trader, an ordinary partnership is an unincorporated business. This means that the business is not a separate legal entity and the partners are personally liable for the business debts. Partners are jointly and severally liable so, if you‟re in business with someone with no personal assets then you could also find yourself liable for their share of any business debts. A partnership can continue even if one partner resigns or dies as long as there are at least two other existing partners left. If there is only one partner left, the partnership must be dissolved, however, the remaining partner can continue on the trade as a sole trader. If one partner takes on a debt, all the partners are jointly liable for repayment of the debt. If one of the partners resigns, dies or goes bankrupt, the remaining partners will still be personally liable for any outstanding debts. However, for tax purposes each partner is taxed on their own share of the profits and therefore, each partner is personally responsible for ensuring they pay the correct amount of tax on time through their own tax returns. Limited liability partnership An LLP is different from a traditional partnership in that it is a legal person separate from its members. It has “members” rather than partners and must be formally incorporated to exist. Like a limited company, an LLP has to submit accounts and an annual return to Companies House each year. This requirement is more demanding than for normal partnerships and specific accounting rules may lead to different profits from those of a normal partnership. However, unlike a limited company there are no requirements for board meetings or decision making by formal resolution, nor does an LLP have a memorandum or articles of association. Partners and members of an LLP can join and leave at any time without the partnership being dissolved. However, to be a partnership there would have to be a minimum of two partners/members present. How partners are paid and taxed For tax purposes an LLP is treated exactly the same as an ordinary partnership despite having limited liability. Each partner is taxed personally on their share of profits through their own selfassessment tax returns which will be subject to income tax and class 4 NICs. Whether you are a partner in an ordinary partnership or a member of a limited liability partnership, you are classed as self-employed and taxed on your share of any profit made by the business*. Your drawings from the business are not subject to PAYE and do not need to be processed through a payroll system. * For this to apply to LLPs, the business must carry out a trade or profession rather than being simply an investment vehicle. Copyright PCG September 2011 Guide to Freelancing Version 7.0 23
Page 3 and 4: SECTION 1: INTRODUCTION 1. About th
Page 5 and 6: SECTION 1 Introduction This section
Page 7 and 8: “I can‟t tell you how much admi
Page 9 and 10: THE FREELANCE CHECKLIST Time estima
Page 11 and 12: FREELANCE CHECKLIST CONTINUED... Ti
Page 13 and 14: Once you go freelance, you enter a
Page 15 and 16: What the IR35 Intermediaries legisl
Page 17 and 18: Specify your working relationship b
Page 19 and 20: Although it‟s perfectly possible
Page 21 and 22: • The registered office is the co
Page 23: Comparison between dividend and cap
Page 27 and 28: UMBRELLA COMPANY An umbrella compan
Page 29 and 30: SECTION 3 THE BOOKS This section co
Page 31 and 32: Do they come well recommended? If p
Page 33 and 34: KEEPING RECORDS What records should
Page 35 and 36: GET A BUSINESS BANK ACCOUNT Before
Page 37 and 38: Invoicing clients outside the UK If
Page 39 and 40: Debt collection top tips Be courteo
Page 41 and 42: 5. Pay all three taxes (PAYE, Emplo
Page 43 and 44: HOW TO PAY BILLS AND EXPENSES When
Page 45 and 46: Travel If you run a limited company
Page 47 and 48: SECTION 4 Paying the taxman This se
Page 49 and 50: WAYS OF ACCOUNTING FOR VAT Cash acc
Page 51 and 52: You can deduct one percent off the
Page 53 and 54: Upper Earnings Limit (UEL): £817 p
Page 55 and 56: Sole traders, partners and members
Page 57 and 58: SECTION 5 Running the show This sec
Page 59 and 60: 10 Top tips from experienced home w
Page 61 and 62: WORKING AT THE CLIENT‟S SITE It m
Page 63 and 64: WORKING THROUGH RECRUITMENT AGENCIE
Page 65 and 66: Legal Considerations: Agencies are
Page 67 and 68: Building rapport is ESSENTIAL. If y
Page 69 and 70: Website In the 2010 National Freela
Page 71 and 72: Freelancers often complain about th
Page 73 and 74: A good way of doing that is to send
Page 75 and 76:
The value of the final pension you
Page 77 and 78:
6 Risk prevention This section cove
Page 79 and 80:
EMPLOYERS‟ LIABILITY INSURANCE Al
Page 81 and 82:
PROFESSIONAL INDEMNITY INSURANCE Pr
Page 83 and 84:
PRE-DISPUTE TAX COVER HMRC Officers
Page 85 and 86:
BUSINESS INTERRUPTION INSURANCE Bus
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