Guide to Freelancing

Transcription

Welcome to the IPSE Guide to Freelancing. Please
bear in mind this guide is aimed at UK freelancers, so
any tax issues and other legalities mentioned here are
governed by British rules. All content within this guide
is correct at time of print and relates to figures for the
financial year 2013/14.
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Contents
01 Section 1
Introduction
»»
»»
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About this guide
About freelancing
If you do nothing else, do this.
05 Section 2
Setting up your freelance business
»»
»»
»»
Setting up in business
Limited company: why you might want one
Alternatives to a limited company
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Accountants
Bookkeeping
Money in the bank
Money in your pocket
Money out
16 Section 3
The Books: Handling the business finances
30 Section 4
Paying the taxman: What to pay, how and when
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Value Added Tax (VAT)
Taxation of limited companies
Taxation of sole traders, partnerships and LLP’s
37 Section 5
Running the show: How to manage a successful business
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Where is your HQ?
Winning work
Managing the workload
Financial planning
53 Section 6
Risk prevention: Insurance and protective measures
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Assessing risk
Compulsory insurance
Worth considering
Section 1
Introduction
This section covers:
1. About this guide
Who it’s for and how to use it
2. About freelancing
Career paths and how to go about it
3. If you do nothing else, do this.
The freelance checklist
About this guide
Hello and thank you for choosing the IPSE Guide to Freelancing. Please bear in mind this guide is aimed at UK freelancers, so any
tax issues and other legalities mentioned here are governed by British rules. All content within this guide is correct at time of
print and relates to figures for the financial year 2013/14.
If you’re just starting out...
Are you thinking of starting up as a freelancer, contractor or consultant? Some of the heavier tax and regulatory matters can
seem rather daunting if you’re not familiar with them – but it doesn’t all have to be done in one go. Give the whole guide a
quick scan first and then come back to individual chapters later, scheduling a separate chunk of time for each section. If you put
things in practice bit by bit, you will become much more fluent over time – developing that broad business savvy is one of the
most rewarding parts of being your own boss.
If you’re already established...
The guide is a useful reference source to keep abreast of current regulations.
Either way, don’t skip...
The freelance checklist at the end of this section. If you’re just starting out it will help you plan your launch and if you’re already
established it will help you to review your current set up.
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Taking the plunge...
“It’s easy to delay and make excuses about not being sufficiently
prepared. I’d say if you have a clear idea of what you want to be
doing, the skills to do it, and you have a financial buffer in place, just
jump in and give it a go. I honestly think one of the biggest hurdles to
starting out is worrying too much about being prepared. It can’t hurt
to read a few guides and talk to people, but when it comes down to
it if you’re suited to freelancing, you’ll soon find out. If not then you
can always just find yourself a regular job – nothing wrong with that.
Long story short, just get out there and do it.”
Frank G. Freelancer
And don’t forget, we’re here if you need us
IPSE is the UK’s only not-for-profit association dedicated to supporting, representing and protecting the freelance community.
So far 22,000 UK freelancers have joined IPSE because it helps them get ahead in business.
To find out more visit www.ipse.co.uk
About freelancing
“I can’t tell you how much admiration I have for people who leave
the comfort of a regular wage to strike out on their own. It takes a lot
of courage, and without that courage this country would be a much
poorer place,”
Prime Minister David Cameron
Freelancers play a pivotal role in Britain’s 21st century innovation-driven economy and are increasingly being recognised as key
drivers of wealth creation in the country. You no longer have to belong to a large company to be credible. In fact, big brands are
fragmenting and the personal brand is emerging as the force of the future. Experts are saying that, in the networked economy
of today and tomorrow, individuals are as important as a big company.
Different ways of freelancing
‘Freelancer’ is a broad term covering many different ways of working independently. Some people work on long term contracts,
doing a full week at a single client site for several months until the contract is finished or renewed. Others work with several
clients at a time or on a series of fast turnaround projects.
Freelancers use different terms to describe what they are, e.g. freelancer, contractor, consultant, independent professional,
interim, portfolio worker, self-employed, business owner. They use a range of legal forms to run their businesses, including
limited companies, sole traderships, partnerships, umbrella companies and others. They might brand themselves using their own
name, or else create a completely separate business brand and logo, presenting themselves as a small business rather than an
individual. Some work through agencies, others directly with their clients. Some charge by the hour, some by day or week, and
others give a fixed project fee. The unifying factor is that freelancers are their own bosses and have commercial, business-tobusiness relationships with their clients.
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To go freelance, you don’t necessarily have to work in the traditional areas associated with freelancing such as media or IT.
More and more people are finding creative ways to exploit their skills in all sorts of areas such as business development,
environmental consulting or even offering training in niche areas, for example selling to government departments.
Building your own career ladder
Freelancing is not for everyone. There are risks. It’s not an easy option. In fact, the survey conducted by IPSE in 2010 showed
that the general population was happier with working hours, time for themselves and time with family, than freelancers.
However, with risk comes reward. In the same survey, freelancers were shown to be happier overall than the general population.
IPSE’s annual membership surveys consistently show that most people go into it because they want to, not because they are
forced into it through redundancy, while only three percent plan to use it as a stopgap while they find a permanent position.
Moreover, two thirds of freelancers continue to work as freelancers because of the autonomy it gives them.
Anyone choosing the independent route will need to build their own career ladder and work out how to structure their business
in a way that frees up their full potential. The business will also need to be supported by some kind of promotional activity to
ensure a sustainable level of work. And when it comes to deciding which marketing technique works best, there is no magic
wand. There are almost as many views on effective marketing as there are freelancers. As with so many things, you have to take
what works for you, adapting the techniques that best fit your style and industry – the section in this guide on winning work
will give you some ideas to try out.
It is certainly worth experimenting with different approaches until you are able to narrow down those that deliver the best
results for you.
It’s a good idea to revisit your goals and long term plans regularly, benchmarking your journey and adjusting course if necessary.
There is nothing wrong with switching business models or re-inventing yourself completely at different points in your career.
For example, someone starting out as a programmer can later morph into a project manager and eventually into a management
consultant charging a premium fee.
“Just as travel broadens the mind, a freelancer will have a broader
and more colourful experiential mind-set than executives or ownermanagers”
Tony Lahert CEO, Step Solutions, Argos Direct
The Role of Freelancers in the 21st Century British Economy).
If you do nothing else, do this...
Time estimate
THE GRAND STRATEGY
About a day
Do a simple business plan. Template available to IPSE members
Couple of hours
Do a financial forecast. Template available to IPSE members
Under an hour
Write down a cash flow strategy to mitigate against late payments or income gaps.
Time estimate
ADMIN MATTERS
Couple of hours
Decide whether to set up as a sole-trader, limited liability partnership, limited
company, or under a PAYE umbrella.
Big decision. Allow a
day or so.
Source an accountant (unless you went the umbrella route). Ask for
recommendations and referrals on the IPSE legal & accounting forum. Check
whether the service includes a basic record keeping and invoicing system.
An hour or less
If your accountant doesn’t provide one, source a record keeping and invoicing
system. Ask for recommendations on the IPSE legal & accounting forum.
Check
Check
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Time estimate
ADMIN MATTERS
A few days
Get a bank account set up in your company/business name.
Couple of hours
Send relevant forms to HMRC (ask accountant for assistance). If in doubt, call the
IPSE tax helpline.
An hour or less
Consider the VAT Flat Rate Scheme – discuss merits with accountant and if
applicable, apply.
Time estimate
IT & SYSTEMS
Can take weeks
Install internet and email. Ask for help on the IPSE technical forum.
1 week
Get business phone line, mobile phone and, if necessary, a fax.
A few days
Source computer/s, printer, backup system and any other equipment needed - ask
for help on the IPSE technical forum.
Several hours
Install software.
Half a day
Set up a professional base to work from.
Time estimate
THE BUSINESS DRIVE
Half a day
Review business plan and decide which business model, price bracket and
marketing tactic to focus on.
A few weeks
Launch a new business drive based on the above.
A few days
Follow up hot leads.
Several hours on and
off
Review results and decide whether to continue or switch tactics. Swap ideas with
others on the IPSE contracting issues forum or at IPSE Real Life Meetings (RLMs).
Time estimate
GETTING READY TO DELIVER
20 minutes
Understand the project lifecycle from the client’s perspective.
Couple of hours
Develop a project briefing template to send to clients to help them specify
objectives, deliverables and project milestones.
About an hour
Understand the concept of a business-to-business working relationship and draft a
policy (for own record) establishing how this will be achieved with potential clients.
If in doubt, call the IPSE tax and contract helpline.
A few minutes
Understand the concept of a business-to-business working relationship and draft a
policy (for own record) establishing how this will be achieved with potential clients.
If in doubt, call the IPSE tax and contract helpline.
Under an hour
Download Terms and Conditions template and customise so it is ready to append
to proposals and quotations.
A few minutes
Download Mutual Secrecy Agreement template for any projects that might have
confidentiality issues.
Check
Check
Check
Check
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Section 2
Setting up your
freelance business
Working out the right trading structure
4. Setting up in business
Important rules and regulations, including IR35 and Employment Status
5. Limited company: why you might want one
Why many freelancers decide to set one up, what the implications are and how to go about it – also what to do if you eventually want to close the company down
6. Alternatives to a limited company
Other options explained, including sole trader, partnership, limited liability partnership and umbrella company
Setting up in business
Once you go freelance, you enter a new realm of laws and regulations.
The word ‘freelance’ is a layman’s term, not an official category used by the Government to classify workers. Therefore, ‘going
freelance’ actually means setting yourself up as a business by establishing a trading structure and letting the tax authorities
know what you’re up to.
These are the trading structures through which you can operate:
Trading structure
Legal category*
Your tax status
Limited company
Incorporated
Company director and/or employee of your company
Sole trader
Unincorporated
Self-employed
Partnership
Unincorporated
Self-employed
Limited liability partnership
Incorporated
Self-employed
Umbrella company
Incorporated
Employee of the umbrella
* An incorporated business is a separate legal entity. You can think of it as being like a separate person – it can own things, have
bank accounts in its own name, and it can be liable for debts or lawsuits. If you are unincorporated it means that you and the
business are one and the same – there is no legal separation.
Each of these structures has its own tax and legal implications. All of them can be set up fairly quickly, but some are quicker
and easier to set up and run than others (see the following chapters). Whichever way you chose to operate it’s essential to
start thinking in terms of the business, not you as an individual. You should think about having a business telephone line installed
separately from your private line and/or using a business mobile phone. If you already own a desk, computers and other office
equipment, you should consider ‘selling’ these to your business, initially recording the value as a personal loan to the business
from you, in the form of set-up expenses.
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Avoiding problems with the taxman:
‘Employment Status’
Employment status is an important issue to understand fully as it could influence decisions regarding your set-up.
Your employment status decides whether you should be treated as employed or self-employed for tax purposes. You might
think you are freelance or self-employed, but that doesn’t necessarily mean that the taxman will agree with you. The tax
authorities can challenge your employment status on any particular client contract if they think that you are behaving as if you
were that client’s employee – in other words, not a real business. This is known as ‘deemed employment’. If you do all your work
for one client, or if you have very long contracts with particular clients, you could be vulnerable.
The implications of being ‘deemed employed’ can be expensive because HMRC will seek to recover the higher levels of tax and
NIC that are payable by employees. Who they choose to recover the tax from, depends on your chosen business structure.
In addition your employment status also has an effect on other laws such as the Agency Workers Directive for more information
visit IPSE’s policy website pages.
Implications for sole traders and ordinary partnerships
Sole traders and ordinary partnerships are known as unincorporated businesses – in other words, you are self-employed as
opposed to having a separate corporate structure. As a result sole traders and partners in a business report their income on
their own income tax self-assessment return. Sole traders will complete a self-employment page and the individual partners will
complete a partnership page.
If, as a sole trader or partnership you are ‘deemed employed’ then your client will be liable for tax and NICs on the fees they
have paid you. This can be charged retrospectively for as long as the engagement took place, even if that means several years.
It can be very expensive and probably won’t do your client relationship much good if the situation should arise.
Implications for limited liability partnerships (LLP)
Under an LLP structure the Intermediaries Legislation (IR35) will apply and thus if the engagement is deemed by HMRC to be
‘employment’, the partnership itself will be liable for the extra tax and NIC’s both employer’s and employee’s.
Implications for limited companies
If you are the director of your own limited company through which you bill your client(s), and the taxman says you are ‘deemed
employed’, then the IR35 legislation can kick in, allowing HMRC to reclassify the engagement between you and your client as
‘IR35 caught’.
If you are working with more than one client you are less likely to be caught by IR35 however it is not impossible for IR35 to
apply to one or more of them since IR35 is assessed engagement by engagement.
The typical relationship involving a freelancer trading through a limited company is:
Engaging organisation (the client) – limited company service provider (your company/the “intermediary”) – the worker (you),
and there may be an agency between your company and the client.
What the IR35 Intermediaries legislation allows HMRC to do is create a ‘hypothetical contract’ which asks the question: “If the
intermediary (your company) was removed from the business relationship and the worker (you) were engaged directly by the
end client what would that relationship be?”
If HMRC can successfully argue that the relationship would most closely represent a contract of service (employment), then
only for tax purposes and only for the engagement(s) in question, you will be deemed an employee. And in this scenario, you
can only be deemed an employee of … your own company!
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The taxman will then insist that your own limited company should have deducted PAYE tax and NICs on the all of the fees paid
by the client, as if the fees were salary payments. The additional tax due can be charged retrospectively going back up to six
years. They may also charge interest and penalties, and there are likely to be accountancy fees to sort it all out. That’s how
contractors can find themselves owing tens of thousands and sometimes even hundreds of thousands in tax and NIC’s that they
weren’t expecting.
How HM Revenue & Customs assesses your employment status
Currently HM Revenue & Customs (HMRC) use three key employment status indicators called ESIs) to decide whether you
are a genuine business or whether you are in fact a ‘disguised employee’ of your client. The principle is that if you have an
engagement where you have to provide your personal service, where there is an obligation to offer and accept work and where
you can be controlled by the engager, then a contract of service (employment) exists.
Where any one of these three elements is missing, then it cannot be a contract of employment and so logically it must be a
contract for services (self-employment). In an ideal world, it would be best to “pass” all three key tests, but “passing” two is
better than one. But where these status indicators are inconclusive, one should also consider ‘in business’ factors or factors
which show that a freelancer is taking the kind of financial risk that would not be required of an employee. In essence, the more
factors in your favour the better.
Being in business can be most easily demonstrated by the type of expenditure you incur; for example, most employees do
not need to invest in office equipment and stationery to do their job. It is highly unlikely that an employee would need liability
insurances or to submit invoices in order to get paid. Also most employees will receive some form of employment benefits and
have the protection of employment law. If you are IBOYOA (in business on your own account) you will have to make provision
for all of these things and face the prospect of contracts terminating at short notice and with no guarantee of finding future
work etc.
The key is to think of yourself as a business and act as one. This goes beyond business structure - it’s a principle that actually
starts in your head. You are you, and the service you offer is your business. In short, genuine freelancers are in business on their
own account and bear the responsibility for the success or failure of their business. They are not ‘disguised employees’.
Ultimately, a number of factors can come together to create a whole ‘picture’ of your employment status. So rather than
relying on any single factor to protect you from being wrongly accused of being an employee, make sure the whole picture of
your status can reasonably be said to be that of a business. For more information, IPSE provides a wealth of resources for its
members, including tax and legal helplines, and specific guides to IR35 and the Agency Workers Regulations.
The Employment Status tests used by HMRC
TEST 1: Personal service
Employees are obliged to do the work
themselves, whereas, suppliers are not.
HMRC will, therefore, scrutinise whether
you genuinely have the choice to appoint a
substitute to deliver work for clients.
TEST 2: Mutuality of obligation
Employees are obliged to turn up for work and
there is an obligation to pay them, even if the
work is not up to standard, or if the work dries
up.
TEST 3: Direction and control
Employees may be directed in how to carry out
their work, whereas, ‘suppliers’ exercise their
professional judgement in how to carry out
their work.
How to pass this test
Develop a project briefing template to send to clients to help them specify
objectives, deliverables and project milestones.
Are you obliged to keep on doing the work, and is the client obliged to
keep on offering you the work? If yes, this is an indicator that you may
be deemed employed. If, on the other hand, either you or the client can
terminate the engagement relatively easily, this means you are not.
Does your client tell you what to do? Do they check up on you? Do they
provide you with a desk and/or the equipment you need? If so, there is a
danger they think of themselves as your boss, which would fail the test.
You should be the one proposing solutions based on your expertise and
bearing the risks associated with running your own business.
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Specify your working relationship by means of a contract
In a dispute the courts will look at the contract between your business and your client to infer whether or not you are actually
an employee by another name. Therefore, it’s essential to draw up a contract for any large project you take on. Furthermore,
it should be a contract for services with your business, not a contract of service with you personally. This contract should
accurately reflect the relationship between parties, and should include clauses that demonstrate your ability to send substitutes,
the lack of mutuality of obligation, and that you have direction and control over your work.
It is really important to have one professionally drawn up. IPSE members can download a template ‘contract for services’ at
www.ipse.co.uk/resources
IPSE members can download a comprehensive guide to IR35 from www.ipse.co.uk/resources.
Case study: Experiencing a tax investigation
Robert is a freelance project manager and infrastructure consultant. Out of the blue he was contacted by HM Revenue &
Customs (HMRC) who wanted to review the PAYE records of the limited company he operates to check he was paying proper
tax and NI. As a IPSE member he knew straight away what they were really interested in – checking his contracts to see if they
could deem him to be ‘IR35 caught’. HMRC suggested he call them, but instead he called the IPSE help-line which advised him
on his next steps.
The tax inspector asked to see his books and records for the last six years and spent two hours going through them. He wanted
a complete breakdown of expenses and asked Robert to highlight any mobile phone calls that were personal. Robert duly went
through them and found £4 of personal phone calls out of receipts totalling hundreds of pounds. Assuming the inspector would
dismiss this as an insignificant amount, Robert was surprised to hear him say “I’ll have to think what to do about that”. Then
the request came to view his client contracts for the previous five years. As expected, the inspector announced that they were
being passed to the IR35 compliance department.
IPSE provided Robert with an expert adviser, Jacqui Mann from Abbey Tax Protection. As a former tax inspector, Jacqui advised
Robert and his accountant throughout the IR35 investigation process and dealt with the authorities on Robert’s behalf. The cost
of this representation was covered thanks to his IPSE Standard membership. In the end the case was closed without Robert
being liable for additional tax or penalties.
“I felt very panicky at the beginning, but being a IPSE member has definitely helped the situation”, says Robert. “Having Jacqui
to represent me was very reassuring, and on top of that I was able to discuss it on the IPSE forums with others who have been
through the same experience.”
For more information on what to expect from a tax enquiry visit www.ipse.co.uk/resources
In a nutshell: Setting up in business
»» ‘Going freelance’ essentially means that you are setting yourself up as a business. To do this, you have to formally set up a legal business structure and let the tax authorities know how you are operating
»» Freelancers can operate as a limited company, sole trader, partnership, limited liability partnership (LLP) or umbrella company
»» The tax authorities scrutinise your client relationships and can challenge your employment status if they think you are not genuinely in business on your own account
»» If you are the director of your own limited company or operate as an LLP, through which you bill your client(s), you need to be aware of the risks of IR35
»» Working relationships with clients should be specified by means of a professionally drafted ‘contract for services’ – IPSE members can use the IPSE template contract
»» IPSE members are covered for tax investigations – if a revenue officer asks to meet for an informal chat, you are under no legal obligation to do so – instead ring the IPSE help-line for advice
»» Please visit IPSE website policy pages for more information about employment status and Agency Workers Regulations
8
Limited company: why you might want one
Although it’s perfectly possible to freelance as a sole trader or partnership, a large proportion of freelancers prefer to
‘incorporate’ – in other words, to set up a limited company.
One of the main reasons for this is that some clients are wary of working with unincorporated businesses because it puts them
at risk under the employment status rules. However, it’s not the only reason. Having a limited company lends certain credibility.
It is a separate legal entity, which helps to create a division between the person and the business. It also protects any personal
assets – if the company goes bust or gets sued, creditors can’t take your possessions as long as you haven’t acted fraudulently
or negligently, in which case they might be able to seize your personal assets (as specified in The Companies Act 2006).
Implications
A limited company is a distinct legal entity in its own right. It has rights and responsibilities and can own property or equipment.
This means that there are more rules and regulations to running a limited company than an unincorporated business. A number
of returns need to be made within a strict time limit:
»»
»»
»»
»»
»»
Company tax return
Company accounts and a computation of taxable profits
Form P35 in relation to salaries including directors remuneration
A form P11D (return of taxable benefits and expenses) for each director/employee
Personal tax return for the company directors
However, with the help of a good accountant, this isn’t unduly onerous. It will cost you a bit more than running an
unincorporated business, but on the other hand a company gives you a certain amount of control over when and how you pay
tax which can result in legitimate savings.
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Weighing up the benefits of a Limited Company
Pros
•Overcomes the hurdle of clients who won’t deal with sole
traders or partnerships
Cons
•There are more rules and regulations
•Personal assets are protected against company debts*
•If you get hit with IR35, you get stung with the bill, not the
client
•You can control how you pay yourself to ensure tax
efficiency
•There is more admin due to the legal reporting
requirements and number of returns that have to be made
•If you are working through a recruitment agency, the
agency or the client can pay your limited company gross.
A recruitment agency must pay all others as if they were
employees by applying PAYE
•Accountancy fees tend to be slightly higher for a limited
company
•The penalties for getting it wrong or submitting returns late
are greater than for sole traders
•It’s easier to set up trade accounts with suppliers
•Owner managers can get Statutory Sick Pay, Statutory
Maternity Pay and similar benefits**
•You can’t just withdraw money from the business without
formally recording it as salary, dividend or loan
•Can have occupational pension scheme and NIC relief for
pension payments
•Your company must pay a 25% tax on any money you
borrow from your company if you don’t repay it within nine
months of the year end (this is repayable after the loan has
been repaid), HMRC will also charge interest on the unpaid
amount
•A limited company can raise funds through Venture Capital,
Enterprise Investment Schemes or sale of equity
•The company has to pay corporation tax on gains made if
you sell company assets.
•Entitled to R&D tax credits
* As long as you haven’t given any personal guarantees or acted negligently
** 10% of Statutory Maternity Pay is paid to small employers, so the owner managed company can claim the cost back from the Government
with a 5% margin. As the cost is borne by the company and then recovered, the margin remains within the company. Sole traders cannot claim
Statutory Maternity Pay but if you are registered self-employed and are paying Class 2 National Insurance Contributions (NICs), you will be
eligible for Maternity Allowance (MA) for 39 weeks. This pays a standard weekly rate of 90 per cent of your average gross weekly earnings
(before tax) for the first six weeks. For the following 33 weeks you will get either the standard rate of £135.45, or 90 per cent of your
average gross weekly earnings, whichever is the smaller. For more information about maternity pay please visit http://www.nidirect.gov.uk/
statutory-maternity-pay.htm
The Rules
»» The company must have at least one director and a registered office, and must have “Limited” or “Ltd” after its name.
»» Private limited companies are not obliged to appoint a company secretary unless the company’s articles contain a reference to the company having a secretary.
»» Ownership in terms of the split of shares in the company is up to you but many freelancers split the shares with their spouses. HMRC have previously attempted to challenge this type of set up, in particular, with the infamous Arctic Systems case, which HMRC lost at the House of Lords. Following the case HMRC proposed a new set of rules to combat what they called ‘income shifting’; however, these are still on hold. In general, it is considered best to make the split when the company is first formed and in the case of a husband and wife, ensure that the shares subscribed for or provided to the spouse are full ordinary shares. IPSE members can download the guide to Family Business Tax for more information.
»» The registered office is the company’s legal address and it can be your accountant’s office, your own office premises or your home office. In the case of a home office, it is important to check the terms of any lease or
mortgage agreement to make sure there are no restrictions regarding commercial operations.
»» The registered office must be within the jurisdiction in which the company was incorporated. So a company formed in Scotland must have a registered office in Scotland and a company formed in England or Wales must have its registered office in England or Wales. Legally, a plaque or sign must be displayed outside the building to show that this is the company registered office, although IPSE does not know of any freelancers who Guide to Freelancing
10
have been prosecuted or investigated for failing to comply.
»» A limited company must file annual accounts with Companies House and also a corporation tax return accompanied with the accounts to HMRC. The limited company must also complete an annual return to Companies House. This document confirms details of the shareholders and directors of the company.
»» Finally, any company with an annual turnover in excess of £77,000 from April 2012 must register for VAT. More information on the requirement to register is given in the VAT section.
The role of the Company Directors
As a company director you are legally responsible for making sure the company is run properly, according to the law and in
the interests of the shareholders. The latter shouldn’t be too hard given that you and/or your spouse are probably the only
shareholders.
A director of a limited company is not strictly an employee of that company unless he/she has a contract of employment.
Although not a legal obligation, some freelancers draw up a contract of employment as it can help make the case that you are
not IR35 caught. However, bear in mind that ‘employment’ leads to such responsibilities as the provision of the minimum wage
and other statutory benefits. Your accountant may have a standard contract that you can tailor to your specific needs or it may
require you to engage the services of an employment law contract specialist to create one.
Questions to ask yourself
»» How long are you intending to freelance or contract for? (If it’s just a few months, it’s probably not worth setting up a limited company)
»» Can you handle the legal responsibility of being a company director?
»» Can you set up proper business to business relationships with your clients so as to avoid being IR35 caught?
»» Can you simplify the admin with the help of a good accountant?
How to set up the Limited Company
Some freelancers consider putting some of their own personal money into the business as a loan from you to the business.
This can be repaid later as the business begins to generate income. If your business subsequently folds you may then lose your
investment.
The easiest way to set up a limited company is to ask an accountant to set one up for you, or to use the IPSE Start-up package.
Accountants usually charge around £100-£150, although some do it for free by absorbing the cost into your ongoing monthly
fee.
You can also do it yourself, which can be a bit cheaper - around £40 (or £100 for a same day service).
You can find out more about this in the guidance booklets available via the Companies House website
www.companieshouse.gov.uk.
What to do if you want to close the company
If, for whatever reason, you decide you want to close down your company, you will need to complete a ‘Striking Off Application
(DS01)’ form available on the Companies House website (www.companieshouse.gov.uk) – you need to have stopped trading at
least three months before.
If there are any funds left in the company, you need to decide how to take it out. There are three options: 1) take it out as
dividends or 2) take it out as capital 3) make a company pension contribution. Option 2 should, in a typical scenario, be the
more attractive than Option 1. Check with an accountant, financial planner or tax planner to make sure the principle works with
your specific situation.
11
Option 1: Take all the money out as dividends
All remaining funds in the company after payment of all liabilities are treated as a final dividend distribution and allotted to
the shareholders as usual. As of 2012/13, all dividend income at or below the £34,370 basic rate tax limit is taxed at 10%.
Dividend income at or below the £150,000 higher rate tax limit is charged at 32.5% and the higher rate dividend tax rate is
now 42.5%. Careful planning is required here as you might not know what other income you will receive in the rest of the tax
year.
Option 2: Take all the money out as capital
To do this you need to let HMRC know that you intend to make a claim under ‘Extra Statutory Concession ESC C16’. Essentially
this concession treats the final distribution of the company as capital, rather than revenue and is therefore subject to Capital
Gains Tax (CGT) rules.
There are two useful reliefs for CGT:
1. The first £10,600 of annual capital gains are exempt from tax, and this applies to each taxpayer.
2. There is also Entrepreneurs Relief. Normally, gains between £10,600 and £34,370 are charged at 18% and
gains above £34,370 are charged at 28%. However, with Entrepreneurs Relief the tax rate on the gain is only 10%.
You can claim this relief if:
»» the company is your ‘personal company’, i.e. you own a minimum of five percent of the voting shares, and are an employee/director of the company
»» the company is a qualifying trading company. There are limits on the amount of non-business assets the company can hold in order to meet the criteria – accumulated reserves count as non-business assets.
Option 3: Make a company pension contribution
If you have a pension shortfall, you can make a lump sum contribution of up to £50,000 into a pension. From the tax year
2014-15 onwards, this will be reduced to £40,000. This should reduce your Corporation Tax bill for your last year of trading, as
they are an allowable expense under the revenue’s “Wholly and exclusively” rules. It will also reduce the CGT bill in Option 2 as
the lump sum will be taken out of the business before it is closed down.
Comparison between
dividend and capital distribution
A husband and wife are both 50/50 shareholders of their limited company, so the funds are divided equally. They decide to
close the company and there is £75,000 left in the company after all liabilities have been paid. They have no other capital
gain occurring in the year and are eligible for Entrepreneurs Relief. Therefore, they are able to create significant savings by
distributing the funds as capital rather than dividends.
The dividend route
The capital route
Dividends
£75,000
Capital
£75,000
Taxable amount
£75,000
Taxable amount after
allowance of £21,200
(£10,600 x 2)
£53,800
Tax liability
If at 25% rate
If at 36.11% rate
£18,750
£27,082
Tax liability
10% if claiming
Entrepreneurs Relief
£5,380
Important note: HMRC can enquire into a company tax return up to two years after the end of the accounting period. If you
are an IPSE member and you have decided to stop freelancing, you are, therefore, advised to maintain your membership to
cover the two year window in order to remain protected in case of a tax investigation.
12
In a nutshell: Limited Companies
»» ‘Incorporating’ or operating as a limited company is a popular route for freelancers - many clients have a policy of not working with sole traders
»»
»»
»»
»»
Because of the admin involved, it is not worth setting up a limited company if you only plan to freelance for a few months
Running a limited company is a big responsibility – you need to understand the rules
An accountant can help you set the company up
HMRC can investigate company accounts up to two years after the end of the accounting period, including the accounts for the year you cease to trade.
Alternatives to a limited company
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
13
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 self-assessment 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 selfemployed 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.
Setting one up
Although it is not a legal obligation, partnerships should have a comprehensive member agreement in place and take legal or
professional advice about the issues covered in the agreement.
As a member of a partnership you need to register as self-employed, which can be done online via the HMRC website. See
www.hmrc.gov.uk/partnerships.
To set up an LLP you also need to incorporate the partnership – you can find out more here: http://www.companieshouse.gov.
uk/about/gbhtml/gpllp1.shtml
Alternatively you can appoint an accountant as your agent – they can advise you on the implications and handle the set-up
process for you.
A partnership is a good choice if...
»» Your current 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
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»» You protect your personal assets by taking out adequate insurance cover, for example Professional Indemnity in case of a lawsuit
»»
»»
»»
»»
You don’t want the responsibility of being a Company Director
You and your partners have compatible skills and a clear, shared vision
All of the partners have high levels of trust in each other
You have a partnership agreement professionally drawn up
A limited liability partnership is a good choice if...
»» You want the reassurance of having your personal assets protected
»» You don’t mind the extra admin involved in sending accounts to Companies House
»» You don’t want the extra responsibility of running a limited company
Find out more at www.hmrc.gov.uk/partnerships or appoint an accountant to set one up for you
Umbrella Company
An umbrella company is a service for people who don’t want to or need to run their own limited company. By joining an umbrella
service you’re handing over the responsibilities and admin to a service provider. You become an employee of the umbrella
company – the umbrella then bills your client through its own limited company structure and pays you a salary, with PAYE
tax deducted at source, based on the work you do for your clients. You still have to land your own work, but they do the
rest, such as payroll, debt collection and paperwork. It’s very easy, saves time, and removes the need to be aware of the legal
requirements and risks involved with running a limited company.
The downside is that it’s not your own company and, therefore, it’s harder to build your own brand. It’s also less tax efficient
because all the money is paid as employment income. However, if you are intending to contract for a short period, say a few
months, this could prove to be the best option. If you are unavoidably ‘IR35 caught’ it may also represent a good choice – IR35
becomes irrelevant because the fees you earn from the client have the full PAYE tax deducted at source when they are paid to
you as salary.
Make sure that the umbrella company you choose is a PAYE Umbrella. Any providers that claim to be able to pay you gross,
without deducting tax at source, are likely to get you into hot water with the tax authorities. If you decide to go the umbrella
company route do your research, seek peer recommendations and consider carrying out credit checks. You should also be very
wary of any offshore solutions - IPSE has a policy of advising against aggressive tax avoidance schemes.
Will an offshore company protect me from IR35?
Some freelancers have been told that they can use an offshore company to avoid IR35. It does not matter where your company
is incorporated as this does not affect how HMRC determines IR35 status. There are freelancers working in the UK with
companies incorporated in countries such as Ireland, the Netherlands and so on. There are reciprocal legal and tax agreements
between the UK and these countries. However, some agents and clients are nervous about dealing with foreign companies.
Certain offshore schemes have used an umbrella structure and divert bonuses or other income into loans or employee benefit
trusts, whilst IPSE cannot comment on specific cases, arrangements of this nature are subject to very close scrutiny by
HMRC (particularly since the June 2010 Budget and the subsequent anti avoidance legislation that has either been passed or
proposed) and indeed some schemes have been successfully challenged by HMRC with retrospective taxation applied. Careful
investigation should be applied before entering into any of these arrangements, schemes of this nature are not covered under
IPSE’s tax investigations insurance policy.
An umbrella company is a good choice if...
»»
»»
»»
»»
You don’t want the responsibility of being a company director or the hassle of handling your own business admin
You are only planning to freelance for a short time
You are unavoidably IR35 caught
If you wish to have a taste of freelancing without committing to setting yourself up in business
15
Section 3
THE BOOKS
Handling the business
finances
7.Accountants
Why it pays to get one, what to look for and where to find one
8.Bookkeeping
How and why it is important to maintain proper records
9. Money in the bank
Setting up a business account, how to submit invoices and tips for chasing outstanding debts
How to pay yourself from the business
10.Money out
What you can and can’t claim as a legitimate business expense
Accountants
Why it pays to get one
Legally there is nothing stopping you from keeping your own accounts if you so wish, using an accounting package such as Sage
or QuickBooks. Sole traders, for example, may be less inclined to get an accountant. However, many freelancers do prefer to
have their accounts done by a professional, so they can get on with doing what they do best. At the end of the day it is your
legal responsibility to make sure your accounts are correct, so it really is worth the cost. Using a qualified professional also helps
show the tax authorities that you are taking extra steps to comply with the rules.
An accountant can provide tax advice, complete the relevant tax returns and, if you have a limited company, produce the
mandatory end of year accounts, which includes the P&L and balance sheet. Some accountants may also offer additional
services, such as bookkeeping, including recording and processing of receipts and expenses and invoicing.
For the basic service, a good business accountant will usually charge between £60 and £120 plus VAT per month to draw up
the end of year accounts and tax returns for a limited company. VAT returns are sometimes included in this fee as well. If you
operate as a sole trader or partnership, your accountancy needs may be moresimple and you could therefore be charged less.
Tax is a complex area and the rules for freelancers can change from one year to the next. Good accountants are an excellent
source of advice. For complex issues, it’s often worth getting a second opinion as well - IPSE members can contact the tax and
legal help-lines with any queries.
16
Where to find a good accountant
Go to www.ipse.co.uk and browse the list of IPSE Accredited Accountants – they have been given specialist training in
freelance-specific issues and have undertaken and passed an exacting training and assessment programme. If you are an IPSE
member, you can also ask for recommendations from other freelancers on the IPSE forums – people tend to reply very quickly,
sometimes within minutes.
What to look for in an accountant
Do they understand freelancing?
Don’t be afraid to ask about the firm’s experience of freelancing. Also, question the accountant’s knowledge about specific
freelance regulation, such as IR35. It is important that you feel confident in the service they provide.
Do they suit your individual business requirements?
Consider how you prefer to work and then ask relevant questions in order to make sure the service is suited to your specific
needs. You may wish to enquire about typical response times, how contact will be maintained, who will manage your account
and act as your main contact. Run through your business plan and detail any areas in which you would like the accountant to be
involved, such as business advice, financial reporting, tax and auditing work. Find out if they offer any additional services you
may require, such as management accounts, cash flow forecasting, advice in respect of other business activities/investments or
tax planning.
Do they come well recommended?
If possible ask to speak to freelance clients who are currently on their books. Other freelancers in your network can also provide
vital insight that will help you avoid potential pitfalls when choosing an accountant.
Do they belong to one of the Chartered Institutes?
This will offer you more protection against malpractice. Remember that anybody can call themselves an accountant but the
main professional bodies all insist that their members carry adequate Professional Indemnity insurance, as well as running their
own strict disciplinary schemes (including dispute resolution).
Do they charge fixed fees, monthly or hourly?
You need to know what you’ll be charged so that you’re not caught by hidden extras. Make sure you are clear about what
is included in your package and any additional charges that you might incur. Fixed fees are becoming increasingly common
although some accountants do charge on an hourly or monthly basis. If possible try and meet your new accountant face-toface. It will help build the relationship, moving the arrangement beyond being simply ‘an accounts processing service.’
“You simply can’t be a one-man accountant, lawyer and all the rest,
and do the thing that you’re very good at doing.”
Michael Darby, Freelance branding consultant
In a nutshell: Accountants
»»
»»
»»
»»
Use an accountant – it’s a more efficient use of time, resource and expertise
Shop around carefully for the right accountant – it’s an important decision
Don’t forget you are the client – ask questions until you are satisfied with the answers
Budget between £700 and £1500 plus VAT per year for accounting, depending on whether you’re a sole trader or running a limited company
»» Visit www.ipse.co.uk to source specialist freelancer accountants
If you’re a IPSE member, it can often be worth getting a second opinion from the IPSE tax and legal help-lines.
17
Bookkeeping
Setting up a system
Bookkeeping is the first stage in the overall accounting process and is usually done by the freelancer, although it is possible to
outsource it to your accountant. Bookkeeping involves recording, analysing and filing all the financial information generated by
the business, such as income generated through invoices, expenses and bank transactions. Not only does this provide essential
figures to help you stay on top of your business – you also need it so that you or your accountant can complete the relevant
accounts and tax returns. And if you are inspected by the tax authorities, you need to show that you have a proper system in
place.
Your accountant may provide you with a system. Alternatively, there are a number of excellent systems available that allow you
to do everything from project estimating, timesheets and invoicing, through to calculating VAT and producing profit and loss and
balance sheet statements (see next page). If you’re a IPSE member, ask for recommendations on the forums.
The implications of not keeping proper records
A new approach to BRC started on 1 November 2012. Customers who are more likely to be at risk of having inadequate records
will be contacted by letter to arrange for HMRC to call them to go through a short questionnaire.
Depending on the outcome of this call, HMRC will confirm to some customers that no further action is required. Where some
issues are identified, customers will be offered targeted self-help education options. Customers who are assessed as being at
risk of keeping inadequate records will be referred for a BRC visit.
As of July 2011, HM Revenue & Customs (HMRC) will be investigating up to 50,000 SMEs a year to seek out what it refers to
as “poor record keeping”. Penalties include fines of up to £3,000 imposed for “significant record keeping failures.” You can keep
up to speed with any changes via the IPSE newsletter.
A selection of bookkeeping systems for freelancers can be found here on the IPSE website.
As well as being a legal requirement, proper financial records help you stay on top of your business. There are many
useful systems on the market to help you keep your paperwork in order.
Keeping Records
What records should be kept?
The short answer is, keep everything. The law doesn’t prescribe what records to create, but does say that if you create any
records in your business, these should be retained. You may not always get evidence, such as a receipt, for small cash expenses,
but if this happens, make a brief note of the amount you spent, when you spent it and what it was for. The record must be
made contemporaneously, in other words near the time of the event rather than retrospectively.
If tax authorities were to inspect your records, they might ask to see any of the following:
»» A list of all sales income and other business receipts as they come in, plus supporting records, for example, invoices, bank statements and paying-in slips to show where the income came from
»» A list of all purchases and other expenses as they arise, with supporting receipts or invoices (unless the amounts are very small)
»» All purchases and sales of assets used in your business
»» All amounts taken out of the business bank account, or in cash, for your own or your family’s personal use
»» Business diaries, mileage logs, minutes of Board Meetings, i.e. supporting records as well as the primary accounting records
»» All amounts paid into the business from personal funds, for example, the proceeds of a life assurance policy.
Do they have to be kept in paper form?
You don’t have to keep hard copies of the records if you don’t want to accumulate a warehouse full of physical receipts. HMRC
says the following about scanning or storing records electronically:
18
“You can keep most records on a computer or use any storage device
such as CD-ROM, USB memory stick or a network drive. You may
not need to keep the original paper records as long as the method you
use captures all the information ( front and back) on the document
and allows the information to be presented to us in a readable
format, if requested.”
How long records need to be kept
The law specifies different time periods according to the type of record. These are the main ones:
Payments cash book
6 years (Companies Act)
Purchase invoices (revenue items)
Purchase invoices (capital items)
Purchase ledger
Petty cash records
7 years (Companies Act, VAT)
Bank paying in counterfoils
6 years (Statute of Limitations)
Bank statements
Receipts cash book
Sales ledger
Remittance advices
Deeds of covenant
Income tax and NI records
6 years (Taxes Management Act)
Payroll and payroll control account
Staff personnel records
7 years after cessation of employment
(Statute of Limitations)
Expense accounts and records
Title deeds, leases, searches etc
12 years after interest in property ceases
(Statute of Limitations)
Fixed assets register
Indefinite (Companies Act)
Agreements (under seal)
12 years after expiry (Statute of Limitations)
Agreements (other)
6 years after expiry (Statute of Limitations)
In a nutshell: Bookkeeping
»» You can be fined up to £3,000 for each year you fail to keep proper records
»» Keep all records you generate – any receipts you claim, invoices you send out, bills you receive, payslips, dividend vouchers
»» Records can be computer based – you don’t need paper versions of receipts and invoices as long as all the information is there and readable
»» Use one of the many systems available to keep everything organised.
19
Money in the bank
Get a business bank account
Before charging any money to clients, you need a dedicated business bank account. If you have a limited company, then ‘you’
are not the same in legal terms as ‘the company’, so ‘the company’ needs an account in its own name. The money in that
account doesn’t belong to you until it is formally paid to you by the company.
Sole traders also benefit from having a separate business bank account. Although a sole trader’s business is not a separate
legal entity in the same way that a limited company is, you still need to keep your personal affairs separate from those of the
business. Having a separate business bank account will help you do that.
Choosing a bank
Some people prefer to have the accounts in separate banks so that the bank can’t use knowledge about your business to make
decisions regarding your personal finances. However, others prefer to develop a relationship with a particular bank. This can also
make it easier to transfer money between personal and business accounts.
You don’t need to choose a bank with a local branch. There are specialist small business accounts and high-rate business savings
accounts available over the internet and from non-high street banks. A bank that offers internet banking can also be very
convenient – check whether you can download statements in a .csv or Excel format – that could speed up your bookkeeping as
you won’t have to enter transactions manually.
Many freelancers choose to run two accounts – a business current account for everyday transactions and a business deposit
account to set aside money for tax and VAT. Look for accounts that offer free banking and a good rate of interest on cash
savings – you may be keeping thousands of pounds of tax money in there. Rates vary but should be within a couple of
percentage points of the current Bank of England rate.
Issuing Invoices
What to put on the invoice
1. A clear header saying ‘invoice’.
2. A unique identification number – if your business is VAT registered, it is advisable that this needs to be a sequential number, in other words, part of a series, so that the next invoice follows on from the last.
3.
The name that you regularly use for the business. If it’s a limited company you also need to include the full name of the company as it appears in the certificate of incorporation (you can put the main brand name at the top and the officially registered name as small print in the footer). Limited companies can, if they want to, include the names of the company directors on their invoices, as long as all the directors’ names are included.
4. Your business address. This must be an address where any legal documents can be delivered to you. If your business is a limited company and the business address is different to the registered address, then the registered address should also be included in the small print.
5. Your company registration number if your business is a limited company.
6. Your VAT registration number if your business is VAT registered.
7. The company name and address of the customer you are invoicing.
8. The date that the invoice is being issued (the tax date).
9. A clear description of what goods and/or services were delivered.
10. The date the goods or services were provided (supply date).
11.A column showing the number of units of the goods or services supplied (for example 3 hours), a column showing the price/rate per unit and a column showing the total for each item without VAT.
20
12. If your business is VAT registered, then add three more columns: the percentage of VAT that applies to each item, the total amount of VAT payable per item and then the total amount of each item including VAT.
13. At the bottom show a grand total of all items without VAT, the total amount of VAT owed and finally, a grand total of everything including VAT.
Many agencies will ask you to sign a “self-billing” agreement. This just means that they will prepare a combined invoice and
payment confirmation for you, based on your timesheet. This saves you the bother of having to bill them.
Many electronic bookkeeping systems include an invoicing function that lets you customise a template, generate
invoice numbers, issue invoices and track payments. IPSE members can also download an invoice template from
www.ipse.co.uk
Invoicing clients outside the UK
If you’re supplying services to a client outside the UK, there’s the issue of what to do about VAT. Here’s what to do if your
business is based in the UK and you are invoicing a client with an address in the EU:
1. Don’t include any VAT on the invoice, irrespective of the fact that you are VAT registered in the UK
2. Put the letters ‘GB’ either before your invoice number or in front of your VAT Registration Number
3. Include the recipient’s EU VAT registration number on the invoice. If they don’t have one you need to prove it is a business transaction by asking them to send you a purchase order or official company request, which you keep on file in case you are ever challenged
4. Include the following phrase on the invoice: ‘These services are outside the scope of UK VAT and are subject to reverse charge arrangements’
21
5. Bear in mind these principles apply to the supply of most traditional freelance services – if it’s not a business to business transaction, or if you’re supplying goods, then that will change things and you should seek advice (if you’re a IPSE member the tax help-line is a good port of call).
Invoices sent to clients in countries outside the EU can be slightly more complex. They are also outside the scope of UK VAT,
so in theory whatever local VAT is payable is the client’s problem. However, some countries may have special rules that could
make it your problem as well. For non-EU countries it’s therefore best to double check with that country’s tax authorities. As a
starting point, try the IPSE forums as members work all over the world and there is usually someone who can point you in the
right direction.
Staying on top of cash flow
For any business, cash flow is extremely important. Every year lots of profitable businesses go bankrupt because they don’t
have cash at the right time. A good invoice system and easy to understand payment terms are key to healthy cash flow. These
are some tactics to consider:
»» Send out your invoices promptly, and ensure that they are sufficiently clear and detailed, and that they reflect the terms of your contract, so that the client does not have any reason to query the invoice or delay or withhold payment
»» Make sure that your terms and conditions are clearly outlined in your contract with the client, and that there is no scope for ambiguity
»» Ask for a deposit payment in advance, of 20% or 50%, for example
»» Don’t assume that you have to offer 30 day payment terms – try offering 14 days instead, and where third party expenses recharged at cost are involved, insist on repayment within seven days
»» Offer early discount settlements
»» Chase outstanding invoices and keep dated notes of all conversations
Getting the terms and conditions right
To protect yourself from late payment make your credit terms clear in the original contract. It’s also a good idea to vet new
clients that don’t have a visible track record. This could mean asking for references from some of the client’s other suppliers, or
doing a professional credit check. IPSE members can get discounted rates on credit checking from Creditsafe.
Your terms and conditions should cover your costs, your delivery arrangements and your payment terms. For example, do you
want full or part payment in advance or payment in arrears? If you are prepared to give credit – say 30 days, then say so here.
Many businesses give credit to clients, but if you’re not certain that the client will pay up then you can ask for payment upfront.
You can also state your right to charge interest on late payments and to claim compensation for debt recovery costs. You need
to make your client aware of, and agree to, your terms and conditions at the outset and give the client the opportunity to
discuss any problems they may have before you submit your invoice. Make sure your terms and conditions are also sent out
with the invoice once the work is complete.
IPSE members can download template terms and conditions from www.ipse.co.uk
Tackling late payments
“Credit vetting, terms of trade, accurate invoices and a good rapport should all form part of the structured approach you take
when dealing with your customers,” says Philip King, director general of the Institute of Credit Management.
However, even with a good system in place, sooner or later most freelancers and contractors will have to chase up a late
payment. When that does happen, it helps to be armed with the latest information on your clients’ legal requirements.
Since November 1998, small companies have been able to charge business customers interest on late payments, under the
Late Payment of Commercial Debts (Interest) Act 1998. Small businesses can charge other businesses interest at eight percent
plus the Bank of England base rate. If you have not specified a credit period in your contract it will be assumed to be 30 days
from delivery or invoice, whichever is later. If payment is not forthcoming, after the credit period is up you need to follow up the
invoice with reminders, which can be phone calls, letters, emails or faxes.
Remember, when it comes to tackling late payments you generally deal with the accounts department rather than your direct
client so it can make the process less awkward.
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During the collection process you may encounter customers who either can’t or won’t pay. You may need to impose collection
sanctions such as stopping supply, reviewing the credit limit, imposing interest, use of a collection agency or legal action.
“For customers who genuinely can’t pay, it is important to determine
the cause of the problem and how serious it is, what is being done to
resolve it, what you can do to help and what, if any, assurances can be
offered in return for your help,”
suggests King.
It may be in your interest to negotiate a settlement such as a payment plan. For customers who simply ignore requests for
payment, or make endless promises to pay you may need to threaten, or even take legal action. Take the advice of a solicitor
before taking legal action.
Debt collection top tips
Be courteous
Remember that every contact you make with your client can add to your existing relationship. A professional but friendly
approach can earn your debtor’s respect and cement loyalty.
Convey urgency
Emails and faxes are useful tools in the collection armoury as they convey urgency and often beat defensive barriers when
letters are being ignored or phone calls diverted.
Be systematic
Incorporate phone calls into your collection strategy. A good strategy will timetable appropriate dates for issuing invoices,
making phone calls and issuing reminders.
Be prepared
Check that the information relating to the outstanding debt is correct and that the information is readily available when making
phone calls – i.e. the account number, the invoice date and the balance due.
Be organised
Log the details of the phone call to remind you what action to take next, but make sure that you do not log any information that
contravenes the Data Protection Act 1998. The website of the Office of Public Sector Information includes further details on
this Act.
For further information see also CreditSafe’s fee recovery service and IPSE’s guide to Credit Management and Control
“With new clients I often call the accounts department before an
invoice is due to check that it’s in the system. Many organisations
have fixed days when they do payment runs – I time my invoicing
accordingly. It tends to be the suppliers who are politely persistent
who get paid first.”
Charlie Bradburn, copywriter/consultant
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In a nutshell: Money in the bank
»» Set up a dedicated business bank account - for a list of possible providers visit www.ipse.co.uk
»»
»»
»»
»»
»»
Make your credit terms clear in your initial client contract. Terms do not need to necessarily be 30 days
Create an invoice template which meets all legal requirements
Different rules apply when invoicing clients outside the UK
Errors on invoices are likely to delay payment, check the details with the client before submitting your invoice
Send invoices promptly and have a system in place for following up on late payments
Once clients have paid their invoices, there are various things you can do with the money sitting in the business account:
1. Use it to pay bills, expenses or taxes.
2. Keep it in the business for a rainy day or to invest in growth.
3. Extract it from the business for your personal use.
Extracting money: Sole traders and partnerships
Extracting money from the business is straightforward if you’re an unincorporated business (i.e. you’re self-employed rather
than a company). Any profit left over after tax can be drawn from the business account if you wish.
To calculate the taxable profit:
A. Add up your invoices (excluding VAT).
B. Add up all your legitimate business expenses (excluding VAT).
C. Subtract the expenses total from the invoice total – that’s your profit.
Set aside any money for tax and bills that you owe (plus VAT if applicable – see the section on VAT). Any money left over is
yours.
Note that partners in a partnership are taxed on their share of the profit.
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Extracting money: Limited companies
If you run a limited company, the money received by the business isn’t yours. It still belongs to the company. To transfer any
profits to your personal bank account you need to formally record the transaction as either a salary or a dividend. There are tax
implications when doing this.
Paying yourself a salary
When you receive a salary, your salary is subject to certain taxes that must be accounted for by your limited company. They are:
»» PAYE (Pay As You Earn) Income Tax.
»» Employee’s National Insurance Contributions (NICs).
»» Employer’s National Insurance Contributions (NICs).
The process for paying yourself is as follows:
1. Decide how much to pay yourself each month. They can be varying amounts, but usually people set a monthly amount payable on a fixed date - this can be topped up by one-off bonuses as needed.
2. Transfer the amount from the business to the personal account on the agreed date.
3. Record the transaction as salary on your bookkeeping system, including the date and the amount.
4. Tell your accountant what salary you paid yourself each month – the accountant will issue a monthly pay slip showing the tax deductions.
5.
Pay all three taxes (PAYE, Employee’s NICs and Employer’s NICs) to HMRC from the business bank account – this is usually done monthly by direct debit. Your accountant can advise on the due dates. These payments must be made electronically and the cleared funds need to be in HMRC’s bank account by the 19th day of the month after the salary was paid.
Paying yourself a dividend
Dividends can be paid to the owners (shareholders) of a company from the retained (post tax) profit provided that the correct
procedures are followed. This involves the Board of Directors having a meeting, formally voting the dividend and providing a
written record of that decision. There must also be documentation in the form of a dividend voucher which is then issued to
the shareholder(s). Dividend paperwork must conform to the law – IPSE members can download a dividend voucher from the
freelance toolkit section of www.ipse.co.uk.
The advantage of paying yourself dividends is that neither employee nor employer NICs are payable. However, the total paid out
in dividends cannot exceed the retained profits of the company. Your accountant can assist you with calculating funds available
for distribution and preparation of the appropriate paperwork.
Dividends can be declared as often as you like, although if you are paying yourself regular dividends of the same amount (e.g.
£1,000 once a month) there is a risk that the taxman could reclassify the payments as salary, which would negate any benefit
from receiving dividends upon which neither employee nor employer NICs are payable.
The payment of a dividend should be completely separate from other payments; i.e. do not fall into the trap of transferring one
monthly amount from your business to your personal bank account which is a composite figure of salary, expenses and dividend.
If HMRC see such a payment, they may try to argue that it is all salary!
Calculating dividends
The value of the gross dividend which can be distributed depends upon the realisable profit of the company. In any one year,
the realisable profit equates to the Company income less Expenses + Corporation Tax. Bear in mind that some of the realisable
funds may need to be invested in the business. See also the section regarding tax on dividends.
Deciding whether to pay salary or dividend
As a company director you can decide how and when you are paid. There are various strategies for doing this based on the
relative tax implications. If you haven’t drawn up a contract of employment between you and your company (and you’re not
obliged to), then you are not subject to the National Minimum Wage rules, which means you can set a salary of your choice.
Some freelancers opt for a policy of taking a low salary and topping it up with dividends. The salary will be between £5,725
and £7,755 for the 2013/14 tax year, as any salary between these two points ensures a credit for NIC purposes which helps
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in terms of future state pension and other benefits, whilst remaining below the point where the salary is taxed. This takes
advantage of the lower rate of tax for dividends. Not everybody operates this way – your accountant can advise on the best
route for you.
Another factor to consider is corporation tax. Any salary you pay yourself is an allowable expense, which reduces the company
profit and consequently the corporation tax due. Dividends can’t be claimed as an expense, so they don’t reduce corporation
tax.
How you pay yourself should also take into account a number of factors including your pension provision and the amount of
money you wish to retain in your business for future investment.
Possible payment scenario (2011)
»» As of April 2012, a salary of £626 a month would not incur any tax or national insurance liabilities whilst maintaining your entitlement to the basic state pension.
»» Assuming you don’t have any other income, you could then pay yourself a net dividend of £31,488 each year before having to pay additional income tax.
Paying salary to a partner or spouse
Until 2007 HM Revenue & Customs (HMRC) attempted to penalise businesses where one partner was the main fee earner and
the other received dividends or a profit share. Many freelancers do this in order to benefit from their partner’s tax allowance – if
two people each declare £30K income, they pay a lower rate of tax than one person who declares £60K.
The tax authorities tried to prevent this by re-interpreting an old piece of legislation known as ‘S660A’. IPSE fought off what
later became known as the ‘Family Business Tax’ by supporting the landmark Arctic Systems case all the way to victory in the
House of Lords.
As a result of the court case, it is still legal to pay a partner as described above – however, the law could change and it’s
important to keep an eye on it. IPSE’s Guide to Family Business Tax includes full background information and details of the
current legal position.
Paying yourself when you’re caught by IR35
‘Caught by IR35’ means that the tax authorities deem you to be working as if you were an employee of your client, so
consequently they want the tax that you would be paying if you were employed by the client. IR35 impacts those who provide
services through a limited company in which they own more than 5% of the shares, or a partnership in which they alone or with
one or more relatives take more than 60% of the fees billed to a client. IR35 status is determined by employment tests focusing
on whether you have a right to substitution, mutuality of obligation within the contract and issues of control. More guidance is
available from the IPSE website.
If you have established that you are IR35 caught, ask your accountant to calculate the payments, or else use
HMRC’s guidance at www.hmrc.gov.uk
In a nutshell: Money in your pocket
»» For sole traders and partnerships, your taxable profit is the total of your invoices (ex VAT) in the tax year, minus the total of your business expenses (ex VAT) in the tax year
»» If you operate via a limited company, money is transferred from the company to you, the owner, via salary/
bonuses or dividends
»»
»»
»»
»»
NICs are payable on salary/bonuses, but not on dividends
Salaries/bonuses are offset against corporation tax – dividends are not
Currently, paying a salary to a partner or spouse enables you to benefit from their personal tax allowance
Keep up to speed on IR35 or you could end up being asked to pay tax as if you were an employee of your client.
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Money out
How to pay bills and expenses
When setting up your business bank account you should decide whether you need a card in the company name. Many
freelancers use their personal credit cards for expenses and then claim these back from their company. In this case, be careful
to separate business and personal items. One of the most common mistakes that small business owners make is to mix business
and personal finances, for example, using petty cash or a business credit card to buy personal items, and then not accounting
correctly for the transactions. Once you start mixing your business and personal money, HMRC is entitled to consider that your
personal accounts may constitute part of the business records, and can ask to see your personal bank records. This is something
to be avoided at all costs.
It is therefore advisable to:
»» Pay for business expenses using your business bank account, business credit card or petty cash.
»» Pay for personal expenses using your personal bank account, personal credit card or cash.
This is not always possible in the early stages of setting up your business, but the sooner you establish business accounts and
use them for all business expenses, the better.
Allowable and non-allowable expenses
Allowable expenses are those that may be deducted from your turnover for the purposes of reducing the tax liability of the
business. Expenditure is normally allowable within the company’s accounting period in which it was incurred. You should ensure
that all claims are supported by receipts to justify that the cost was actually incurred.
For expenses paid by a company to be allowable, the basic rule is that they must be incurred wholly and exclusively for purposes
of trade. Expenses paid by an employee or company director are allowable only if they are incurred wholly, exclusively and
necessarily in the performance of the company’s work.
It is, however, accepted that certain assets will be used principally for business purposes, but may also be used personally (e.g.
cars & vans). In this case it is important to be able to distinguish between the business and personal use and apportion the costs
accordingly. Keep a record of business mileage or fares in connection with business journeys in order to be able to identify and
justify business expenditure. If no record is kept, HMRC is entitled to disallow any business expenditure.
Benefits in kind: items for personal use
Where a company buys things for the private use of directors or employees these are classed as ‘benefits in kind’, which are
taxable. So if your company pays for your private holiday for you and your family, this should be treated as salary, incurring tax
and National Insurance charges accordingly.
Duality of purpose: items for business and personal use
The general principle is that HM Revenue & Customs (HMRC) does not, as a rule, regard any expenditure that has a dual
purpose element to be allowable for taxation. For example, a suit or dress purchased to wear at work has a dual purpose in that
you need to wear clothing anyway, so tax relief is not available on the expense.
Capital items: computers, cars, furniture, equipment, property
Generally, capital items are those items that will have enduring benefit to the company, such as computers, motor vehicles and
office furniture. If they are connected to the trade, it may be possible to claim capital allowances over a period of time, based on
percentages specified by HMRC, but you may not claim their whole purchase cost as an expense.
Legal and professional fees
Accountancy fees for preparing your company accounts are allowable because they relate to your business. In the case of a
sole trader, the preparation of the accounts would be allowable, but not the completion of the sole trader’s personal tax return.
Preparing the accounts of the partnership and the partnership’s return would be allowable, but not the cost of preparing the
returns of the individual partners. If the company pays for an employee’s personal tax return, this would count as a benefit in
kind.
The costs of recovering debts, defending business rights, preparing service agreements and appealing against rates on business
premises are allowable. Legal fees incurred on taking on a new lease or acquiring property are not allowable because they relate
to capital items.
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Subscriptions
Subscriptions to professional and trade associations on HMRC’s approved list are allowable, as are trade magazines.
Debts, taxes, penalties and fines
Specific bad debts written off are allowable, whereas a general reserve for bad or doubtful debts is not. If the company is not
VAT registered, the full amount of the expense including VAT is allowable. Interest and penalties relating to income tax, PAYE, NIC
and VAT are not allowable, nor are fines and other penalties for breaking the law.
If interest is due because your company’s tax return has been submitted late, the interest is an allowable expense. Similarly, if
HMRC make a corporation tax repayment to your company which includes interest, the interest would need to be treated as
taxable income.
Interest
Interest on debts incurred to finance the business is normally allowable – as long as it isn’t used to pay the directors. In certain
circumstances, interest on funds borrowed in your personal capacity and introduced into the business will also be allowable,
provided that it doesn’t involve overdraft or credit card interest, and that you can prove that the money was borrowed for the
business.
Entertainment and gifts
You can’t claim the cost of entertaining clients, nor the cost of gifts to clients, unless they are £50 or less in value and carry
a conspicuous advertisement for the business. Gifts of food, drink, tobacco, vouchers and tokens exchangeable for goods are
specifically excluded.
Staff entertainment is allowable provided that the cost per head is less than £150 per annum and the event is open to all staff.
This means that if you are employed by your own limited company, you can claim that amount for something like a Christmas
party, without it being classified as a benefit in kind. Unfortunately this doesn’t apply to sole traders or partnerships.
Travel
If you run a limited company, your company may reimburse you, the director, for travel costs incurred wholly, exclusively and
necessarily for the purpose of the duties of the job. Medical expenses incurred whilst working abroad as part of your duties can
be paid by the company without being rated as a benefit in kind.
Travel to a temporary workplace is allowable unless the assignment is expected to last for longer than 24 months, in which case
it is classified as ordinary commuting and therefore not allowable. In order to put the 24-month rule into context, you have to
determine whether the site you are travelling to is your permanent or temporary workplace. Home to office travel is defined
as ordinary commuting, and it is, therefore, important to establish where the business is being operated from. If you genuinely
operate from home, you can normally claim travelling expenses when visiting clients. IPSE members can get more information
on the 24 month rule.
Employees who use their own cars for business purposes may claim 45p per mile for the first 10,000 businesses miles and 25p
thereafter in each tax year. Sole traders and partnerships with a turnover below the VAT threshold can also claim these mileage
rates as well as the interest on a loan to purchase a car. Where the business turnover is above the VAT threshold, the method is
to claim business mileage by claiming a percentage of the actual costs incurred, such as petrol, capital allowances, the interest
on a loan to purchase a car, insurance, oil, maintenance and road fund licence. The percentage must be justifiable, and therefore
it is best to keep a detailed mileage log of actual business and total mileage. The London congestion charge is allowable provided
that it is incurred exclusively for business purposes.
Accommodation and subsistence
The cost of overnight accommodation is allowed if solely for business purposes, and you may also be reimbursed for incidental
costs such as laundry, newspaper and telephone calls home, up to £5 per night in the UK or £10 per night outside the UK.
If you’re away on business and stay overnight, you can claim subsistence up to reasonable levels: this will usually cover the cost
of a meal with reasonable alcoholic and non-alcoholic drinks; and tea, coffee, and soft drinks between meals. Subsistence not
related to an overnight stay can present problems in terms of the ‘duality of purpose’ rules: you are expected to ‘eat to live, not
eat to work’. There are arguments for claiming such meals, but this is definitely a grey area.
Use of home for work
If you work from home, you may theoretically claim a proportion attributable to business use of lighting, heating, cleaning and
insurance, as well as a proportion of rent, business rates, council tax and (in Northern Ireland) domestic rates.
You should be extremely wary of this though, as it could create capital gains problems for you when you sell your home. It may
be better to consider claiming a nominal amount, such as £216 a year, instead. HMRC automatically accepts £4per week or
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£18 per month as being reasonable without the need to produce receipts to justify the claim.
Salaries
If your limited company pays you a salary, that is allowable. A dividend is not.
For salary payments, you should issue a P60 at the end of the year to support the amounts paid, and ensure that the level of
remuneration is justified for the work done, as HMRC may disallow remuneration paid to employees that it considers excessive.
Salary payments to a spouse should be made to an account in his or her sole name, not to a joint account. Money withdrawn by
sole traders and partners is not allowable for tax purposes.
Training
Where the purpose of training is to provide a business owner with new skills, the cost is treated as capital and is not allowable
for income tax. If the purpose is to update existing skills, then the expense is allowable.
Where the IR35 rules apply, training expenses may be included within the five percent allowance for general expenses but not
claimed separately in their own right.
Telephone and internet
If a mobile phone is invoiced to the company, the full cost is allowable and there is no benefit in kind, even if there is an element
of private use.
If it is invoiced to the employee, then the benefit in kind is assessed on the portion attributable to private use. It is helpful if
you have itemised bills to prove the split between business and private use. Note that the deduction is allowed only if you
can identify a specific cost relating to the business calls. For example, if the employee takes out a monthly contract with the
telephone company and pays £50 per month to cover rental and 100 “free” calls. If the bill for the month is only ever £50, i.e.
not all of the “free calls” are used; it will not be possible to claim anything even if half of the calls are business.
The cost of broadband and other internet services is allowable, and if invoiced to the company then incidental use by the
employee does not rate as a benefit in kind. If the service is invoiced to the employee and reclaimed, the element of private use
by the employee may be treated as earnings.
Insurance
Business insurances are allowable, as are life insurance, personal accident insurance, permanent health insurance and private
medical insurance for employees. A sole trader’s or partner’s own life, accident, permanent health and private medical insurance
expenses are rarely allowable.
In a nutshell: Money out
»» Keep business and personal expenditure separate
»» For expenses paid by a company to be allowable, the basic rule is that they must be incurred wholly and exclusively for purposes of trade
»» You can’t claim for entertaining clients, but if you have a limited company you can give yourself a Christmas party, up to £150 per staff member
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Section 4
Paying the taxman
What to pay, how and
when
11.Value Added Tax (VAT)
The registration threshold, normal VAT accounting, VAT schemes, charging and paying VAT
12.Taxation of limited companies, National Insurance, personal income tax and corporation tax
13.Taxation of sole traders, partnerships and LLPs
Tax rates and tax returns, NICs, Schedule D and E
Value Added Tax (VAT)
VAT stands for “Value Added Tax”. Most things you buy in the UK contain VAT, except for loans, some property transactions,
insurance and certain types of education and training. There are three rates of VAT in the UK: normal rate at 20%, reduced rate
at 5% and zero rate at 0%. Any goods you import into the UK are liable for VAT, as well as some services sourced from overseas.
As a freelancer VAT affects you in the following ways:
1. If your turnover reaches what is known as the ‘VAT threshold’ (£77,000 as of April 2012) then you are legally obliged to register for a VAT number, which means you then have to add VAT to your invoices.
2. If you are VAT registered (you’ve obtained your VAT number) then you can claim back any VAT on your businesses purchases.
3. As a VAT registered business you have to submit a VAT return to HMRC every quarter. The amount you pay is the difference between your output VAT (the VAT on your invoices) and the input VAT (the VAT you have paid on purchases).
4. When registering for VAT, you can choose from a number of different VAT accounting schemes, including the Flat Rate Scheme, which is specifically designed to simplify admin for small businesses.
5. You can opt to register for VAT before you reach the VAT threshold – some freelancers find that can work to their advantage as it allows you to reclaim VAT on purchases.
The VAT registration threshold
By law you have to register for VAT if your taxable turnover reaches or is likely to reach a set limit, known as the VAT registration
threshold. VAT registration is not dependent on your legal structure - in other words a limited company has to register if it hits
the threshold, as does a sole trader and partnership. As of April 2012 the threshold was £77,000. Turnover is classified as the
amount of money going through the business, not just the profit. The threshold is calculated on a continual 12¬ month rolling
basis and not just in the tax year or accounting year. One should notify HMRC within 30 days of the end of the month in which
the threshold was crossed.
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To find out about registering for VAT, ask your accountant or visit: www.hmrc.gov.uk
Charging VAT to clients
When invoicing clients you should charge VAT at the normal rate for the supply of your services. So for most freelancers, that
means adding 20% VAT on top of your fees, but you should check HMRC’s list in case the services (or perhaps even goods) you
are supplying are exempt or lower rated supplies. Be aware that you are required to include any zero rated sales invoices in your
list of outputs for the purposes of calculating VAT owed.
If your clients are VAT registered it means that the VAT that you charge them doesn’t actually make you more expensive,
because they claim the VAT back from HMRC. See the chapter on invoicing (money in the bank) for an example of a VAT invoice.
The VAT return can be submitted online. See www.hmrc.gov.uk
Ways of accounting for VAT
Cash accounting
The cash accounting scheme is for businesses with an estimated taxable turnover in the next tax year of up to £1.35 million.
You can continue to use cash accounting until your turnover exceeds £1.6 million. The key benefit is that in the cash accounting
scheme you only pay VAT when your customer has paid you. So if your customer never pays you, you will not have to pay
the VAT for that invoice. If you have clients who do not pay promptly, this scheme can help you manage your cash flow more
efficiently.
The disadvantage of the cash accounting scheme is that you cannot reclaim VAT on purchases (such as start-up costs) until
you have paid your suppliers – which could cause cash flow problems if you buy goods and services on credit. Also if you
reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT
accounting. Beware that if you choose to leave the cash accounting scheme you will still have to account for any outstanding
VAT due including bad debts.
Invoice accounting
Beyond the freelance community, most businesses operate VAT on what is known as “Invoice Accounting”. This means that you
apply VAT to outbound invoices (currently at 20%) and your VAT liability arises when you raise the invoice, rather than when
you receive the payment. Each quarter you calculate the VAT that you have charged, deduct any VAT that you have paid on the
invoices that your suppliers have issued and the VAT element of your other business expenses and pay the difference to HMRC.
You can claim the VAT on purchases as soon as they have been made, even if you have yet to pay the supplier.
Annual Accounting VAT Scheme
The Annual Accounting Scheme is also for businesses turning over up to £1.35 million. This scheme involves making nine
monthly or three quarterly interim payments over the course of the year. You then file a single annual return in which you make
a balancing payment or receive a balancing refund from HMRC. This scheme is designed to make it easier to manage cash flow
and reduce paperwork. You also get two months rather than one month to file and pay your annual VAT bill. In addition you can
continue to use this scheme until your estimated VAT taxable turnover exceeds £1.6 million. However, if you frequently reclaim
VAT, you will only get one repayment per year. Also if your turnover decreases, your interim payments could end up higher
than your VAT payments would be under the standard VAT accounting. You would then have to wait until the end of the year to
receive the refund.
The flat rate scheme and its advantages
If you are earning under £150,000 excluding VAT you can opt for the Flat Rate Scheme. Introduced with the aim of simplifying
VAT for small businesses, the VAT Flat Rate Scheme allows you to pay VAT as a percentage of your turnover instead of having to
work out the VAT on all your sales and purchases.
This can help to simplify your record keeping – there is no need to separate out the gross, VAT and net values in your accounts.
There are few rules to follow – no problems about what “input tax” you can and cannot reclaim. It also gives you peace of mind
– you always know how much of your takings you will need to pay to HMRC and with few opportunities for mistakes, you will
have fewer worries.
You are eligible to join the Flat Rate Scheme if your turnover is under £150,000 (exclusive of VAT), but there is a level of
tolerance so that you can stay in the scheme if in the next 12 months your turnover does not exceed £191,000 (inclusive of
VAT). However, once your turnover exceeds £230,000 (inclusive of VAT) you will have to leave the scheme and go onto the
normal VAT accounting method.
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Most traditional freelance businesses find that the Flat Rate Scheme can work in their favour – the difference between the
VAT paid to you by clients (typically 20%) and the VAT you pay to HMRC (see below) can result in significant savings. However,
you should ask your accountant to assess this for you based on your specific circumstances as this doesn’t work for all small
businesses. Savings made on VAT using the flat rate scheme are treated as income for the purposes of calculating your
corporation tax or personal tax liability.
Although you cannot reclaim VAT on purchases via this scheme, you can reclaim VAT on a single-transaction purchase of capital
assets (such as a laptop) of over £2,000 including VAT.
Paying VAT to HMRC under the flat rate scheme
Every quarter you have to pay a percentage of the total amount of VAT you charged to clients in that quarter. To work out
which percentage to use, you need to look at the categories published by HMRC, and decide which one best describes what
your business will be doing in the coming year. These are some of the categories:
»»
»»
»»
»»
»»
»»
»»
»»
»»
»»
»»
»»
Photography, publishing 11.0 %
Accountancy or book-keeping 14.5 %
Advertising 11.0 %
Architect, civil or structural engineer or surveyor 14.5 %
Computer and IT consultancy or data processing 14.5 %
Computer repair services 10.5 %
Entertainment or journalism 12.5 %
Film, radio, television or video production 13%
Financial services 13.5 %
Lawyers or legal services 14.5 %
Management consultancy 14 %
Printing 8.5 %
To see the full list please visit: www.hmrc.gov.uk
You can deduct one percent off the flat rate that you use for your first year of VAT registration. On the first anniversary of your
VAT registration, the rate will revert to the standard percentage.
To fill out the VAT return you need to know your total sales and VAT amounts for the quarter. This can be calculated in one of
two ways:
a) A cash basis: add up the amounts actually received from clients in the quarter.
b) An invoice basis: add up the amounts invoiced to clients in the quarter.
To register for the Flat Rate Scheme, ask your accountant or visit: www.hmrc.gov.uk
In a nutshell: VAT
»» Freelancers earning over £77,000 (VAT threshold) have to register for a VAT number and add VAT to invoices
»» UK VAT is currently 20%
»» The flat rate scheme is generally the best option for freelancers earning up to £150,000. It is relatively hassle free and can result in savings (these are treated as income for the purposes of calculating your corporation tax or personal tax liability)
»» You can account for VAT based on the time you invoice or the time you are paid
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Taxation of limited companies
There is one very important point to remember – you and your limited company are two separate legal entities. You have your
own tax responsibilities; personal income tax and employee’s National Insurance Contributions (NICs). The company has tax to
pay too. A company pays three main types of tax: VAT (covered in the previous section), corporation tax and employer’s NICs.
Personal income tax payable by the directors
PAYE and NICS
Directors and employees of limited companies pay income tax on their taxable income. This will be deducted monthly through
PAYE (Pay As You Earn), which is HMRC’s system for collecting income tax from the pay of employees, including directors, as
they earn it. An employer is required to deduct income tax and NICs from its employees’ pay and to submit the deductions to
HMRC. This usually needs to be done by the 19th of each month, unless your average monthly payments are likely to be less
than £1,500, in which case you may be able to pay them quarterly. Ask your accountant to set this up for you.
Tax on other income
If you are working through your own company then you will need to complete a Self Assessment Return, including any dividends
your company has paid you, as well as any benefits in kind (such as medical insurance or company car) that you have received
from your company, which should be shown on your P11D for the year. Each year, HMRC will send you a tax return that is
tailored to your circumstances. You should receive this in April, and if you do not, contact your tax office. You need to fill in your
tax return with details of all sources of taxable income, taxable gains, reliefs and allowances.
If you want HMRC to work out how much tax you need to pay, you must submit your return by 31 October following the issue
in April. The deadline for the submission of the Return is 31 October (if a paper return is being completed) and 31 January
(online filing, but please allow at least 10 days to register with HMRC for online filing) following its issue to avoid paying a
penalty but If you submit the form after 31 October you will also need to calculate the tax due and pay the amount by 31
January.
Employee’s national insurance contributions
Your limited company has to deduct class 1 contributions from salary it pays you over a certain level. It also has to deduct class
1A NICs on benefits in kind, such as medical insurance or company cars. These are declared annually via a form P11D. NICs for
company directors should be calculated based on an annual, or pro-rata annual, earnings period.
Lower Earnings Limit (LEL): £107 per week
This is the minimum level of earnings that an employee needs to qualify for benefits, such as Retirement Pension and Jobseekers
Allowance. If your salary is between and £149 per week (April 2013 – April 2014), you will not pay NICs but will be treated as
having paid them when claiming state benefits. For this reason, you must keep details of an employee’s earnings at or above the
LEL on a form P11 or equivalent record and report them at the end of the year on a form P14.
Primary Threshold (PT): £149 per week
When earnings exceed the above level, NICs are deducted from the employee’s salary at 12%.
Upper Earnings Limit (UEL): £797 per week
Where earnings exceed the UEL, the employee pays NICs at 2% on those earnings above the UEL.
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Employer’s national insurance contributions (NICS)
These are payable when the company pays salary to an individual of more than £149 per week. Currently the rate for
Employer’s NICs is 13.8% (2013).
Corporation tax
This is like an income tax for companies which is payable on the profits that the company makes. Once a year you will need to
complete an annual tax return (CT600) and also supply a signed set of accounts to Companies House.
Corporation tax is currently charged at a much lower rate than personal income tax. There are three tax bands, according to the
company’s annual profit.
The rates are as follows:
Taxable profit
Corporation tax rate
Up to £300,000 per year
20% (from April 2012)
£300,000 to £1.5 million per year
21%
Over £1.5 million per year
23% from April 2013
Tax on dividens
Dividends can only be paid out of retained profits. Also, the correct paperwork must be completed and you need to follow the
procedures as detailed in section 3.
The dividend taxation rates are as follows (2012/2013):
»» 10% for dividend income received at or below the basic rate income tax threshold (£34,370)
»» 32.5% for dividend income received at or below the higher rate income tax threshold (£150,000)
»» 42.5% for dividend income received above £150,000
Important note: you won’t actually pay these rates as dividends automatically receive a 10% tax credit (because
corporation tax has already been paid) – basic rate taxpayers won’t have to pay anything, higher rate taxpayers is 25% of
the net dividend, additional rate taxpayers 36.1% of the net dividend.
For further information and to find out how to calculate dividend tax liability, IPSE members can check out the
resources section of www.ipse.co.uk.
Things to be aware of
Penalties
Many statutory forms (Self Assessment, P35 Employers Annual Return, etc.) carry a deadline. If you miss the deadline, you will
receive an automatic fine. You may also void any possible claim that could be made under any Professional Expenses Insurance
that you hold.
Tax investigations
The tax authorities may perform various forms of investigation into both the tax affairs of companies and individuals. These
include PAYE and VAT reviews; the former has been seen to be used as a ‘cover’ for IR35 investigations. It is important to keep
paper records and an audit trail of every single transaction, such as purchasing equipment or declaring dividends. Whenever you
take on a contract, get it reviewed and come to a rational decision on its IR35 status. Make sure you have good professional
representation in dealings with the authorities.
IPSE’s website includes a document explaining how to take reasonable steps to determine your IR35 status. For
further comprehensive information please visit the IPSE website tax advice section
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In a nutshell: Taxation of Limited Companies
»» Companies have to pay corporation tax, employer’s NICs if they pay salary, and VAT if they are VAT registered
»» The Corporation tax rate for small companies with taxable profits of up to £300,000 per annum is 20%
»» Directors who receive a salary from their company must pay employee’s NICs and income tax – this is deducted from the salary and submitted to HMRC, usually by the 19th of each month unless your average monthly payments are likely to be less than £1,500 in which case you may be able to pay them quarterly
»» Directors also need to submit an annual self assessment tax return by 31 October for paper returns and 31 January for online returns
»» Automatic fines are imposed if you miss the deadline for the submission of statutory forms
Taxation of sole traders, partnerships and LLPs
Sole traders, partners and members of limited liability partnerships are classified as self-employed and pay income tax and
National Insurance Contributions on their respective shares of the profits and gains of the business. The tax rates for individuals
are:
»» 20% on taxable income up to £35,000
»» 40% on taxable income £35,001 - £150,000
»» 50% on taxable income in excess of £150,000
Your taxable income is the difference between gross income and allowable deductions. Gross income is the sum total of client
fees paid plus any other income such as dividends or interest. The allowable deductions are your business expenses, as specified
in the bookkeeping section of this guide.
Declaring income via the Self Assessment tax return
To declare this income you need to complete a Self Assessment tax return with details of all sources of taxable income, taxable
gains, reliefs and allowances. If you want HMRC to work out how much tax you need to pay, you must submit your return by
31 October following the issue in April. The deadline for the submission of the return is 31 October (if a paper return is being
completed) and 31 January (online filing) following its issue to avoid paying a penalty, but if you submit the form after 31
October you will also need to calculate the tax due and pay the amount by 31 January.
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National insurance contributions (NICS)
Self-employed people pay two classes of NICs:
Class 2 contributions. This is a flat rate of £2.50 payable weekly (2011/12) and counts towards Incapacity Benefit, state
retirement pension and Bereavement Benefit.
Class 4 contributions. This is paid on profits and gains at or above a set level and applies to all people who are normally selfemployed, aged 16 or over, and under state retirement age. Class 4 liability does not cease until 5 April following retirement
age. Class 4 contributions are based upon your taxable profits for that year, which you will show on your annual Self Assessment
tax return. They are worked out as a percentage of your annual profits between a lower and upper limit and are paid twice a
year as part of your annual tax return.
Class 4 NIC limits and percentages (2011/12)
Lower limit£7,225
Upper limit£42,475
Rate on difference between upper and lower limit
9%
Rate above upper limit2%
Employing someone else
If you’re self-employed, you can still employ someone else. If you do employ someone, you have a legal responsibility to deduct
tax and Class 1 NICs from their pay and remit it to HMRC. You will also be responsible for payment of Class 1 employer’s NICs.
Making payments
Most self-employed people make two payments on account for the tax year before the return for that year is due, on:
»» 31 January in the tax year, and
»» 31 July following the end of the tax year
Each payment includes half of your income tax and Class 4 contributions bill for the previous year. Any additional or balancing
amount due is paid on 31 January, the filing date for the Return.
Clarification of the terms ‘Schedule D’ and ‘Schedule E’
The schedule system does not exist anymore. However, references to Schedule D and Schedule E do make things nice and
simple and the terms are still used in historical contexts.
Schedule D is now known as ‘Trading Income’: it is the income from a trade, profession or vocation. Tax on trading income is paid
by a sole trader, partner or limited company, or the profits earned by a trading limited company.
Schedule E is now known as ‘Employment Income’ and covers employed people. If you are employed, you pay tax by Pay As You
Earn (PAYE) and make NI contributions at the Class 1 rate, whether you are employed by your own company, someone else’s
company or an agency.
In a nutshell: Taxation of sole traders, partnerships and LLPs
»» The tax rates for individuals are: 20% on taxable income up to £35,000, 40% on taxable income £35,001 - £150,000, 50% on taxable income in excess of £150,000
»» Income must be declared via a self assessment tax return. The deadline is 31 October for a paper return in which HMRC calculates the amount owed, or 31 January for online submissions in which you (or your accountant) calculate the total tax payable
»» If you are self-employed, you will need to pay class 2 NICs of £2.50 per week and Class 4 NICs as part of your annual tax return
»» Self-employed people make two payments on account: 50% of your income tax and Class 4 contributions on 31 January and the remaining 50% on 31 July following the end of the tax year.
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Section 5
Running the show
How to manage a
successful business
14.Where is your HQ?
Choosing where to base yourself: a home office, a pod in the garden, a shared office or at the client’s site
15.Winning work
Top tips for landing new clients and growing your business
16.Managing the workload
Maximising your time, the briefing process and managing the project lifecycle
17.Financial planning
Financial buffers, savings, mortgages and pensions
Where is your HQ?
In a 2011 IPSE survey, 12% of freelancers said they worked from home, and a quarter commute between 20 and 50 miles a
day, usually to their client’s premises. Other options include renting or sharing an office, using one of the many workhubs or
workspaces springing up around the country, or even building a dedicated pod in the garden.
Working from home
If properly implemented, giving up the office can work like a dream, but you need to be disciplined, organised and have access to
the right technical equipment.
Some of the benefits:
»»
»»
»»
»»
»»
»»
»»
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Low-cost way of launching a business
No nightmare journeys on commuter trains or gridlocks on motorways
Flexibility of working methods and hours
Increased productivity levels without typical office interruptions and “chat gaps”
Low operating costs
The ability to accommodate family demands
The chance to stroll in the garden for a 10-minute break
Having your own office helps show the tax authorities that you are ‘In Business On Your Own Account’.
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“A wireless network means that I can work anywhere at home.
However, work-in-progress is also stored on remote servers, so in an
emergency (like when builders accidentally cut the phone line). I can
resume work from anywhere with an internet connection. I usually
keep normal office hours, although I have the flexibility to meet client
needs regardless, whenever they arise.”
Derek Pattenson of Small Office Solutions
Winner of the Remote Workers Freelance Consultant Award in 2009
Potential drawbacks
Home working doesn’t suit everyone. For some people, the drawbacks outweigh the benefits:
»»
»»
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»»
»»
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Feeling isolated and bored
The chance of increased pressure and longer hours
Clashes between business and family demands
Not being able to switch off
Poorer rewards if working from home holds back development of the business
Interruptions from family, neighbours and friends who do not respect work regime
Some people create a separation between work and the family by converting their shed into an office or building one in the
garden. Freelancer Phil Thane works from this self-built home office in Wales. It’s also possible to buy purpose built garden pods,
for example www.roostuk.com or www.officepod.co.uk.
10 Top tips from experienced home workers
»»
»»
»»
»»
Treat your working time as seriously as if you were working at an office
Make sure those you share your home with see it that way too
Aim for a definable, permanent workspace – not the kitchen table
The right furniture and equipment are essential investments - get a good chair, especially if you work long hours at a computer
»» Installing a separate telephone line lets you make a clear distinction between your work and home life - when you finish working, let business calls go to voicemail
»» VOIP telephony like Skype or Vonage can deliver considerable savings - calls between Skype users are free, and calling traditional landlines or mobiles from Skype is relatively cost-effective
»» Remember to get specific insurance cover for your business equipment
»» Make time to socialise, network and meet new people, particularly if you live alone
»» If you are freelancing, arrange the occasional meeting with those you work with - personal contact is so much more memorable than email or phone conversations
»» Timetable breaks - include sessions away from work to eat, exercise and socialise
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“I love the freedom and comfort of working at home. Thirty minutes
in the garden is better than any coffee break round a machine – real
coffee instead of plastic coffee. A 10 metre ‘commute’. Not having a
formal dress code. No office politics. Adjusting my timetable to fit
my personal life and family commitments. I never feel lonely as I can
still be in touch with the world when I want to be by phone, Skype
and email. Over 90% of my work is done for companies based in
mainland Europe.”
Nina Downes
Paying business rates on home offices
There are new rules in place since 2003, which means that you don’t normally have to pay business rates on a home office
provided that:
»»
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»»
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You only use the kind of equipment you might find in any domestic study
You have not made structural alterations
You don’t employ people from the premises
You don’t have frequent business visitors on site
For further information visit: www.voa.gov.uk
Each case will be considered on its merits, and the Valuation Office Agency, which is responsible for assessing the ratings, will
consider the extent and frequency of business use in each individual case.
Alternatives to the Home Office
Some freelancers prefer to rent commercial office space that is completely removed from the household and 100% dedicated
to work. This can be anything from a hot-desk or shared space to fully serviced offices. As it is your business you can choose
the location to suit your needs – you may be able to find a professional and affordable space within walking distance from your
home.
Workhubs are also becoming very popular, for example THECUBE in London’s Commercial Street offers freelancers, professionals
and small businesses flexible workspace and facilities in an environment that facilitates collaboration and networking.
Similar co-working spaces are popping up all over the UK. Old Broadcasting House is located in the heart of Leeds, The Hub
Bristol is situated on the harbour-side, while the Werks in Hove is also engaging in a new spirit of community where freelancers
can find affordable, flexible space and benefit from one another. It’s this collaboration that differentiates co-working spaces from
hot-desking options.
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Workhubs Network is a consultancy service that offers specialist advice on the creation of co-working spaces. The organisation
has produced a national report on the impact workhubs can have to support home-based businesses. The report found that
both occasional and full-time users actively prefer to work in a building where they can network and form flexible business
partnerships, and the research also suggested that this often leads to new, unplanned business opportunities.
PERSPECTIVE
I was attracted to co-working, and the short commute gets me into
the work mindset. Even though I’ve only been here a few weeks I’ve
noticed a significant increase in my productivity. I read a study
that showed that mixing in diverse social groups produces more
innovative thinking and I feel that’s an important aspect of coworking. On a more practical level, the email group has proved
helpful – people will chip in with advice. I’m also starting a personal
branding exercise, so those different perspectives will be helpful.
James Holloway, Lighting Consultant
Working at the client’s site
It may be necessary for you to work at the client’s premises and use the client’s equipment. However, having your own office
and your own equipment, helps to demonstrate to the tax authorities that you are genuinely ‘In Business On Your Own Account’
and that your client relationship is not one of “disguised employment” (IR35 caught) – an issue that could affect you if you
operate a limited company.
It is therefore worth weighing up the decision carefully and discussing it with your client. Are there valid reasons why you need
to be there every day? For example, do you need to plug into specialist equipment housed at the client site, that you could not
supply yourself? Do you need daily face to face contact with the project team, or would it work better to have periodic project
update meetings?
If there aren’t compelling reasons, you may be better off using your own base to work from.
In a nutshell: Where is your HQ?
»» In order to separate work from home life, create a dedicated work station or office, if space and budget permit, a pod or office in the garden can be an excellent solution
»» Invest in a good sized desk and a proper office chair to protect your back
»» An alternative is a shared space or ‘workhub’ these are springing up across the country and research has proven that mixing with diverse sectors produces more innovative thinking
»»
»»
»»
»»
Have proper backup systems such as a remote server to store work in progress in case of power failures or IT problems
Insure your business equipment and check that working from home doesn’t invalidate any home insurance policies
Generally speaking you do not have to pay business rates on a home office
It may be necessary for you to work at the client’s premises, but there should be good reasons you are a business in your own right, so there is no need for the client to be keeping an eye on you as if you were an employee
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Winning work
Sales and marketing is a core function in any business - freelance businesses are no different. However, without the resources
and budget of a large company, freelancers generally can’t afford large scale marketing efforts. Prospecting for clients therefore
needs to be highly targeted to be cost and time efficient.
When starting out as a freelancer, agencies can be a good source of work, especially if you don’t have an established network.
Agents are basically outsourced talent scouts for clients – the better ones also act as an outsourced marketing service for you.
You don’t have to work through agents if you are able to find client work directly. As you become more experienced you may
find that you get better rates and potentially more interesting projects working directly with clients.
Having a positive attitude and believing in yourself are very important. Not only that, but planning, organisation and persistence
will pay dividends. Never forget that people buy from people - always treat your business contacts as you would like to be
treated. Listen carefully to what they want, ask them for feedback, keep your promises, and be thoroughly professional in all
your dealings with them. Your reputation is everything.
In a 2010 survey commissioned by IPSE 668 business leaders were asked how they usually find freelancers. Recruitment
agencies proved to be the most popular route, while 42% of business leaders usually find freelancers through referrals. A similar
pattern emerged when freelancers were asked how they land work.
Know your worth
“ If you think it’s expensive to hire a professional, wait until you hire
an amateur ”
Red Adair, The world’s most famous fire fighter
Working through recruitment agencies
How agencies operate
Depending on the recruitment agency, the relationship can work as follows:
1. The agency pays you and charges the client your fees plus commission.
2. You invoice the client directly and the agent charges the client a separate commission for finding you.
There are also a growing number of online portals that operate an agency style model – some even charge a fixed fee to act as
the matchmaker.
How to choose good recruitment agencies
Some agencies have gained a poor reputation among freelancers, but equally there are many good ones that can prove very
valuable for finding work. When dealing with an agent, remember that fundamentally they are salespeople. They want to sell
you a contract and to sell you to the client. This is how they get their commission. They are businesses, first and foremost, in a
competitive world.
It’s worth registering with several agencies to increase your chances. Start by looking at agents offering a work opportunity you
may be interested in. It’s important to meet them face-to-face. A good agent should take time to get to know you and your
skills so they can sell you effectively. However, you can maximise your chances of getting work by:
»» Returning calls fast
»» Providing a brief summary to explain why you are suited for a project (particularly if it’s a project that particularly interests you)
»» Following up on every single project for which you have been put forward (it shows that you care and is also a good reason to get in touch)
Try to find out as much as you can about the project from the agent before you give permission to send your details to the
client. Don’t let agents put you forward for a role for which you are not suitable - agents are required to ask your permission
before submitting your details to a client.
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A list of agencies is published on IPSE’s supplier directory. IPSE members regularly share experiences about agencies and can
point you in the direction of good ones. Have a look on the IPSE forums.
Note to IPSE Plus members: remember you can claim up to £10,000 if your agency goes bankrupt and owes you money.
Things to check if the agency pays you directly:
Remember, if you are a sole trader, you can’t be paid by a recruitment agency, only by the end client.
If you are a limited company the recruitment agency can pay you gross, without deducting tax and NICs. This gives you more
control over your tax situation. However, it’s essential to check the agency contracts. Nowadays, a “good” contract is outside
IR35 and on true business-to-business terms. A “bad” contract contains clauses that restrict your ability to work for clients or
place personal liability on you or your family. Typically, this sort of contract will look more like a contract of employment than a
business contract.
Your engagement on a project will usually involve an upper level and a lower level contract. The upper level contract is the
contract between the agency and the client and the lower level contract is the agency’s contract with you. Both of them should
feature proper business terms and conditions.
IPSE publishes a list of agencies using IPSE approved contracts. If your agency isn’t on the list you can refer them to the IPSE
Approved Contract Scheme or ask if they would be willing to use IPSE’s approved contract templates.
In terms of how the agency pays you, this is usually done on the basis of timesheets signed by a representative of the client.
The exception will be fixed-price work, although even here the timesheet may be the recognised indicator of progress. Many
clients also have project time sheet systems. Typically a freelancer will raise an invoice on a frequency agreed at contract
negotiation time, usually weekly or monthly, which is reconciled with the signed-off timesheets. It is in the interests of all
parties that timesheets be filed regularly and accurately as they are the basis for clients’ and agents’ cash flows and ultimately
your income.
Finally, if you are asked to supply information relating to the Agency Workers Regulations, check the guidance in the policy
section of ipse.co.uk.
Negotiating rates
The agent will usually be paid commission as a percentage of your hourly rate, anywhere from 5% to 25% (although it can be
higher), depending upon industry and sector, so the agent gets paid only if you get work. Some clients have agreements with
agencies to supply freelancers on a fixed level of commission. In this case, the agent’s margin is usually non-negotiable, so if you
want more money it will need to come from the client. You therefore need to push home your competitive advantage during the
initial discussion with the client. If the client really wants to hire you, this puts you in a stronger position to negotiate a larger
share of the money being paid to the agent.
Like all sales meetings, it helps if you have researched the potential client – it will impress if you clearly understand what they
do and their market. Also make sure you ask all necessary questions to understand the task you are looking to undertake and
clarify the nature of the relationship between the client, the agency and you, for example, with whom you should be discussing
contractual issues versus project issues.
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At this stage it’s worth finding out how much commission the agency charges as this can sometimes have an impact on the
client relationship. Let’s say you are getting paid £25 per hour and the client is paying £50 per hour for your services. All clients
expect to pay an agency margin but, because some agents have two-sided non-disclosure clauses, the client may, in this case,
think you are a £40-an-hour freelancer. This will have an impact on the level of expertise the client will expect you to have.
This, in turn, could have a significant effect on the relationship you have with your client during the contract.
Contract negotiation is not just about getting more money. You may want to secure an IR35 friendly contract, which can reduce
your tax and NI liability. You could also consider negotiating the right to work from home, more project control and so on. A rate
will often be slightly higher if you accept payment terms of 30 days rather than seven.
If you are nervous about the thought of going for lots of interviews or negotiating, remember that it is just a normal part of
freelancing and gets easier with practice. Do not take it personally – you are no longer an employee, so this is a straightforward
business-to-business negotiation. See the top tips on negotiating rates at www.ipse.co.uk. IPSE Plus members can take
advantage of Freelance MBA resources from Ashridge Business School.
Legal Considerations:
Agencies are often subject to a number of laws designed to protect low paid temporary workers from abuse. Though as a
freelancer, typically running your own business, you are usually not the intended target of such legislation, it is worth taking the
time to familiarise yourself with the rights you are entitled to, and with the way these laws might affect your relationship with
an agency.
The Agency Workers Regulations (usually known simply as ‘the AWR’) are laws which guarantee certain agency workers
similar working conditions and protections (particularly in terms of pay, holiday, and working time) as if they were employed
permanently. They do not affect the genuinely self-employed or freelance individuals who are ‘in business on their own
account’, so for most freelancers, they will not apply.
In order to ensure that they do not have to provide you with any additional rights under this law, an Agency may take steps to
ensure you are definitely a business, by providing a business-friendly contract, or by ensuring you fill out a questionnaire for
example. It is also in your interest to be treated as a business as it may help prove to the tax authorities that you are definitely
a business, as opposed to an employee. For more information on the AWR, visit www.ipse.co.uk, where you can download a full
guide to the law.
Other legislation which may affect you includes the Conduct of Employment Agencies and Businesses Regulations. They are
often known simply as the ‘Conduct Regs’, or sometimes, confusingly, the ‘Agency Regs’ or ‘EAA regs’. These regulations are
designed to protect those who work via an agency from unfavourable contractual terms such as “handcuff clauses” or ‘temp
to perm fees’. Freelancers can choose to “opt out” of this protection. Many choose to do this as it provides a further pointer
that they are genuinely operating a business. Some do wish to be protected by the ‘Conduct Regs’ and if so there are various
obligations an agency must fulfil. For more information on the ‘Conduct Regs’, a guide for IPSE members is also available to
download at www.ipse.co.uk within the resources section.
How I work with recruitment agencies
“I use the phone a lot to build and maintain relationships with agents. I also use the online portal Jobserve. I think it’s important
to be very clear about how you will market yourself. When I started out I had a long list of things that I could do but was in
danger of being seen as a jack of all trades and expert in none.
My “silver bullet” was to market myself as a project manager. Clients understand what this means. Once you are in the
organisation you can turn your hand to lots of other things - once they get to know and trust you. You have to establish
yourself first with a new client to gain trust through what you can do and bring to the party. I treat my business as a business
and run it as such. It sounds trite, but how many of us take time out for training to keep our skills up to date or regard time
spent at networking or other events as valuable marketing expenditure to expand our contacts and grow our opportunities for
renewals. Thinking of yourself as “Jo Smith Ltd” and doing all of the things that companies do to increase their presence in the
market place does, literally, pay dividends.”
Chris Bell, Freelance project manager
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Approaching clients directly
Some freelancers prefer to work directly with the end-client, without a recruitment agency or third party in between. The
‘end-client’ may also be an agency such as advertising, marketing agency or consultancy which tends to work with freelancers
a lot. Freelancers often find that working directly with the client gives them more control over their rates and simplifies the
relationship and lines of communication.
This means you have to work a bit harder to build your own network. One way to do this is to set up a three tier contact
system: an electronic database of names. A Customer Relationship Management (CRM) tool can help, for example www.
salesforce.com or www.brightpearl.com (the latter includes an integrated bookkeeping and invoicing system).
Tier one: hottest prospects
Your first tier of contacts should include every person and organisation you know who is personally capable of offering work.
Include everyone you have ever worked for in the past. This list represents your hottest prospects. Contact them directly. Tell
them you’ve gone freelance and a bit about what you’re doing. If you haven’t already got a recommendation or testimonial
from them, ask them to send you one as a) it will remind them why they liked working with you and b) you can use it to market
yourself to other clients. This first tier has the greatest potential to get you going quickly, and to keep you going profitably for
many years.
Tier two: people who could refer you to someone else
Your second tier should include everybody you know who might know someone else who could offer you work. Dismiss no one
- include people you haven’t spoken to in months or even years. Drop these people an email with a brief update on what you’re
doing and ask them if they know anyone who might benefit from your service. If you use LinkedIn, you could also connect with
them on that – this helps you stay in touch.
Tier three: wish list of clients you would like to work with
Your third tier should include the people or organisations that you do not know personally but would want to work with - they
might include the leading companies in your industry, or competitors of companies you no longer work with. This is your wish
list of possible clients. Use directories, libraries, guides or whatever resources are available. You can then plan a targeted mailing
or phone campaign (see the next section on promotional techniques).
Promotional tools and techniques
The following tools and techniques apply whether you work via agencies or go directly to the client. In both cases, proactive
marketing is the key to consistent workflow, better rates and interesting projects. Marketing isn’t just about getting more
work – it’s also about getting better work. The more proficient you become at presenting yourself, the better you can convince
people to give you the juiciest gigs in town.
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The phone
Cold calling can be very effective as long as it’s extremely targeted – you don’t want to be calling a huge number of completely
random companies. Research specific organisations and departments that you think could benefit from your skills. The better
you know their industry and challenges, the less ‘cold’ the call will be. Call reception to identify the best contact and subtly find
out the best time to reach them. Do some desk research into that person and their work. Know what you are selling and how
that could be useful to the person you want to speak to. Then call them.
Building rapport is ESSENTIAL. If you know they are just back from holiday, ask how it was. If you’ve been there too, share an
anecdote. Find out what makes them tick and you can almost be guaranteed that they will get back to you.
Make it light-hearted but don’t ramble. Introduce yourself and explain in a nutshell what you can offer (pitch it professionally
but in a relaxed way so it doesn’t come across as too formal). If you have worked with a similar organisation, tell them what
you did for that company. Also, focus on their possible pain or pressure points which should come from your research or your
conversation with the receptionist (e.g. they are always in meetings, travel a lot, are a team member down, about to launch a
big product).
It can help to say, “you may not have a need at the moment, however if it’s OK, I would like to send you my CV/LinkedIn page
and perhaps you could forward it to anyone you think might be interested.”
There is a certain art to cold calling and not everyone is comfortable doing it. If you are, then you have a fantastic asset. If not,
you might be able to outsource it – try typing ‘lead generation for freelancers’ into Google.
Email campaigns
Targeted marketing via email can also be effective, and cost very little.
According to the EU anti-spam rules it is ok to send unsolicited email to business owners and company employees without their
prior consent, as long as:
»» You don’t conceal your identity
»» You provide an easy (free of charge) way for the person to opt-out of receiving further communications from you
»» You provide a valid address for opt-out requests
The rules for emailing private, non-business individuals are different – you can’t email them without their prior consent.
However this shouldn’t affect you if you are using the email campaign to land B2B clients in a traditional freelance capacity.
When crafting your email, spend some time working on a good headline for the subject box. It’s no good saying something like
‘CV attached’ because at the end of the day, why should they care?
If you have researched their ‘pain’ you should be able to come up with something very specific that addresses their problem and
hints at a solution. So for example, let’s say you’re a French speaking PR specialist in the UK. Do you know any UK companies
selling to France? Have they got PR covered, or could they use your help?
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If your research indicates that they lack the know-how, your subject box could say something like: ‘How to earn press attention
in France’. If you think they have the expertise in-house, but are stretched for time and could use some help, it could be: ‘Need
help writing French press releases?’
The trick is also to keep it short enough so the subject doesn’t disappear off the edge of the person’s screen (bear in mind they
might be reading it on their mobile).
Individual targeted emails are likely to have a higher response rate, but if you want to do wider blanket mailings, services such as
www.graphicmail.co.uk can be used to set up and track the campaign.
The CV
Instead of presenting your career in reverse chronological order with half a dozen bullet points underneath each job; write each
major project you have done as an evidence based case study and create a section titled ‘Portfolio’.
This is the most effective framework for professional contractors to write their CV – it breaks your career down into individual
pieces of work. You may identify 30 pieces of work and decide that 15 of them are up to date and relevant. Once you
have identified the key pieces of work, write them as short case studies (no more than 6 lines long), ideally using the STAR
methodology (Situation, Task, Actions, Result).
The CV then becomes a portfolio of case studies and you are able to change the order around depending on what roles you
are applying for. Of course, recruiters will still want to see your dates of employment or contract engagement, so put a career
chronology section after the case studies with the date, company name and your job title. This framework will provide you with
much more flexibility and allow you to tailor the CV to the roles you are applying for in a much more effective way.
Networking
For freelancers, networking can be one of the most effective ways of finding new business. After all, people buy from people, so
face-to-face contact is likely to work much better than cold calling, advertising or other forms of promotion. A recommendation
by someone who knows you can be extremely influential indeed. See the top tips on networking at www.ipse.co.uk. Also check
the IPSE events calendar for a networking event near you.
In terms of networking, one of the things I’ve actually done is to
create groups where like-minded individuals come together. We meet
up on a monthly basis and we actively discuss what’s going on, “OK
what are you doing? Can I actually up-sell something with my skills?
What am I doing? Do I actually need some Java skills or some Six
Sigma skills?”
Manav Mehan, Change Management Specialist
Website
In the 2010 National Freelancers Day survey findings, clients ranked website and/or online presence as the least important
factor when selecting a freelancer. Qualifications, price and evidence of training came top.
So in terms of your immediate priorities, spending a lot of time and money on a website might not be top of the list – you’ll
be able to judge whether you need one by the reactions of any prospective clients or agencies. Are they asking to see your
website?
That said, sitting down to plan your website forces you to really think about how you communicate your offering. If you include
a clear ‘call to action’ – a reason and a means to get in touch with you – it can be an effective complement to your overall
marketing approach. It need not cost the earth either. Blog platforms like wordpress.com allow you to set one up for free and
it doesn’t have to be in blog format as the software lets you create normal web pages as well. There’s also www.about.me – a
neat way to create a single webpage to link to any of your other online resources, such as pieces of work you’ve created.
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Social Media
Some freelancers use their LinkedIn page instead of a website – it’s a free, quick and easy way of creating an online profile
that is always up to date. You can also set up a custom URL on LinkedIn so you can publish a personalised link to your profile.
Crucially, this enables you to maintain contact with past clients and build your network. Asking for recommendations from past
colleagues or clients is a good reason to get in touch and keeps you on their radar. For top tips on maximising your LinkedIn
presence, see the section on boosting your marketability in www.ipse.co.uk.
You can also create a ‘company page’ on either LinkedIn or Facebook. Twitter is another alternative – excellent for assessing the
market, gathering information, developing your reputation and building relationships. Visit the IPSE website for tips on using
Twitter to get more clients.
IPSE often runs seminars on using social media effectively – keep an eye on the events calendar at IPSE.co.uk or subscribe to
the newsletter for updates
PR
You don’t have to be a big company to use PR. Here are some of the things you might consider doing:
»»
»»
»»
»»
»»
»»
»»
Public speaking
Make yourself available for interviews by positioning yourself as an expert in your field
Look for press opportunities in relevant trade journals
Write white papers and technical articles
Consider writing a blog and contributing to other popular professional blogs
Write case studies about recent projects
Issue short press releases on recent successes.
How I use PR
Public speaking is a useful way of building a reputation provided that you help others by giving useful information, not by
directly selling services. Within most communities knowledge sharing is a valued way to behave, while overt marketing is poorly
received. Other ways to share knowledge and information include publishing articles, contributing to podcasts, running webinars
and video.
“In 2009 I invested in the professional production of a video case study about a large project. This was used as part of the entry
for an international design award, which ended up taking me to San Francisco for the Awards event with help from UK Trade &
Industry. That video keynote, which has been used at international industry events that I could not attend in person, has been
instrumental in securing extra business and has resulted in more invitations to speak at international events.”
Colin Butcher of www.xdelta.co.uk is a consulting engineer specialising in mission critical systems. More advice on building your
career can be found in The Freelance Career Ladder: seven business models to help you plan the journey at www.ipse.co.uk.
In a nutshell: Winning work
»» Agencies can be a good way of outsourcing the task of finding clients – particularly when you’re starting out
»» It’s important to check the agency’s credentials – ask for recommendations. Also check the contracts they are using are based on sound B2B terms
»» Finding clients directly usually takes more marketing effort, but can lead to higher rates, a more straightforward relationship and clearer lines of communication
»» People buy people: working your personal network is the most effective way to land work – keep in touch with everyone you have ever worked with
»» LinkedIn can be used as a good alternative to a website and is an excellent way of staying in touch
»» Don’t ignore the power of PR – are there any opportunities for you to speak at an event or write an article to show your expertise? Remember that in PR, the goal is to give useful information, not to sell
»» Watch the videos at www.nationalfreelancersday.org.uk to get a feel for the wide range of marketing techniques used by freelancers
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Managing the workload
Freelancers often complain about the fact that their workload is either feast or famine. After a couple of years you will probably
start to see some trends.
If you are overwhelmed with work, don’t be afraid to say, “I can’t fit it in now, however I could start the project in three weeks’
time”. If the client really wants to work with you, there is a good chance they will agree. If a project mushrooms, don’t be afraid
to discuss an updated budget with the client. If you state your case clearly, they are likely to agree and you will feel more
motivated to do a good job.
Schedule holidays, business planning and new business activities for the quieter periods and don’t be afraid to take the odd day
off to re-charge your batteries. Some freelancers build time into their schedule to do something completely different such as a
training course or even voluntary work. Variety helps you meet new people, which could lead to a new brief.
When you sit down to work, concentrate on one thing. Multi-tasking has been shown to be counterproductive. A widely
reported study by research firm Basex put a price tag on what they termed the modern “attention deficit”, which, they estimate,
consumes nearly a third of each worker’s productive day: “28 billion man-hours lost annually to unnecessary interruptions cost
U.S. businesses $650 billion per year.”
It’s rare for anyone to be able to focus completely on one thing for more than 50 minutes, so it makes sense to work in batches
of 50 minutes, or less if you find your attention wandering. Schedule five minute breaks in between and you should find you get
more done.
Also, rather than wasting time trawling the internet for resources, use the IPSE website, helplines and forum to answer your tax,
legal and freelance/contracting related questions. Also, don’t forget you can download useful documents such as non-disclosure
agreements, contract templates and guides – saving you a lot of time and hassle.
“I have to make sure that I don’t bite off more than I can chew, taking
on work that I can’t deliver against. Conversely, it’s important to
keep enough in the forward order book. When there’s enough work
coming in and you can manage it, it’s not stressful, but if it goes too
far in either direction it can get quite stressful – you learn to strike
the right balance.”
Stuart Mealing, freelance contractor.
Here are some suggested stages in the project lifecycle:
Nail down the brief before the project starts
Ask the client to send you a written brief outlining their end goal – the problem they need to solve. The brief should include
parameters such as deadlines, budget and responsibilities. Ask them to convey the details they already know and also any areas
of uncertainty. This encourages them to adapt the brief as new information comes to light. If your client is very busy or is a
new client, be proactive and make it easier for them by offering to discuss the project over the phone and then drafting the
brief for them to adjust as required. It also helps keep momentum and increases the chances of the project actually happening.
This works particularly well for smaller projects - smaller projects often lead to bigger briefs.
Draft a written agreement to ensure clarity for all parties
A written agreement can be initiated by the client or the freelancer. Include a statement of work detailing deliverables, costs
and timescales. Don’t use an employment contract - use a contract for services to define a B2B relationship. Using a proper
contract avoids IR35 and employment law issues. Members can download contracts from the IPSE website.
For smaller projects, a purchase order can be an appropriate alternative. Less defined projects can be split into stages - agree
the deliverables at each stage and to avoid misunderstandings further down the line, it is important to put any changes or
additional requirements in writing.
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Ensure the client has everything in place for you to start work on the project. Have you covered everything off with the client?
For example:
»»
»»
»»
»»
»»
»»
Lines of communication
The sign-off process and who is responsible for ultimate sign-off
Access to other team members or external suppliers
Access to systems
Where you will work
Who is providing the necessary equipment, you or the client?
Manage the project proactively
Remember you are not an employee – you should manage yourself and not expect to be managed. Freelancers are judged on
results and it’s your responsibility to deliver against the brief, on time, on budget. Good freelancers earn their client’s trust and
go to great lengths to maintain it - a win-win relationship built on mutual respect helps resolve any potential conflict.
Communicate regularly
A daily or weekly dialogue with the client encourages a collaborative relationship. Schedule regular review points to check
everyone is still in agreement and to make any necessary adjustments as new information comes to light. For larger projects,
regular review meetings involving the whole project team gets everyone working together and irons out any problems early.
Frequency of meetings can be ramped up as the project nears its critical phase/launch or be reduced when things are on track
and people are short of time.
Whilst face-to-face contact is important, particularly if you are working remotely, sometimes a focused phone or Skype
conversation will suffice. If you do decide that a face-to-face meeting is the best course of action, make sure it is as productive
as possible by checking that key decision makers will be present and sending all parties a detailed agenda beforehand which
includes the desired outcomes and timings.
Evaluate the results once the project has been delivered
Once the project is completed find out what impact it had. This will help you plan any future improvements. However, bear
in mind it is the results that should be evaluated, not your personal performance. Freelancers are businesses and therefore
shouldn’t receive employee-like performance reviews. Instead you should aim to co-evaluate the impact of the project with the
client (see the advice of success coach John Niland in The Freelance Career Ladder).
A good way of doing that is to send the client a short ‘project impact questionnaire’ to help identify the main learnings from a
project. This is also useful for capturing positive client endorsements for promotional purposes.
In a nutshell: Managing the workload
»» Partition your time so that you work on a specific task for 50 minutes without any distractions, it’s far more efficient than trying to multi-task
»»
»»
»»
»»
Write a project brief at the start of any project to ensure clarity and focus for all parties
Use a contract for services to define a B2B relationship, this avoids IR35 and employment status issues
For smaller projects, a purchase order can be an appropriate alternative
Once the project is underway, schedule regular review points to check that everyone is still in agreement with the direction the project is taking – make adjustments as required
»» Face-to-face contact is important but make sure any meetings are 100% productive by planning carefully and ensuring you know what you are hoping to get from it
»» Get feedback – evaluate the project impact so you can plan improvement
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Financial planning
Planning for down-time and non-billable time
As a freelancer there is no such thing as “holiday” pay. In fact, you do not get sick pay either. When a company takes on an
employee, it will usually include a cost margin to cover these eventualities, so the employee’s annual salary will generally include
a given number of “paid” holidays. Some companies even take out insurance against employees becoming sick.
You need to factor these additional costs into your revenue calculations. You will not work 365 days a year. Apart from your
holidays, there are many reasons why you may not be earning. You may be “between contracts” for a period of time. You or a
family member may fall sick and you may have to take time off work.
You may be able to insure against illness (be careful to ensure you understand what exactly you are covered for in case of
sickness) but you can also “insure” yourself by having savings set aside. This brings us to your buffer. As a rule of thumb, some
freelancers assume that they will be working 150 days per year.
A financial buffer
Every freelancer needs a buffer. Use your freelancing income to build up a cash reserve fund in your company sufficient to pay
you enough to cover your living expenses for a prolonged period (e.g. at least six months). You need to allow for tax in your
calculations as the taxman will expect to be paid on time. Remember also you may have VAT to pay in the future as well as other
standing business expenses such as insurance, accountancy fees, software support agreements, telephone bills, and so forth,
even though your company may not be generating any income.
By building up a cash buffer you will protect yourself against any breaks in freelancing. You will never be forced to take an
unsuitable contract and you will never have to worry too much about short-term breaks due to illness or circumstances. You
can take out Permanent Health Insurance to protect yourself against being unable to work for longer periods of time due to ill
health.
Planning for retirement
As a freelancer, you are responsible for your own retirement – there is no corporate pension scheme you can join, unless you
set one up yourself. However, if you are director of your own company, you have more options than a standard employee. For
contractors who operate through a limited company, turning company pension contributions into a pension represent one of the
most tax efficient ways of getting money out of the business as it can save National Insurance Contributions (NICs), income tax
and corporation tax.
Personal pensions
A personal pension is a type of private pension that is approved by HM Revenue & Customs and receives certain tax
advantages. You take out a personal pension under a contract with a pension provider and contribute to it yourself.
Personal pensions are money-purchase arrangements in which your money and any additional contributions from a third party,
such as an employer, is invested to build up your pension fund. Most personal pension providers require you to make payments
on a regular basis, or lump sums, for example at the end of your tax year.
The value of the final pension you receive in these schemes depends on the amount invested, the time invested and the quality
of the funds you invest in. You, as an individual, bear any risk on the investment returns in these schemes.
Stakeholder pensions
A stakeholder pension scheme is a flexible and portable personal pension arrangement that must meet strict Government
standards. The main differences between stakeholder pensions and other personal pensions are:
»» Annual management charges capping as set down by law
»» The charge capping means that some providers choose to invest in simple tracker funds that do not provide the wide range of investments many unit-linked personal pension funds offer
State pension
In addition to any occupational schemes and personal pension arrangements, you may be able to benefit from basic pension
provisions made by the State, which currently comprise:
»» Basic State pension: The Pension Service (part of the Department for Work and Pensions) will pay your basic Guide to Freelancing
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State Pension based on your National Insurance record. You may also qualify for the additional State Second Pension based on your earnings and National Insurance contributions.
»» State Second Pension (S2P): An additional State Pension on top of your basic State Pension, paid by The Pension Service. This was called SERPS, but since 2002 it is called the State Second Pension. Self-employed people cannot build up a State Second Pension, but salaried directors can. Contracting out will end for nearly all schemes in April 2012.
»» For a state pension forecast visit www.thepensionservice.gov.uk.
Taking pension benefits
There are now many ways that you can draw an income from a pension. Traditionally, individuals took 25% Tax Free Cash
(TFC) and the balance as an annuity. However, annuity rates are very poor, they lack flexibility and are often offered poor death
benefits. New rules allow more flexible options, including taking part of your pension whilst you slow down to a part time role,
but leaving the balance to grow, or using Drawdown to take an annual income from your pension. The rules on taking benefits
for pensioners over 75 changed in April 2011 are there is now no need to take an annuity from age 75. The new rules affected
the level of contributions that can be made and the total size of allowable pension pots. For more information see the IPSE’s
Guide to Pensions (members only) on www.ipse.co.uk.
Although your pension contributions attract tax relief, the payments you receive when you retire will be taxable. There will be
no NI to pay.
Pension alternatives
There are disadvantages with pensions, such as the lack of flexibility, management charges and the fact that you can take only
25% of all your pension arrangements as a tax-free lump sum.
There are many alternatives to a standard pension for a company director – see the paragraphs about WRAPs and SIPPs further
on. Or, if you would prefer your retirement income, rather than the contributions you make today, to be tax-free, you could
take out an ISA, although overall this is less tax efficient. Of course there are other options as well, such as building up a large
property portfolio, where you can benefit from the power of gearing, but being a landlord is a decision not to be taken lightly.
As a freelancer, your lifestyle will be quite variable. You may end up working abroad and could even retire overseas. You can
use your company’s surplus funds to save for your retirement. To do this, simply leave the money in the company by using a
corporate savings account. However, growth rates are unlikely to keep pace with inflation, and this is far less tax efficient than
company pension contributions (see the IPSE Guide to Retirement Savings for an explanation on how your company can make
pension contributions on your behalf and claim them as an allowable business expense).
WRAPs and Self-Invested Personal Pension Plans (SIPPs)
WRAP is an investment concept that originated in Australia. The idea is that the client has investment freedom and can hold
other assets on the platform, such as Individual Savings Accounts (ISAs), Unit Trusts, Bonds, etc. Typically, fund performance
can be monitored online. Holding all assets on one platform greatly reduces the effect of charges and allows movement
between the different asset classes, without the need to disinvest. Typically, a contractor would work with a Financial Planner
when using a WRAP.
A SIPP is a personal pension with a wide choice of investments. It lets you choose from a wide range of funds and other
investments. You can hold individual stocks and shares in a SIPP should you wish. The SIPP wrapper provides the tax advantages
and legal framework for your collection of investments for retirement. What you hold within the SIPP wrapper is up to you. You
are able to choose and switch between a wide selection of funds and permitted investment types. With a stakeholder and many
personal pensions you can choose only from a limited selection of investment funds.
SIPPs and WRAP allow an enormous range of investment options to be exploited for those with the desire, time and confidence
to manage their assets individually. Alternatively a professional adviser can help with some ground rules, asset allocation
strategies and guidance.
Seeking financial advice
If you wish to obtain advice about a pension or retirement planning, you should use an Independent Financial Adviser. It is usually
best to work with a fee based, rather than commission based adviser. You can find an IFA close to where you live through the
www.unbiased.co.uk website. Check that the adviser has the G60 or J04/J05 pension qualification if you want someone that
has specialist advice. Ensure that the adviser understands the rules on company contributions to pensions. IPSE is affiliated with
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Wealth Matters (www.wealth-matters.co.uk) who have been providing pension advice to IPSE contractors for over six years.
Mortgages for freelancers
The fear of not being able to get a mortgage is often a reason people cite for not going freelance. Indeed most online mortgage
providers are geared towards employed workers. The challenge is that often high street-lenders don’t understand how
freelancers work or fail to appreciate that your accounts will not necessarily reflect your full capacity to re-pay a mortgage.
It’s well worth trying an Independent Financial Advisor (IFA) which specialises in freelance or contract working. They should be
able to help secure you a competitive fixed or variable rate mortgage at ‘up to four times your contractor rate’ with high-street
lenders. In addition, you may not be charged a broker fee.
ContractorFinancials, for example, has been able to negotiate underwriting that works from a multiple of your hourly/daily rate
rather than using your last three years’ accounts.
A list of IPSE affiliates specialising in mortgages are contained in the supplier directory at www.ipse.co.uk
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Section 6
Risk prevention
Insurance and protective
measures
18.Assessing risk
Tools to prevent or mitigate financial meltdown and other disasters
19.Compulsory insurance
When you are legally obliged to take out insurance
20.Recommended insurance
Insurance policies that should be seriously considered by most freelancers/contractors
21.Worth considering
Insurances for those who want comprehensive cover against all risks
Assessing risk
Running a business can be risky. That’s why many people prefer to have a boss than to be their own boss. However, savvy
freelancers are aware of the risks and do everything necessary to minimise them. Risk assessment forms the basis of a Business
Continuity Plan, so that your business doesn’t collapse the first time it encounters the inevitable storm.
The steps are as follows:
1.
2.
3.
Highlight high priority risks to your business.
Work out the best way of preventing them.
Work out how to soften the blow if they happen, despite your efforts to prevent them – this usually involves taking out some kind of insurance.
IPSE members can download the ‘risk buster’: an assessment tool to plan for potential mishaps
Using insurance to minimise fall-out from a bad situation
When it comes to insurance bear in mind it isn’t always optional. The following chapters outline the insurances that are required
by law as well as those that make sense from a commercial point of view.
Insurance quotes can vary enormously, so this is one area where it really does pay to shop around. It’s possible to save money
by taking out insurance bundles – for example a common bundled package is Professional Indemnity insurance combined
with Employers Liability and Public Liability. Always read the small print as it may contain key exclusions or caveats. Be careful
to check whether any new policy you take out could clash or invalidate any of your other policies (being double insured can
sometimes cause issues).
For a list of insurers see the IPSE supplier directory at www.ipse.co.uk.
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Compulsory insurance
Employers’ liability insurance
All employers (unless they are exempt) are legally obliged to have at least £5 million of Employers’ Liability insurance to protect
them against claims from employees for accidents or sickness caused through work. Some insurers include Employers’ Liability
along with Professional Indemnity and Public Liability insurance as a single package.
Situations where Employers Liability is compulsory for freelancers
Any freelancer who employs someone must take out this insurance. There are no hard and fast rules about who counts as an
employee for the purposes of Employers’ Liability insurance. What matters is the real relationship with the people who work
for you and the degree of control you have over the work they do for you. Even part-¬time and casual staff may count as your
employees. Remember also that you can have employees irrespective of whether your business is a limited company or a sole
tradership. If in doubt, IPSE members can contact the legal helpline – it’s open 24 hours, 365 days, free of charge.
Exemption from Employers’ Liability insurance
Very small businesses that employ only their owner are exempt. If they are a limited company, and employ only the owner, they
are still exempt provided that the owner owns more than 50% of the issued share capital. Family businesses, employing only
closely related family members, are also exempt unless the business has been incorporated as a limited company.
What happens if you contravene
The law is enforced by the Health and Safety Executive (HSE) who can ask to see your certificate of insurance at any time.
You are required to display your Employers’ Liability Insurance (ELI) certificate at your work place, so it is visible to all your
employees. You are now also allowed to display your certificate electronically as long as all employees have reasonable access
to it. If you do not display the certificate of insurance or refuse to show it to HSE inspectors when they ask, you can be fined
£1,000. You can be fined up to £2,500 for any day in which you are without suitable insurance. For more details on employers’
liability, visit www.hse.gov.uk
Motor Insurance
Third-party liability insurance is compulsory for all motor vehicles used on the road. Comprehensive insurance includes third
party liability but also provides cover for fire, theft and accidental damage.
Personal accident cover for certain bodily injuries sustained by the driver is usually offered as an extra option and will pay out a
weekly or lump sum; an important consideration if you work for yourself. Ensure that business use is specifically covered by your
motor insurance policy.
Insurances specified by contract
In some instances, even if not legally required, clients will demand that the freelancers/contractors they work with have
additional insurance cover such as Professional Indemnity insurance and/or Public Liability insurance.
Check your client contracts for any insurance that may be required – if you don’t have the stipulated insurance in place you are
likely to be in breach of contract and the client may be able to take legal action against you.
What does the contract say?
If one of your contracts with a client or agency specifies you have a particular insurance, you could be liable if you don’t have
the relevant policy in place.
Recommended insurance
Professional Indemnity Insurance
Professional Indemnity insurance helps protect you and your business if claims are brought against you by a client due to a
problem with work you have done for them. It covers legal costs and any compensation paid as well as costs incurred to rectify
a problem. These costs can be significant and could even put you out of business. You may feel confident in the quality of your
work, but any small business, freelancer/contractor is vulnerable to a professional indemnity claim. In some cases a claim might
be brought against you that has no merit, following a disagreement with a client for example, but you might still face legal costs.
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You should consider buying Professional Indemnity cover if you:
»» Provide clients with professional advice and could be challenged on your work
»» Handle documents/data belonging to a client
»» Are responsible for a client’s intellectual property
To work out the level of cover you need, consider the following:
»» Size of the contract and client
»» Potential cost of your defence if you were to be sued
»» The maximum compensation that could be awarded against you.
A good policy, as well as covering you for areas such as negligence, breaches of intellectual property and loss of documents/
data, will also provide protection for areas such as defamation. It will also provide for loss of client fees in the event of a
Professional Indemnity claim. Make sure any policy you buy, as well as covering you for the following 12 months, also covers
you from the date when you began trading. Should you stop trading, retire, or take a permanent job, it is wise to purchase
Professional Indemnity insurance for at least another 12 months in case a client brings a claim against you for work done
previously. In extreme events, a claim could actually be made against you up to six years after the claimant’s first knowledge of
a problem, according to the Limitation Act 1980.
Professional Indemnity Case Studies
Case study 1: client withholds payment and threatens legal action
An IT contractor was hired to write a piece of software for a business. Specifications and timings were agreed up front but,
as time went on, the client changed the specifications and the timings moved. Ultimately, the client was not happy with the
work done to the timing the contractor believed he had agreed. The client withheld payment, formally complaining and making
threats about legal action while commissioning someone else to finish the work. Under the contractor’s Professional Indemnity
insurance, his insurer negotiated with the client, who agreed to ‘walk away’. The insurance policy also paid the contractor his
outstanding fees.
Case study 2: freelancer caught up in copyright dispute
A freelance designer was commissioned to design a website. In good faith he used images he found on the web that he believed
to be copyright free. This transpired not to be the case and the rights holder issued a demand for payment. He was fortunately
covered under his Professional Indemnity insurance and his insurer negotiated a settlement and paid the fee incurred.
In each of these examples, the freelancer/contractor was able to rely on their Professional Indemnity insurance to
remedy the situation, minimising any financial loss and, just as importantly, reputational damage.
Public Liability Insurance
Public Liability insurance covers you against claims arising from accidents to members of the public or damage to property that
occur as a result of your business activities. Today’s growing compensation culture can make your business more vulnerable to
these types of claims and Public Liability insurance can provide peace of mind by meeting the related legal or compensation
costs.
Even if you work from home, you may need Public Liability insurance. If clients or contractors visit you there, the policy will
cover you if they injure themselves while they are on your premises, by tripping on a computer cable for example, and end up
suing you for damages.
If you attend clients’ premises, Public Liability insurance will also cover you should you accidentally damage their equipment; you
might spill a cup of coffee over a client’s computer for example.
Property and Contents Insurance
For the purposes of business continuity it’s important to plan for things like fire, theft or flood, so that you can replace lost or
damage equipment if you need to. If you own the building you work in you will need to insure the actual premises themselves.
You should also ensure that anything else you are responsible for, from the fixtures, fittings, stock, computers and equipment
are all insured appropriately. The ability to get your business up and running again quickly might depend on it.
Even if you work from home, you need to check that equipment used for business purposes is still covered by your home
contents insurance. If not, you should consider purchasing specific business insurance or extending your home cover.
55
Professional expenses (Tax Investigation) Insurance
HMRC can conduct random tax investigations on your business or personal affairs, which can be a bit alarming if you’re not
completely expert in the complexities of the tax system. Having a professional adviser to represent you can make an enormous
difference to the outcome. Whereas, your accountant will be an expert in accounting matters, these advisers are specialists in
the specifics of a tax investigation. They are usually ex-tax inspectors themselves and will work alongside your accountant,
dealing with the tax authorities on your behalf so that you don’t unwittingly say something misleading that could escalate the
matter unnecessarily. Having an adviser on board gives you a much better chance of a swift and favourable conclusion.
Needless to say, this representation costs money. An investigation may also incur further accountancy costs. Some
investigations run to the tune of tens of thousands in professional fees – hence why insurance is a good idea. Note that HMRC
can conduct enquiries on a company for after two years after it has closed, so it’s advisable to keep the insurance in place until
the two year window has passed.
Note: IPSE members are automatically covered for as long as they remain members, so if you join you don’t need to take out
this insurance - a professional adviser will represent you if you are investigated and you also get the support of others who
have been through the same experience on the IPSE forums. This is included along with all the resources of IPSE membership
for £149 + VAT per year.
Pre-dispute Tax Cover
HMRC Officers now have the right under Schedule 36, Finance Act 2008, to inspect business premises, business assets and
business documents. They can inspect all of your business records such as current income, corporation tax, as well as VAT
and PAYE. These are not investigations, although a visit may become an investigation if non¬compliance is established. PAYE
inspections are known to be a common route for full blown IR35 investigations. HMRC runs these checks regularly but does not
publish details of how it chooses which company to audit. Again, having a professional adviser to deal with the case can prevent
this turning into a messy dispute with the taxman. Note: Pre-dispute cover is included in IPSE Plus membership.
Life Insurance
As a freelancer/contractor, you don’t receive death in service benefits from an employer, which pays out a lump sum in the
event of your death. This could mean your dependents would be exposed to potential financial hardship. You can arrange life
cover personally or via your company (which is typically more tax efficient) so that your family is protected and any mortgage
or other debts can be repaid in the event of your death. A lump sum payment or ongoing annual benefits can be paid and you
should always consider the merits of writing policies ‘in trust’ to ensure a smooth payout to your beneficiaries while making the
most of any tax advantages. In the case of pension related life insurance, paid for by your company, you can also receive tax
relief on the premiums.
Critical Illness Insurance
Critical illness insurance will pay a lump sum on diagnosis of a specific range of illnesses. Any pay-out can help fund any
necessary changes to your home, car or simply provide a financial cushion to help your recovery free of financial concerns. A
suitable alternative to this might be Income Protection (covered in the next chapter) – it is advisable to have some kind of
protection in case you can’t work.
Product Liability Insurance
Product liability insurance, which is recommended for product led businesses, covers you against injury or damage caused by
faulty goods. This can be important if you manufacture, repair, install or even retail goods; a small defect could open you up to
56
large claims. Your policy should protect you against safety claims, manufacturing quality, spoilage and any compensation costs
such as medical bills.
Worth considering
Private Medical Insurance
Private hospital care can make a lot of sense. Quicker treatment times through private care can help you plan potential
treatment more effectively around work, avoid lengthy layoffs and help you get back to work sooner. In this way the income
that would otherwise have been lost means that these policies can sometimes be self-financing and also helps you to avoid a
more serious long term break in your income.
Income Protection
As a freelancer, you do not have the safety net of an employer to pay for sick leave. It is worth investigating permanent health
insurance to cover your personal outgoings should you ever be unable to work for long periods. Some policies will pay a tax free
income on the very first day of any illness or incapacity, all the way through to retirement if necessary. It’s important to ensure
that both salary and dividends are covered by the plan and it is best to be wary of so called mortgage payment protection plans
which offer only short term benefits and often do not recognise freelance income. It’s advisable to apply for all forms of health
related insurance before you experience symptoms of a serious nature.
Protection against bad debts
It is possible to take out policies that cover you if your client or agency goes into liquidation owing you money. If you are a IPSE
Plus member you are automatically covered for £10,000 in the event that your agency suffers bankruptcy leaving you with
unpaid fees and up to £1,000 where the agency defaults on its contractual obligations.
Tax loss insurance
Some insurers offer policies that will help protect you against any outstanding tax, National Insurance Contributions, interest and
penalties suffered in the event that an IR35 enquiry by HMRC finds against you. Abbey Tax Protection offers discounted rates to
IPSE Plus members.
Business interuption insurance
Business interruption insurance compensates you for extra costs incurred and trading profits lost if your business suffers serious
disruption after, say, a fire or flood and you are unable to trade as normal. These costs can often be much greater than losses
from property damage for example.
Legal expenses insurance
Legal expenses insurance covers legal costs such as solicitors’ fees and court costs, and is bought as protection against any
future legal action. Many policies offer legal guidance via a telephone helpline.
Key man insurance
Key man insurance can make your business less vulnerable to the illness or death of key employees. The insurance will pay out to
the business in the event of a serious illness or death of a key individual. Premiums can often be offset against corporation tax.
Jury service expenses insurance
Being called for jury service can have a major financial impact on a micro-business, especially if the person called is the main fee
earner for the business, since compensation currently amounts to little more than expenses for the individual. Note: IPSE Plus
and IPSE Solo members can claim a jury service allowance of up to £500 per day, less any amount recovered from the relevant
court, for up to ten days.
For a list of insurers see the IPSE supplier directory at www.ipse.co.uk.
57
© Professional Contractors Group Ltd trading as IPSE (The Association of Independent Professionals and the Self Employed) Sept 2014
Registered in England and Wales, number 03770926,Registered office: Heron House 10 Dean Farrar Street, London SW1H 0DX. This guide is not intended to constitute legal or professional advice, and neither IPSE nor
the document’s authors accept any liability for any action or inaction taken on the basis of this document. This document is intended for general guidance and information purposes only. It has been prepared in good
faith and represents IPSE’s own interpretation of the law; reasonable efforts have been made to ensure accuracy. Whilst this document has been prepared with the help of legal advice and research, its content is of its
nature generalised and it is no substitute for specific legal advice. Individual circumstances will always vary, and specialist professional or legal advice should be sought where required.
58

Guide to Freelancing

Transcription

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