sole trader/freelance vs limited company

sebastianj

Can any one please advise on the best option? whether to work as a sole trader/ freelance or a limited company.

thanks in anticipation,

sebastian

Annisele

There is no single best option that suits everybody - both have advantages and disadvantages.

Maybe if you tell us a little more about what you're doing?

sebastianj

thanks for the response,
I am working 3 days a week in my current job. I am being offerred another one on a temporary basis and I can see myself doing similar thing in the future. The choice is either a sole trader or a limited company.
sebastian

PlutoinCapricorn

Will you be buying and selling on a large scale? Will you be renting offices and employing people? Are you in the IT or construction industry? Can you estimate how much you will earn? Will you be making a regular commitment with indefinite end date to a client?

In general, it is best to start out as a sole trader and only create a company if and when you reach a certain stage. However, some clients will not give you work unless you have a company, and you have to be careful of HMRC's crackdown on 'false self employment'.

dlspttr

The Limited Company option is more tax efficient, but the savings are offset against higher accountancy charges at lower levels. So, it depends upon various factors including your anticipated turnover, profits etc.

sebastianj

thanks dispttr,
plutoincapricorn also seem to suggest the same thing, I am in IT and expect to earn a little above average, What I don't understand is the HMRC crack down on 'false self employment'. and how to safe gaurd against this?
sebastian

westy22

What I don't understand is the HMRC crack down on 'false self employment'. and how to safe gaurd against this?

Google IR35 and Management Service Companies (MSCs)

chrismac1

I have some useful links I can send you on both the issues you've raised. In a nutshell:

1. The benefits of going limited outweigh the costs after about £20k of profit is achieved. This is not the full story though - for example I have one client who knows they'd save £4k or more per year if they "went limited", but having considered the other issues involved they remain a partnership.

2. IR35 is dead in the water providing you play your cards right and have fee protection insurance. Playing your cards right means drafting and operating your contract such that you stay outside the HMRC trap, and keeping good records of times when you operated in such a way that you were clearly outside the trap. The fee protection insurance means that if HMRC decides to waste £1.5m of taxpayers' money in getting a maximum of £50k tax back from you, you can throw just as much cash at the case as they can.

PlutoinCapricorn

IT is a special case, as is the construction industry.

I believe that IR35 legislation was introduced because many IT workers declared themselves self employed, then carried on working for their employers under the same rules. This is a good example of false self employment. If you are an employee in all but name, and must obey your boss, then HMRC may rule that you are really an employee.

The IT industry is one where it is not always possible to get work as a sole trader: the clients want you to have a limited company or work via an umbrella company.

http://www.itjobsinlondon.com/articles/London-Contractor-Guide-to-Limited-of-Umbrella-company

chrismac1

"I am working 3 days a week in my current job. I am being offerred another one on a temporary basis and I can see myself doing similar thing in the future."

This quote alone suggests there is no ongoing relationship present at the very least in the OP's next assignment, which is a good starting point when seeking to build a case for being outside of IR35. Personally I don't want to see IR35 reformed, because HMRC have mucked it up and the industry in general can cope with it, any changes must offer as much threat as opportunity. The key thing for the OP to bear in mind if he or she goes down the self-employed route is to operate outside of IR35, not just have a contract which says that you do and then pay lip service to that contract. Also if you contract through an agency make sure the head contract is consistent with your sub-contract.

sebastianj

Thank you very much for some very clear and helpfull comments. I think limited company is the one that suites my needs but complex in a sense that I need to draw a wage from the limited company as well as get paid PAYE. I am sure an accountant will know what to do in these circumstances.


sebastian