Greg Dickson: We're here with Paul Rawlings from Nimbus Accounting today to talk about
how to choose an accountant when you're a contractor or freelance, and some of the differences
between a limited company and an umbrella company.
So, Paul, thanks for joining us today.
Paul Rawlings: Thank you, Greg Dickson.
Greg Dickson: No problem.
What are the main benefits and differences when using a limited company compared to the
more traditional umbrella company?
Paul Rawlings: Well, coming from an accountant point of view, it's all down to tax.
In an umbrella company it's not tax efficient.
You spend a lot more money.
Basically, you're just being taxed as an employee, you also have the additional cost of employers
national insurance, because you're actually suffering that as well.
So, the biggest thing, if you've got your own limited company is obviously the tax efficiency.
I think umbrella companies came about as helping contractors overcome the substitution clause,
in that if an umbrella has got hundreds of contracts, then potentially they could send
a substitute for another contract.
Which, if you've got one contract in one limited company, it makes it difficult to say that
someone has got equal skills and they can perform that role.
So that's the only benefit I see that an umbrella company gives you, for protection of IR35.
It obviously does a bit of paperwork for you, but at the end of the day,
that's nothing really.
Greg Dickson: So a limited company isn't an affected by IR35?
Paul Rawlings: Oh no, no, it still is.
Oh yeah, it all still accounts for that.
Even an umbrella company is affected by IR35.
But what the umbrella company is trying to mitigate is the substitution clause.
Greg Dickson: Right.
Paul Rawlings: It's just bringing it to reality, actually.
Greg Dickson: That means you can't send someone else in your place, is that right?
Paul Rawlings: Yeah.
So, all contracts now - and it's important that you look at the reality rather than just
the wording - so all contracts and all contractors should be able to send a substitute in their
place.
So someone should be able to turn up on a Monday morning and say, "Well, I'm here from
ABC limited to do this job."
The client, should be happy, because that client isn't employing an individual.
They're employing the company.
That's the same with the umbrella company.
What they're actually doing is the umbrella company is obviously the contracting company,
and they're sending someone to that client.
But with the umbrella company, because they've got a whole host of, say, IT contractors under
their books, then potentially on a Monday morning, the actual client, could have anyone
turn up.
All they're employing is the umbrella company to send someone to work.
However, the reality is the umbrella company and the limited company are still sending
the same individual to do the same work.
Greg Dickson: Okay.
Excellent.
So, say, if I was in a situation where I was with an
umbrella company, what's the general process to change from an umbrella company to a limited
company?
Paul Rawlings: It's all to do with the contract.
So at the moment, your contract is with the - the umbrella company holds the contract.
So you need to see what kind of clauses there are for you to leave and then you need to
go to your client, the end person, and say, "Right, can we reissue this contract to my
new limited company because I'm no longer trading through the umbrella company?"
Greg Dickson: Okay.
Paul Rawlings: It should, is as simple as that.
Greg Dickson: Okay, excellent.
So when you're looking to form a limited company, what is the process and what sort of expenses
come up from that?
Paul Rawlings: It's very simple.
You can go on the internet and form your own company today.
I had one client who formed a company, it cost
him £5, and then they got £50 back.
So I think both...
Paul Rawlings: Yeah, I know.
I mean, there's a business model somewhere there.
Greg Dickson: Possibly flawed.
Paul Rawlings: Yeah.
But I think what you get from that is a Barclay’s bank account,
so the kickback is from Barkley's that you have one of their accounts.
So, you obviously need to set up an limited company, that fee, and then there's the accountancy
fee.
I wouldn't recommend someone does that on their own,
and a monthly accountancy fee can run from anything from £70 to £150 per month.
Greg Dickson: Okay.
Now when sort of looking for a new accountant, what questions should you be asking them to
make sure that you've got a good fit?
Paul Rawlings: Well, I think everyone's quite price sensitive, so fees first, how much they're
going to charge you.
But then fees can reflect lots of different things.
You could pay someone, an accountant, say, £69 a month, but potentially all you're then
getting is a call center at the end of the day.
So you can phone up, speak to a different person each time, and potentially
you're not speaking to an accountant.
So, if you were to pay more, I think the more money you pay the better quality you're going
to get.
So if you're going to go for an accountant, then you need to make sure that the person
who initially signs you up is the person that's going to sort of act for you throughout.
Because what lots of firms will do is the big chief will go along, win the business,
but then someone a couple of levels down from then will actually be the person you interact
with day in, day out.
So you want to know actually who you're going to speak to everyday if you've got a query,
and it's that person you actually want to spend a bit more time getting
to know before you sign up with the accountant.
Greg Dickson: Would you be looking for accountants that have experience in the contractor marketplace?
Paul Rawlings: Yeah, I'd definitely go for one that specializes in contractors, because
you want basically a contract review.
So you need an accountant to sit there, go through your contract, and actually see whether
you fall within or outside of IR35.
I think with the contract review, it almost takes it to another level now with the business
entity test that the revenues introduced, so that's highly important.
Again, you need to take that test, and which an accountant should be able to sort of give
you the questions, and that should be another review point in a discussion you have with
your accountant.
Greg Dickson: So how do your direct expenses relate with limited companies?
If you look at the umbrella company model, everything is sort of offset by your expenses.
Is that sort of similar?
Paul Rawlings: Yeah, I think most umbrella companies really only take into consideration
travel and if you can justify any other, say, direct expenses.
So if you're running your own limited company, potentially you're going to attract a lot
more expenses than you would do within your umbrella company.
So potentially there are going to be lots of computer equipment, I imagine, if you're
an IT contractor, and you've got your own computer equipment which you work on, and
that's going to be an expense billing to company.
Same to travel, obviously the accountancy fee is going to go in there.
So there are a lot more expenses that would be claimable, as long as they're incurred
in the course of business as a limited company, more so than an umbrella company would pay
you.
Greg Dickson: Obviously that would make the year-end more efficient, the amount of tax
that you owe.
The taxable income will be less
Paul Rawlings: Yeah.
The net profit in the company is going to be lower, so your corporation tax liability
will be reduced.
Greg Dickson: Excellent.
Now talking sort of with other contractors, one of the biggest complaints when using a
limited company is the sheer amount of paperwork.
Do you have any suggestions, a way that people can be more efficient or manage the paperwork?
Paul Rawlings: Well, everyone says there's a lot more paperwork, but there shouldn't
be if you've got a good accountant.
So at the end of the day it's the accountant who should be making sure that you're keeping
your receipts or recommending systems for you to do that.
So on the receipt front there's Receipt Bank.
There are lots of third-party products out there that
can help you manage that.
The other paperwork...
Greg Dickson: What's Receipt Bank?
Paul Rawlings: Receipt Bank is a company where you can scan a receipt and they will enter
that onto another accounting product.
You can send them emails, again, with receipts attached, and they basically do all
the analyzing the receipts for you.
They scan all of the invoices and put them on a on-line database so you can always access
them.
So the rule is you have to sort of save all your receipts for six years.
But being a contractor, traveling around a lot,
working hard, you might lose your train ticket, you might lose your Petrol receipt.
Where if you just sort of snap it with your phone and send it over to Receipt Bank, they've
got a scanned copy of it and they process it all for you.
Greg Dickson: That sounds useful.
Paul Rawlings: Yep.
Greg Dickson: Yeah.
Then sort of day-to-day managing of the account, sort of software packages that you suggest
to your clients?
Paul Rawlings: Yeah.
We always suggest Zero, and there's an integration with Zero and Receipt Bank.
So on Zero there are live bank feeds, so everything can go through there.
So if you are quite disciplined with how you run your business and pay everything on business
cards, then when it comes to the bookkeeping element of your accounts, you can do it in
minutes.
So gone are the days when you needed spreadsheets, sitting there, tapping away all of your expenses,
and putting everything into columns.
That's back in the '80s.
But today it's all about online software, and Zero is by far the leader in that.
Especially with the integration with Receipt Bank makes it a lot easier.
There shouldn't be any physical tapping on the keyboard.
Everything is done with the click of a mouse.
Greg Dickson: I like the sound of Receipt Bank, because you can just do it as you're
sitting on the train or whatever.
It's one of those things, you just email it all the way through.
Paul Rawlings: Well, that's it.
Yeah.
I think they're turnaround is 24 hours, so if you send your receipt in, in 24 hours'
time it will be sat in Zero.
When you reconcile it to a bank transaction, or if you've paid for it personally, to just
pay off through the director's loan account.
Greg Dickson: Yeah, brilliant.
So let's talk about what figures and what you'd expect.
Now say a contractor has got a contract for £100,000 a year, what would they expect for
their take home?
That's a pretty tough question but...
Paul Rawlings: Yes, well there's obviously lots of variables.
So if you as a contractor, one director, and one shareholder, with £100,000 contract,
you should be looking at paying an effective rate of tax at about 29%.
So potentially you should be taking home about £71,000.
So £100,000 contract, you should take home £71,000.
Now obviously the other option, which is what lots of people do, and you need to be careful
with this in that you are not income shifting, is obviously husband and wife.
If your wife is genuinely involved in the business, you can gift as a husband, or even
as a wife you can gift to your spouse shares, and that's tax exempt from capital gains tax.
So as long as you're not shifting income and they're working in the business, then potentially
on that same £100,000 contract, rather than taking home £71,000, you could take home
£82,000.
So you're then looking at an effective tax rate of 18%.
Greg Dickson: You'd essentially be paying your spouse or partner a wage.
Paul Rawlings: Yeah, a wage.
If they're an equal shareholder.
What I say there is if you're going to do that, there needs to be some reality to it.
Don't just do it for tax avoidance because that's not allowed and you can't be doing
it for income shifting.
Greg Dickson: Income shifting is...?
Paul Rawlings: Income shifting is basically the husband saying, "Well, I want the wife
to utilize the wife's allowance, and I'm just going to give her all the money.
So give her 50% or my shares.
But what I'm going to do is once I pay her a £20,000 dividend, I'm going to take it
back and I'm going to spend that money."
That's income shifting.