Support, advice and solutions to help you get your Freelance business off the ground

If you are thinking of joining the 1.4 million freelancers in the UK it is not an easy option, but can lead to a fulfilling and exciting career.

Devising a Plan

You need to research your market – understand where you fit in that marketplace, how many freelancers already work in your area, who’s the competition, how much do they charge? You can then position yourself accordingly and decide what you can offer in terms of price, customer service and terms of business.

Devise a basic plan for starters that:

• clearly defines your product and service offerings
• identify your target audience and market segments
• review the scope, size and trends within your market
• define your pricing model
• identify your main competition
• identify your strengths and weaknesses
• create the right image – logo, business cards, letterheads, website, email address, marketing collateral
• seek out networking opportunities

Social media, such as Twitter can provide valuable insight into the trials, tribulations and rewards of working in this way, it can also give you a bit of insight into the competition!!

Adopting the right business structure for you and your clients is Essential.

Should I be a sole trader?

The upside

• You don’t have the administrative or legal responsibilities of limited companies.  Whereas a limited company is a separate legal entity in its own right, which can own things, just like an individual, a sole tradership doesn’t have that status, nor the responsibility and admin that goes with it.
• Essentially, your business income is counted alongside your existing personal income, so the accounting side of your business is very straightforward.
• Business expenses, and any losses, can be off-set against tax
• If HMRC decides you are ‘deemed employed’, they would seek to recover the higher levels of tax due from your client, rather than you.  Although it would be highly embarrassing, and probably end your client relationship, you wouldn’t have to pay the tax liability yourself.

The downside

• You are personally liable for any debts you incur in the running of your business, including law suits, which you wouldn't be under the Limited Company route.  This means personal assets such as your home are potentially at risk.
• If you land work via an agency, and the agency is responsible for remunerating you, they must by law pay you as an employee, which is not tax efficient.
• Clients can be wary of engaging consultants or contractors who are sole traders because, if you are ‘deemed employed’, they would suffer the financial consequences.

Arriving at a verdict

Find out from your existing or prospective clients whether there is any objection to working with a sole trader.  If any of them are reticent, you’re probably better off as a limited company.

Weigh up whether your activities are likely to incur any large debts which could put your personal assets at risk and decide whether you can mitigate against them.  If you aren’t incurring debts, then you should be safe enough as a sole trader, as long as you have any relevant indemnity insurance in place against law suits.

Then speak to your accountant to compare the cost of being a sole trader versus a limited company, including the various tax implications.  If the saving in terms of money and admin is not significantly greater as a sole trader, you might be better off as a limited company.

 If you don’t have an accountant, PCG’s website lists a number of PCG accredited accountants who specialise in freelance issues.

If you choose to be a sole trader then the PCG membership option designed to protect your business is PCG Solo.  Click here for information on PCG Solo membership >>

Should I set up a limited company?

The vast majority of contractors and freelancers work through their own Limited Company.  The quickest and easiest way to set up a limited company is to go to an accountant or company formation bureau and buy an “off the shelf” company, which will cost you between £100 and £150, although some accountants will set one up for you for free.  A limited company must have at least one director and a registered office and must have Limited or Ltd after its name.  A limited company is a distinct legal entity in its own right.  You are not the same as the “company”; the law sees the limited company as a separate “person”.  It has rights and responsibilities and can own property or equipment.  The company may have a business account with a supplier, can have its own bank accounts and can hold shares in other companies.

The upside

• Your company is a separate legal entity, which makes it liable only for debts it incurs.  Your personal assets, such as your home, are protected.
• It can help credibility with clients and suppliers and financiers.
• If you land work via agencies, they don’t have to deduct tax at source.  Instead they can pay you gross, which is more tax efficient.
• Business expenses and losses can be off-set against tax.
• You can control how you combine salary and dividends to pay yourself.  In many cases a limited company can be the most tax efficient route available.

The downside

• You have legal responsibilities as the director of a company.
• There is more admin and a marginally higher cost in running the company due to obligations such as submitting company accounts.
• You can still be ‘deemed employed’ if your relationship with your client resembles employer/employee, but your company will suffer the financial consequences by having to pay employed levels of tax and NIC on any fees paid by your client to your company.  This is known as being IR35 caught, and HMRC can seek to recover tax going back several years.

Arriving at a verdict

How long are you intending to freelance or contract for?  If it’s just a few months, it’s not worth setting up a limited company, but if you intend to work for yourself for the foreseeable, go for it!

Find out how much your accountant would charge to handle the admin and company accounts for your limited company.  Some charge surprisingly little for a quality service (PCG’s website lists a number of PCG accredited accountants if you don’t have one).  You may find the marginally higher costs and admin of running a limited company are outweighed by the advantages, such as limited liability and tax efficiency.

Make sure you understand the issue of employment status and how to avoid being IR35 caught by using proper contracts and working practices (again, your PCG membership will supply you with contracts and advice).  As long as you can set up proper business to business relationships with your clients, you should have no problems with IR35, and no reason not to set up a limited company.

If you decide to set up a limited company, PCG can make it easy for you with PCG OneStop: Click here for information on PCG OneStop membership, the easy way to set up and run a limited company >>

If you already have a limited company and wish to keep it, there are two PCG membership options available, PCG Standard and PCGPlus.  PCGPlus gives you additional protection and resources such as PAYE Audit cover, Jury Service cover, Agency bankruptcy/default cover and access to Ashridge’s renowned Virtual Learning Resource Centre. 

Click here for information on PCG Standard membership >>
Click here for information on PCGPlus membership >>

Should I join a PAYE Umbrella scheme?

An umbrella company provides a ready made invoicing vehicle for contractors and the contractor is an employee of the umbrella which could have hundreds, even thousands of individuals all on PAYE on its payroll.  In general terms, the individual is caught by IR35 and so there are no issues about status, other than the End User (and Agency) does not want to be the employer.  The umbrella supplies the worker to the agency for a contract at the End User.  The benefit to the worker is that by being an employee of the umbrella, he can claim travel and subsistence expenses that would not be available to an employee deemed to be based ‘on site’.

The umbrella charges the worker a fee for the provision of its service, but the worker is still better off than someone on PAYE as an employee of the End User.  Umbrella companies come in all shapes and sizes – their main purpose is to make life simple for contractors while maximising their earnings; by taking responsibility for admin and compliance on behalf of the contractor and reducing the amount of tax that they pay.

• By joining a PAYE Umbrella you are handing over the responsibilities, admin and hassle to an umbrella company who bills your client through its own limited company structure and pays you a salary 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.
• If your clients will not work with a sole trader, yet insist that you work in a way that is ‘deemed employed’ without wanting to actually employ you, this offers a way of working with those clients. However, be sure that the client knows what they are doing: PCG advises that if an employee is right for the position, clients should go ahead and hire an employee, and not attempt to get around the obligations this entails. If a contractor really is right for the role, there is not really any excuse for not using a proper business-to-business contract, so you may wish to negotiate changes to the terms.
• The fact that you are paid a salary and effectively have employee status helps with proof of earnings for loans and so forth.
• Although you are paid as an employee, you don’t have a boss.  You are your own boss and you decide who you work for and when.

The downside

• It’s not your own company and therefore it’s harder to build your own brand.
• It’s not tax efficient because all the money is paid as employment income.

Arriving at a verdict

If you are intending to contract for a short period, say a few months, this could prove to be the best option.  
The same applies if you are willing to forego the tax and commercial advantage of running your own limited company in order to rid yourself of the extra responsibility and paperwork.

If you are unavoidably ‘IR35 caught’ it also represents a good choice.

However, 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.

PCG can provide you with a quality umbrella company that is fully compliant with the law.

Click here for information on PCG Umbrella >>

Should I run a partnership or Limited Liability Partnership?

The upside

• It allows a simple way for two or more people to work together, similar in many ways to going the sole trader route for an individual.  You don’t have the potential admin burden of a limited company’s separate legal status.
• A Limited Liability Partnership (LLC) gives the additional advantage of limiting your personal liability in the way that a Limited Company does.

The downside

• If any of the partners withdraw from the business (if they die, resign or go bankrupt), the partnership must be dissolved instantly, since it has no legal status.
• Unless it is a Limited Liability Partnership, all partners have joint and several liability for the debts of the partnership.  Please note that a partner's own tax is not a debt of the partnership.
• If any of the partners fail HMRC’s employment status indicators, the partnership will bear the financial consequences, in the same way as a limited company.

Arriving at a verdict

Are you intending to freelance in partnership with someone else for the foreseeable future?

If so, the same principle applies as for sole traders.  Check with your accountant whether you would make any significant savings as a partnership versus the limited company route.   Once you know the answer, you can weigh up the savings against the disadvantages.  There’s a good chance that you would be better off forming a limited company.

If you decide to form a partnership, the PCG membership option designed to protect your business is PCG Solo.  Click here for information on PCG Solo membership >>

However, you decide to move forward, do make sure that you get good Professional Advice, PCG Accredited Accountants have received additional training in tax matters of particular importance to freelance workers and developed a good understanding of how freelance businesses operate.  

download your free PCG Guide to Freelancing click here