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What Type of Business is Best for Me?

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What Type of Business is Best for Me?

If you have taken the decision to become a contractor, you may be overwhelmed by suggestions from well-meaning friends or family members as to how you should organise your business. Whilst it can be invaluable to take advice from people who have experience of running their own business, financial arrangements can vary hugely from one sector to the next, or depending on your income and tax arrangements. Therefore it is always recommended that you consult an expert before making any rash decisions.

Sole Traders

When you are just starting out and establishing yourself in business, being a sole trader can be the simplest and easiest way to work. You can register with HM Revenue and Customs (HMRC) for free using their online form or over the phone, and they will provide you with all the information you need to get started. You will be responsible for completing an annual self-assessment tax return and paying your own tax bill, but the process is relatively simple and the form will calculate how much tax you owe. You will also have to pay your own National Insurance at the appropriate rate.


Partnerships

A partnership is basically an arrangement whereby two or more sole traders operate together. They will both complete self-assessment tax returns for themselves and pay National Insurance as individuals, but the business will be considered as one entity when it comes to VAT. One of the considerations contractors need to take into account with the partnership model is that each member is considered jointly liable for any debts the business incurs, so if one partner is unable to repay their share then the other partner(s) will be pursued to make the payments.


Limited Liability Partnerships

A limited liability partnership works a little bit like a cross between a normal partnership and a limited company, offering the flexibility of a partnership with the risk protection afforded by limiting your liabilities. With this arrangement, the partners are actually ‘members’ who are self-employed and are remunerated in the form of ‘drawings’. These payments do not affect the level of profits declared for tax purposes.


Umbrella Companies

For many contractors, the idea of using an umbrella company might seem like an easy way to manage all their administration without having to take responsibility for their own tax and National Insurance, and there’s no doubt that it might seem like a ‘best of both worlds’ scenario. An umbrella company will treat you as an employee and deduct tax at source through the PAYE system, but they will also pay both employee’s and employers’ National Insurance on your behalf, which could mean you take home a much smaller proportion of your pay cheque than you would otherwise.

Because of this, working through an umbrella company could cost you more than using your own limited company to administer your tax and National Insurance, so it pays to be wary of the hidden costs of outsourcing your financial management in this way. It is also possible that you could be pursued for any mistakes that the umbrella company make should HMRC investigate them, so it can leave you vulnerable if that were to happen.

For more information on Umbrella Companies, you may find the following pages useful:


Limited Companies

For those who want to enjoy as much of their income as they can, trading through a limited company that you set up and run yourself is usually the most lucrative way to do business. As the director of a limited company you can benefit from a range of tax efficiencies which are not available to those who are operating as sole traders or through other outfits such as umbrella companies. You can also choose to draw dividends as well as a salary from a limited company, and because dividends to not attract National Insurance, this can help you to save money on your annual bills.

It is also a good way to minimise the risks to your personal assets as you and your company will be considered as separate entities, which means that you will not be personally liable for business debts, even if you are the sole shareholder.

Nixon Williams can help you organise your limited company and manage your expenses in the most effective way. Your dedicated accountant will be aware of all the potential savings available to you, will help you to establish whether you would be better of becoming VAT registered or using the Flat Rate VAT Scheme and help you work as tax efficiently as possible.

For further information about Limited Companies, we recommend you visit the following pages:


Off-Shore Schemes

There are schemes which utilise off-shore accounts and promise investors the chance to take home a relatively high proportion of their income. Often based in Switzerland, the Isle of Man or the Channel Islands, those who sell these schemes often promise to reduce your tax bill by paying a low salary and offering the rest as a ‘loan’. Some will claim to be HMRC approved tax vehicles, or state that they are ‘legally backed’ in order to seem legitimate, but it is this sort of scheme that the Treasury are clamping down on. This kind of arrangement constitutes tax avoidance and so there is new legislation which renders the schemes completely futile and the investors liable for the unpaid tax, plus interest and penalties.

Nixon Williams do not offer this kind of scheme to their clients, or any other which operates in a way which constitutes tax avoidance.


How can Nixon Williams help?

The team of accountants at Nixon Williams are dedicated to relieving the stress that contractors may associate with accountancy and tax by taking care of all your business and personal taxation needs. We assign all of our clients their own dedicated, knowledgeable accountant and provide a direct line so you can contact them whenever you need. Our accountants are all specialists in the contractor market and ensure that they always keep up-to-date with any changes to tax legislation to ensure that they provide only the most current advice.

For more information about contracting and finding the best way to operate as a contractor, please get in touch with a member of our new business team on 01253 362062 or email jacqui.fairbrother@nixonwilliams.com.


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