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Setting myself up as a contractor in the UK, advice on invoices please

AeroNucDef (Aerospace)
6 May 11 11:34
Hi all,

This is mainly a question for UK contractors.

I've been presented with an opportunity to work for a company on contract, and they want me to invoice them directly. I've been working mainly through agencies and design companies, so they have taken care of all of the paperwork.

The company is offering about £30 per hour, when I invoice them do I include the VAT at 20% on the invoice, so I charge £36?

Also is being a Limited company (on the flat rate scheme) the most efficient way to operate?

I'll be doing all my own accounting, there's not going to be a lot of receipts.

What kind of things can I claim for? Lodgings, Fuel...?

yours

Fish
MacGyverS2000 (Electrical)
6 May 11 11:42
Out of curiosity, what kind of work do you do?  I ask because I would think most engineers fresh out of school would make close to £30/hr working directly for a company that pays for all benefits and such.  I just can't imagine £30/hr as an independent consultant and making a living after paying for taxes, food, travel expenses, etc... but then things may be significantly different in the UK.  If I work for a consulting company, they charge me out at maybe US$120-130/hr, I may see 60% of that (give or take)... if I'm working as a direct consultant, I may see 90% of that.

Dan - Owner
http://www.Hi-TecDesigns.com

AeroNucDef (Aerospace)
6 May 11 12:04
I'm a design engineer, been doing it for 15 years, and yes the pay sucks here in the UK. Unfortunately there is little negotiation with large companies, and the rate seems to be about the industry average. I probably could get a couple more pounds per hour, if I really pushed them.

The most money seems to be in the Oil & Gas sector in Aberdeen, which I've been trying to get into.

The rest of your question is what I'm trying to find out. I'm trying find out how to pay as little tax and outgoings as possible. I just need to find out the best way to do it.
ajack1 (Automotive)
6 May 11 15:07
So many swings and roundabouts.

They might include VAT in the £30 offer although this is not normal, but well worth finding out.

Even if they do you do not have to register for VAT if you turnover less than £73K PA, which on £30 / hour is very unlikely, unless you have other forms of income.

Flat rate is not applicable to all and the rate varies depending on what service you offer, so even that is not clear cut.

As for being a limited company again there are pluses and minuses, basically you will be a director and employed by the company, this does offer some tax advantages and ways of paying less NI by paying yourself a low salary but making it up with dividends, or goods in lieu of payment, but even this has restrictions, far to complicated for me to try and explain.

The downside is you need to submit audited accounts every year to companies' house and it is harder to claim tax relief on the odds and ends you can as a sole trader.

As to what you can claim for again it depends greatly on your circumstances, basically you can claim all the running costs of an office or part claim if you work from home, work related travel other than to your normal place of work and accommodation if you need to travel again other than your normal place of work. Beyond that you really want to speak to an accountant.

Basically speak to an accountant they will tell you what is best for you, finding a good account who you can work with will be one of the best things you will ever do.
 
ajack1 (Automotive)
7 May 11 3:45
One more thing if you do form your own company I would strongly recommend looking at joining the F.S.B. This will be on of the best investments you can make in my experience.

For a small annual fee they offer many services including free banking, they actually pay you, okay not much but every little helps. They also offer free 24 hour tax and legal advice and you get free insurance against being investigated by the tax office.

With more and more companies now being investigated and the average cost being around £5K none of which you can claim back even if you have done nothing wrong at all, it is well worth the cost for this alone.

The legal helpline is also very good and as you slowly battle your way through all the red tape that government put in your way, with the only real aim seeming to be to ensure no business in the private sector can actually survive, this is very useful. Whilst the current government are cutting down on red tape for small businesses it is still a minefield and one that very few are aware of when starting up a business.
 
csd72 (Structural)
10 May 11 12:49
You may find you have serious tax issues when you are a limited company doing more than 50% of your work for one employer. They penalise it badly.

As for the VAT, I think it depends on your turnover, at the rate you are talking about I think you may slip under the minimum amount requiring VAT registration.

there is also national insurance, you may need to pay double contribution.

Suggest you talk to an accountant before you commit.

There are many good resources on the net to give general advice if you google it but a good engineering reference for structural engineering is in the Aprill 2011 Structural engineer:

http://www.istructe.org/thestructuralengineer/#

By the way, £30 does sound a bit low for aerospace to me, it would be okay for civil/structural but I would expect you guys to get a bit more.  
AeroNucDef (Aerospace)
12 May 11 9:46
Thanks ajack1 and csd72.

The company has dropped it's offer to £25ph (buggers), and I found out that I would have to stick VAT on the invoice. Also I would have to make sure that I wouldn't fall into the IR35 tax thing, which could cost me a fortune.


 
KENAT (Mechanical)
12 May 11 10:52
iwonafish, definitely talk to an accountant.  We had a guy at my place in the UK in the early 2000's who worked similarly, and the tales he told about the Inland Revenue and how his accountant worked for him were enough to convince me that trying to do it without talking to an accountant was foolhardy.

(Macgyver - trying to equate US wages to UK wages is really tricky - it definitely isn't just a case of the exchange rate.)

Posting guidelines FAQ731-376: Eng-Tips.com Forum Policies http://eng-tips.com/market.cfm? (probably not aimed specifically at you)
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csd72 (Structural)
12 May 11 13:08
I have a close friend who works as a sole trader EE in the UK and he was saying that he often takes advice on his accountant of whether a certain type of project arrangement is likely to be seen as 'independent' by the tax office.
AeroNucDef (Aerospace)
12 May 11 14:24
Kenat, I'm seeing my brothers accountant next week, he specialises in small businesses and contractors, and he charges reasonable rates.

csd72, Your friend is right. Just a few wrong words on a contract can put you in a very high tax band.   
MacGyverS2000 (Electrical)
13 May 11 6:40
Ken,

I know there's a wide difference in taxes, what employers offer in bennies, etc.  But man, no matter how I cut it, £30/hr just feels like an extremely low wage for any experienced engineer in either area (okay, maybe not a Civil winky smile). After hearing about this nasty VAT, it sounds even worse.  Gas prices are high, too.  What's the typical take-home?

Dan - Owner
http://www.Hi-TecDesigns.com

berkshire (Aeronautics)
13 May 11 13:09
iwonafish,
If you do decide to go the company route, there are companies in the UK that produce ready made companies, you buy one complete then just change the name. This avoids a lot, but not all of the minefields involved in setting up your own company.
B.E.

The good engineer does not need to memorize every formula; he just needs to know where he can find them when he needs them.  Old professor

KENAT (Mechanical)
16 May 11 12:28
MacGyver, it's really difficult trying to compare.  When I got my first Engineering job in the US (it was arguably more a drafing/design job) making well over $60k it sounded like a lot - compared to the 27270 GBP (+ some overtime/bonuses occasionally) I'd last been on in the UK.

However, in terms of standard of living etc, it really doesn't seem any higher than it was then.  Now, it's hard for me to compare because compared to in the UK when I was free and single I now have a wife and step kids so it's not like for like.

Maybe it's even a case of having more money and finding stuff to spend it on.

However, despite nominally higher pay, and nominally lower costs for many items, I just don't see the massive quality of life difference many espouse.

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KENAT (Mechanical)
16 May 11 12:29
Oh, as to take home.  By the time money is taken out for my health care (and I still end up spending more on top of that when I come to use it than I did in the UK) then the % net is pretty comparable to what I saw in the UK.  This is CA though which isn't necessarily representative of other states.

Posting guidelines FAQ731-376: Eng-Tips.com Forum Policies http://eng-tips.com/market.cfm? (probably not aimed specifically at you)
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MacGyverS2000 (Electrical)
16 May 11 13:10
Okay... in the States take home is in the low- to mid-60s percentage range.  This is after company-discounted healthcare, 2 weeks PTO, federal/state/local taxes, etc.  Most transportation is done via car since mass transit infrastructure isn't nearly as big here (unless you're in a big city), so a few $k/yr is lost to gas (not to mention cost/upkeep of the car itself)... probably evens out, though, considering your bus fair and higher gas cost for the miles you o travel in the car.

I always got the impression average house size was much bigger here in the States, but that could be due just to the people I've spoken with living more of the student/mobile bachelor lifestyle (i.e., flats).

Dan - Owner
http://www.Hi-TecDesigns.com

kieran1 (Structural)
18 May 11 16:32
Don't except such low pay. £25-£30 per hour is crazy even in these tough times. Working for that rate the work is going to be S*** and you will be treated with contempt. Don't except any less than £50 per hour and add on the VAT. Even that is half of what a good Engineer should get. If someone else wants to work for such low fees, let them, it won't last long.

As a profession, Engineers need to stop driving down fees. I find it crazy, I'm expected to design buildings for a % fee which is less than what the estate agent will get for selling it.  

Kieran
 

HamishMcTavish (Nuclear)
18 May 11 17:15
iwonafish,

try looking at the PCG website for their guide to freelancing
http://www.pcg.org.uk/cms/index.php it might answer some of your questions

taxcafe also have some decent books on the benefits of limited vs sole trader http://www.taxcafebooks.co.uk/

whether you are sole trader or limited you still pay two classes of NI. As a limited company you only pay less NI if you pay yourself minimum wage or similar and 'generally' you pay less tax overall if you have a good accountant (because your corporation tax is calculated on your profit rather than your turnover which is what sole trader is based on)

whether you need to register for VAT depends on the current threshold - check out the HMRC website

if you do charge VAT you itemise it seperately on your invoice but most companies expect to pay VAT so it's no biggie, applying for the flat rate scheme is probably easier for the work you will be doing (if you exceed the threshold), you charge out at 20% VAT and pay the taxman 13% (or so - as others have said it depends on which band you decide to charge - again check out the HMRC website for the info) so 7% uplift to your hourly rate

btw £25 per hour is absolute rubbish for someone with your experience [assuming you're any good smile ]  you could get more than that as staff

you can claim for travel and subsistence as expenses - an accountant will advise of other expenses but there are also publications on the HMRC website too

you can talk to an accountant about setting up a limited company - they can buy them off the shelf too, they may also be able to offer contract checks to see if you fall foul of IR35. Not sure where you have picked up the idea that you cannot work for one company because of IR35. The test for IR35 is whether they think you act like an employee - working more than one contract doesn't mean that you cannot fall into this trap because they assess EACH of the contracts you have so you could be liable on one but not another (depending on your contractual arrangements)

btw The membership fee for PCG includes insurance against investigation by HMRC but others offer similar policies as straight insurance. PCG also offer deals for insurance  - employers liability, public liability and professional indemnity (you should check your contract to see what levels the client expects you to have)

Good luck, HM

 

No more things should be presumed to exist than are absolutely necessary - William of Occam

Pud (Mechanical)
23 May 11 16:05
iwonafish,

Unless job also includes:

Free food
Free luxury accommodation
Free beer
and a pass for the local whorehouse...

that rate sucks. It's not even a skilled "blue collar" rate!

I was getting that in the mid 1980's doing quality systems "consultancy" work.

Cheers

Harry

www.tynevalleyplastics.co.uk

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