What are your responsibilities as a limited company contractor?
With nearly 5m people now working for themselves in the UK, there are more freelancers, contractors and small businesses on these shores than ever before.
Approximately 900,000 of Britain’s 1.91m limited companies are made up of independent workers – in other words, freelancers who choose to work through their own limited company, which is sometimes also referred to as a Personal Service Company (PSC).
If, like the hundreds of thousands of others who have made the positive decision to form a limited company and operate through it, you might be wondering what your responsibilities are.
So, to give you a firm idea of your duties and what you’ll need to do as a director of a limited company legally speaking, we’ve outlined a number of important factors for you to consider as you start your enterprise.
You must remember that the company is a separate entity to you, which is where it differs considerably from operating as a sole trader, for example.
As someone who manages the company, you’re obliged to act on its behalf and in its best interests – an odd concept, given that you might be the only shareholder and employee, but nonetheless one that you must take seriously.
Under the Companies Act 2006, you are required to:
- Act within your powers
- Promote the success of the company
- Exercise independent judgment
- Exercise reasonable care, skill and diligence
- Avoid conflicts of interest
- Not accept benefits from third parties
- Declare interest in proposed transaction or arrangement with the company
You’ll find an in-depth explanation of what each duty means and how it impacts you, here.
In addition to this, the Government also details several other responsibilities on its website, which you’ll need to consider.
‘Keep company records and report changes’
As the person with significant control in your company, you will be required to keep and also file financial and accounting records to Companies House each year.
For example, you need to submit accurate company accounts to Companies House on time annually. You’ll also need to file a Confirmation Statement every year, in which you must notify Companies House of any changes to your business – whether that’s its activities, office address or people who have joined your company, as a shareholder or director.
While you are responsible for making sure this happens, you can engage an accountant to act on your behalf and handle everything for you – something many limited company contractors choose to do.
‘Pay Corporation Tax’
There are a number of different taxes that a limited company contractor might need to pay. Corporation Tax is one – a 19% tax on your company’s profits.
You should also be aware that you might also need to pay VAT, Capital Gains Tax (GST) and potentially Entrepreneurs’ Relief. Therefore, being aware of your tax responsibilities is vital. If you’re unsure about what to pay and when, it’s well worth speaking to an accountant.
We wrote an article for Contractor UK recently, in which we outline the taxes limited companies must pay. You’ll find it here.
While not a duty nor a responsibility, every limited company freelancer or contractor needs to consider the IR35 legislation.
It’s likely that you’re already familiar with IR35 – which is also known as the off-payroll working rules. In short, the IR35 rules exist to stop ‘disguised employment’, which is when limited company contractors pay less tax when the relationship they have with their client reflects employment, meaning they should be taxed at a similar rate to an employee.
When being engaged by a client in the private sector, you must carefully decide whether your contract belongs inside or outside IR35. In other words, does the service you provide reflect employment or self-employment?
If you work in the public sector, your client will decide this for you. It’s worth noting that from April 2020, private sector companies will be handed the responsibility for determining IR35 status, with the only exemption being if you work with a company HMRC deems as ‘small.’
Given working inside IR35 can cost contractors between 20 – 25% more in tax, it’s important you are confident of your IR35 compliance. Should HMRC decide you have been wrongly working outside the legislation, the tax office could demand thousands from you in missing tax payments. You can learn more about QAccounting’s IR35 services here.
On the face of it, these key considerations might make going limited seem daunting. However, given the possibilities a limited company offers, with regards to tax efficiency and growth, not to mention credibility, it’s a smart and sensible option.
Learn more about QAccounting’s specialist contractor accountancy packages here.
Preparing for BREXIT
Many of our clients have received communications from HMRC over the last year to assist them to prepare for BREXIT. However as this is a complex and new area, this article is designed to further help you to assess how these changes may impact both you and your business.
Further Economic Support
On Sunday 31st October 2020 the Government announced a number of updates to existing economic support measures. The full details of these measures are reported HERE.
Updates to the Job Support Scheme
The Government has published detailed information about the scheme HERE.