Time for company?

YOU SHOULD think again about whether it's worth forming a limited company to reduce your tax bills - that was the key suggestion that Eric Longley, the imaginative accountant who's handled several famous creative types, gave the Branch.

WHAT'S YOUR tax rate? Eric Longley asked the June London Freelance Branch meeting, and got an answer from a numerate member: about 30 per cent. "Forget the kerfuffle about the 10 per cent rate," Eric said: "Since the days of Thatcher we've had efforts to reduce headline tax rates. But expenditure stayed up. So with low tax rates the Chancellor has to stop the bucket leaking - which has led to a tighter compliance regime and new ways to raise revenue the so called stealth taxes."

What's a government to do? "The Chancellor is coining it from petrol,"at the moment: "but where they make the money from us proles is on VAT and National Insurance Contributions (NICs)."

On top of your headline rate of 20 per cent income tax, you as a freelance are paying 8 per cent "Class 4" NICs and a weekly amount on top of that. If you have NICs deducted at source when you are paid for shifts, it could be more, as the employer has to pay employer's NIC on top of deducting the employee's tax and NIC and accounting for that to Her Majesty's Revenue and Customs.

Eric is warming to a way of reducing this - by selling your services and licensing your works through a limited company.

Until recently, he's been of the opinion that it's hardly worth the effort and expense, for freelances whose turnover - the total cash that passes through their business - is merely in the five-digit range. But now he's talking with clients including bricklayers whose operating surplus after expenses is around £20,000 - and working out with each the benefits of forming a company and paying themselves a salary of around £6000 a year - just enough to pay minimum NIC and thus to qualify for a pension.

They'd have £14,000 of income left in the company - which they could pay to themselves as a dividend. Since the tax rate on dividends is lower, they could pay an accountant an extra £200 to deal with the company returns and still save £800 at the end of the year.

What's VAT about then?

Freelances of all kinds also often ask about reclaiming VAT. That would mean registering as a VAT trader; claiming back from HMRC the VAT we paid on all business expenditure; and paying it the VAT we charge our clients. Almost all journalists' clients can afford to pay us VAT - because they are registered and claim it back anyway.

But you have to work out whether you pay enough VAT on business expenses to justify doing the paperwork.

The lively question-and-answer section focused on what you're allowed to count as expenses - both for VAT purposes, if you register, and to subtract from your turnover and reduce the amount liable to income tax.

A member asked whether she could claim for replacing shoes that got ruined doing a story on the beach. No. If on the other hand, she did a lot of her work on construction sites and bought steel toecap boots for that purpose, they would be allowable.

The Revenue are pragmatic. Say you spend £800 on running your home: they would likely accept a claim of £400 of that as an expense representing the time you spend working in it. But if you're naughty and put down clothes, they can come back later and claim the money back.

"Unethically," Eric said, in such cases "I get clients saying the Revenue want £1000 back but it'll cost more than £1000 to fight it - so pay it, which is the unethical bit.

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