Setting up as a consultant

Page may contain affiliate links. Please see terms for details.

Giantvanman

MB Enthusiast
Joined
Dec 7, 2013
Messages
3,825
Location
Essex
Car
FFRR 4.4 TDV8 Autobiography
Knowing there are many diverse and intelligent people on the forum, can any give a rough outline what it takes to set up as a consultant (is sole trader the correct term for tax purposes etc?).

Are we correct in assuming that it would be best to hire an accountant for NI, Income Tax and whatever else has to be paid out?

The consultancy would not be buying and selling; it would be giving a service to a law firm for which they would pay… my wife's time is not cheap! :eek:

Any help and advice will be appreciated and thanks in advance.
 
The consultant could be a limited company or a sole trader. If he/she is working for only one client, though, they may fall into the classic IT consultant tax trap, IR35. In addition there are special provisions for "family firms"

The choice of sole trader vs ltd company will likely be driven by tax considerations. You'll need to think about the VAT threshold as well

If the consultant incurs costs (buying to resell, etc) then being VAT registered will be essential. If their business outgoings are low then there's no benefit to VAT registration

If the person runs more than one business as a sole trader, and passes the VAT threshold, you can't separate two (or more) business entities from a VAT point of view. The simplest way to have one business be VAT registered and one not is to start a ltd company and VAT register that business

I suspect everything will depend on IR35 liability and outgoings. I'd speak to an accountant as a first step

If the paperwork is simple I'd hire an accountant to do the tax return, advise on tax, do paperwork and file returns. So long as you can supply invoices, etc in an understandable spreadsheet form an accountant should be able to calculate your tax liability, do the returns and file them online in one hit

NI can be setup on a standing order

Nick Froome
 
Last edited:
If the person runs more than one business as a sole trader, and passes the VAT threshold, you can't separate two (or more) business entities from a VAT point of view. The simplest way to have one business be VAT registered and one not is to start a ltd company and VAT register that business

Nick Froome

Each business's VAT liability is assessed on its turnover and own legal status, but based on professional advice I've received over the years, you may have a difficult time convincing HMRC that the non VAT registered business should not be so if both businesses are of the same nature, involving the same proprietors. So if you were GVM Security Ltd and GVM sole trader, painter and decorator with a sub vat turnover, neither revenue will impact on the other. If, however, you are GVM sole trader, security consultant and GVM Security Ltd, they would take the view of security and yourself being common elements of what is essentially the same business, so should be combined for the purposes of VAT. I don't know if a partner in the Ltd company would eliminate this issue, but an Accountant would advise.
 
I am consultant.
I have a limited company.

PM if you are interested.

Accountant is essential - you will save (legally) more than they cost.
 
PHP:
Echoing others here, taking advice from an accountant before you do anything will be a great first step. Whether you continue to retain the services of an accountant for submitting returns etc is less clear.

The following was true as of 2010. Your accountant will advise if things have changed since.

With regards VAT, if the business or sole trader has outgoings which attract VAT you should consider registering, immaterial of whether the anticipated turnover is going to be greater then the mandatory registration threshold. The reasons for this are twofold.

First, any VAT paid out in setup costs prior to starting the business (6 months prior if I recall correctly) can be claimed back. This may only amount to £100 or so, so if all you've done is purchased a laptop. But, bearing in mind one of the other members showed splendid photos of his garden office in another thread, some setup VAT can be considerable and should be reclaimed.

Second, you can apply to join the flat rate VAT scheme. Basically this means accounting is easier when submitting VAT returns as you pay HMRC a flat rate percentage of all receivables (including VAT in) rather than 20% of the invoiced amount ex VAT. The key here is that the flat rate is often around 10-13% which for most small businesses actually gives them a profit on the transaction of a few percent. Literally free money. It's both an incentive offered by HMRC to small businesses and a time saver given your calcs are based on X% of invoice + vat, rather than the more complex calc of paying (or reclaiming from) HMRC VAT in minus VAT out.

Here's a calc taken from an accountant's website:

Net amount you invoice your client £5,000
VAT charged on top to your client (20%) £1,000
Gross Amount £6,000
Flat rate VAT 13.5% (this includes a first year discount of 1%) 13.5%
VAT to be paid to HMRC - 13.5% of £6,000 £810
VAT received from client £1,000
Profit for you i.e. what you get to keep £190

The flat rate percentage varies depending on the type of business you run.

There are other considerations to consider with the flat rate tax scheme, not least that you don't normally claim back the VAT you've spent given it's all worked out on the above flat rate scheme. There are exceptions to this however and therefore it may be possible to claim back setup costs whilst still being in the flat rate scheme. I've lost a lot of money in that past by being ignorant of rules that can save you, or make you, quite a bit of money. But again, an accountant is really the best person to take advice from before you do much else

Hope this helps.

Chris
 
You should also consider whether your clients are mostly VAT-registered themselves - if so, it will be beneficial for you to become VAT-registered as well.

If they are not, then remaining not VAT-registered for as long as you can will mean your services will be cheaper for them.
 
You should also consider whether your clients are mostly VAT-registered themselves - if so, it will be beneficial for you to become VAT-registered as well.

If they are not, then remaining not VAT-registered for as long as you can will mean your services will be cheaper for them.

A key point.
 
My head hurts.
Thanks to all for your help and advice and I take back everything I ever said about PAYE.


@ Bolide. There would be no intermediary; my wife would be contracting herself directly to a law firm so IR35 wouldn't apply…I say that with trepidation, Nick.

@MD5. Her turnover would would not be considerable (initially not to vat registration threshold of £82k) and she would be a single entity/company, Mike

@ Def90cars. Thanks for your kind offer, Tony. Once she has committed to proceeding, I may well drop you a line.

@ DaveBarlow. That's the first step in the process…finding a decent accountant. Thanks for that and I may well take you up on that recommendation.

@Patagonian. Thanks for the comprehensive explanation, Chris; it is a big help seeing as we have both been PAYE all our careers.

@ Markjay. Her business outgoings would be minimal but her client (a law firm) is obviously vat registered. One for the accountant to decide, I feel.

Curiously, she is now realising that she don't have to make her services cost effective despite me telling her this for years. They pleaded for her not to retire, begged her to help out from soon after she retired and really, really want her back in the fold. Her skill-set makes her unique and desirable and her professional reputation is immense…head hunters are still sending out feelers even though she is nearly three years retired.

Once again, thanks to everyone for your advice and help.
 
Last edited:
You should also consider whether your clients are mostly VAT-registered themselves - if so, it will be beneficial for you to become VAT-registered as well.

If they are not, then remaining not VAT-registered for as long as you can will mean your services will be cheaper for them.

In fact.... if the only thing provided is service, i.e. no materials of goods are involved in the process of fulfilling the client's order, then it is not an issue if the consultant is not VAT-registered, even if the client is.

In this scenario, the only potential advantage of being VAT-registered, is in the ability to claim back the VAT on any legitimate business expenses such as purchase of computer equipment etc.

This needs to be weighed however against the cost of additional professional services (bookkeeping / accountancy) that may be required for the process of submitting periodic VAT returns.
 
Re IR35 - it comes into play where you choose to set up a company rather than trade as an individual - effectively the company is then the "intermediary" if all it does is sell your services. But there are potentially good non-tax reasons to do that, not least that you get the protection of limited liability - if something goes bad and a client sues, provided you haven't been completely reckless then all they can get are the assets in the company - your personal liability is limited to the share capital you put in (probably a pound or two).
 
Just for clarity, the annual vat threshold is a rolling 12 month period and not your specific trading year.

Pretty much everything else is covered.

From your brief description of what Mrs Vanman will be doing I'd be inclined to avoid vat.

Depending on her role or the advice she provides you should also look into professional indemnity insurance. That may or may not be required. I think the legal industry has its own set of requirements.

And finally don't let her sell herself short. Bill a decent hourly rate, maybe even ask what the company expect to pay before making an offer herself.
 
Maybe wrong here but I understood the government brought in IR35 regs because people where retiring from companies, then coming back as LTD 'consultant contractors' doing the exact same job, obviously at a lower overhead to the employer...:confused:

What is IR35? - Contractor Weekly


My head hurts.
Thanks to all for your help and advice and I take back everything I ever said about PAYE.


@ Bolide. There would be no intermediary; my wife would be contracting herself directly to a law firm so IR35 wouldn't apply…I say that with trepidation, Nick.

@MD5. Her turnover would would not be considerable (initially not to vat registration threshold of £82k) and she would be a single entity/company, Mike

@ Def90cars. Thanks for your kind offer, Tony. Once she has committed to proceeding, I may well drop you a line.

@ DaveBarlow. That's the first step in the process…finding a decent accountant. Thanks for that and I may well take you up on that recommendation.

@Patagonian. Thanks for the comprehensive explanation, Chris; it is a big help seeing as we have both been PAYE all our careers.

@ Markjay. Her business outgoings would be minimal but her client (a law firm) is obviously vat registered. One for the accountant to decide, I feel.

Curiously, she is now realising that she don't have to make her services cost effective despite me telling her this for years. They pleaded for her not to retire, begged her to help out from soon after she retired and really, really want her back in the fold. Her skill-set makes her unique and desirable and her professional reputation is immense…head hunters are still sending out feelers even though she is nearly three years retired.

Once again, thanks to everyone for your advice and help.
 
GVM

I had a consultancy and an accountant too. Feel free to pm me and we can chat via phone anytime.

Beware of IR35 and also Professional Indemnity Insurance too!
 
In fact.... if the only thing provided is service, i.e. no materials of goods are involved in the process of fulfilling the client's order, then it is not an issue if the consultant is not VAT-registered, even if the client is.

In this scenario, the only potential advantage of being VAT-registered, is in the ability to claim back the VAT on any legitimate business expenses such as purchase of computer equipment etc.

This needs to be weighed however against the cost of additional professional services (bookkeeping / accountancy) that may be required for the process of submitting periodic VAT returns.

My thoughts exactly. Because of security considerations, they provide a laptop and she uses our wi-fi and electric. The only additional cost would be the occasional trip up London.

Re IR35 - it comes into play where you choose to set up a company rather than trade as an individual - effectively the company is then the "intermediary" if all it does is sell your services. But there are potentially good non-tax reasons to do that, not least that you get the protection of limited liability - if something goes bad and a client sues, provided you haven't been completely reckless then all they can get are the assets in the company - your personal liability is limited to the share capital you put in (probably a pound or two).

We came to that conclusion to. She would have to trade as Mrs GVM rather than setting up a company which then pays her.

Just for clarity, the annual vat threshold is a rolling 12 month period and not your specific trading year.

Pretty much everything else is covered.

From your brief description of what Mrs Vanman will be doing I'd be inclined to avoid vat.

Depending on her role or the advice she provides you should also look into professional indemnity insurance. That may or may not be required. I think the legal industry has its own set of requirements.

And finally don't let her sell herself short. Bill a decent hourly rate, maybe even ask what the company expect to pay before making an offer herself.

Unfortunately, she has been selling herself short for years, holding onto to understandable but old-fashioned notions of loyalty. She declined many offers for much greater money and benefits over the years. Typically, law firms can be quite cheap with 'support staff' pay and it is not until they realised the hole she would leave that they came to their senses.

Maybe wrong here but I understood the government brought in IR35 regs because people where retiring from companies, then coming back as LTD 'consultant contractors' doing the exact same job, obviously at a lower overhead to the employer...:confused:

She waited the required six months (tax rules) before taking up the first contract so that her tax-free pension lump sum and pension was not affected. We will have to look into it but se will only be doing one tiny part of what she used to do but without the managerial and legal responsibility that went with it. I suspect that the picture will be sufficiently different that IR35 will not be an issue but we will take advice before committing.

That site was the first one we read through this morning.

What is IR35? - Contractor Weekly

GVM

I had a consultancy and an accountant too. Feel free to pm me and we can chat via phone anytime.

Beware of IR35 and also Professional Indemnity Insurance too!

Thanks for that, Mike. I will PM for your phone number and maybe even arrange lunch sometime maybe if you are still up for it.
 
@ Bolide. There would be no intermediary; my wife would be contracting herself directly to a law firm so IR35 wouldn't apply…

I am no expert but suspect that may be the classic IR35 tax trap - working for one company as a non-employed consultant when, in the eyes of the tax man, you are (or should be) an employee

The point about the VAT threshold being over an arbitrary 12-month period is very important

Perhaps the best way to sort this to would be to find an accountant who speaks your language and to get them to sort all the details out directly with the law firm - whilst billing the law firm for their time

If they want her services that badly it's not unreasonable for them to help with the costs & hassle of setting up the means of doing it. They could supply the laptop & printer

Nick Froome
 
Derek - a mine of good quality information!
 

Users who are viewing this thread

Back
Top Bottom