Freelancers' Questions: How to cut tax and other costs when setting up?
Freelancer’s Question: Is there much difference between the sole trader and limited company routes in terms of the allowable expenses and the ways to cut the business’s running costs or the tax liabilities that would arise? Also, are there any savings, in terms of costs or tax, that newcomers to ‘going it alone’ tend to overlook that I should be able to extract?
Expert’s Answer: With the sole trader model, many individuals pay out money on allowable expenses but fail to keep the receipts. Wrongly, they then expect HM Revenue & Customs to grant an allowance based on ‘best recollection.’ Don’t expect this – be certain and safe by keeping the relevant receipts and documentation.
Depending on where you will be working
as a freelance consultant, get into the habit of keeping a mileage log. Alongside
the standard rate and
distance ratios when on the road, remember that travel on site is also allowable.
I have seen some workers who regularly travel about 15 miles a day on site.
It's not widespread but such on-site travel, and the associated relief, is not affected by the 24-month rule.
Now let’s turn to a limited company. Having incorporated your business, it is probably in your best interests to be registered for VAT - and the simplest method, potentially with a tax saving, is to use the Flat Rate scheme.
But when limited company owners ask me, ‘What can I claim?’ I throw a question back – ‘What do you spend?’ The point here is that you are not going to get something for nothing, so analyse what you spend and then apply the tests to see whether it is allowable.
The test for allowable expenditure is less strict for the company than for the employee. For an employee, it is “wholly exclusively and necessarily in the performance of the duties of the employment”, whereas for the company itis “wholly and exclusively for the purpose of the trade”, which is an easier test to pass.
Finally, have a look at the expense and see if you can do it cheaper - you will pay more tax but there will be a net gain.
The expert was Bob Jones, a former Inland Revenue tax inspector and the founder of expenses advisory internet-taxation.co.uk
22nd September 2011