I've been meaning to write this post for a while, just haven't really got around to it. However, I am asked on the semi-regs on what are the practical steps for a freelancer/contractor/independent contractor to start their business, and what are the things they need to get started.
I'll call it out here, please don't take this as legal advice, and I highly recommend you validate it with an accountant or other professional organisation. This is basically what I did to setup my companies. So is mostly from experience.
Also, where I link to products or services, I may use a referral link, which will help us both out... whether it be a voucher, money off or a free month on the premium.
So here it is... my 101!
Start a business
The first step is to set yourself up your trading entity. There are a few ways to do this, an Umbrella, self employed or a Limited Company. I'm assuming most people who will be reading this will be in the professional services world, so will more than likely go down the limited company route.
The benefits to this is you create a separate legal identity, to which owns the liability, rather than yourself. This protects you, the director from company debts or other legal action. Be warned however, there are times where you the director, and shareholder can be accountable (e.g. Fraud), so don't do anything stupid.
It also gives you the ability to work with larger organisations, as some prefer to work on a business to business relationship.
The downside to a Limited company is the cost and time to run it. You need to submit accounts, run payroll, manage separate insurance, bank accounts and keep on top of all your admin. So make sure you get an accountant to help.
You'll find most accountancy firms can help you with setting up a limited company, so have a chat with them to see what's on offer. There are also many options online from companies that will do it for you... but i haven't used one, so cant recommend any that Ive seen.
Register for the VAT flat rate scheme
This is something I would recommend you speak to an accountant about, however it massively simplifies your accounting processes, and can make you a little bit more money when billing. You must register for VAT if your business turns over more than £85k a year. However, once registered, you can charge VAT on top of your rate.
Now, under standard VAT registration, you as a business can claim your VAT back for any of your expenses (software, services etc.). However, you then pay the full 20% to HMRC.
This is where it gets interesting. As your expenses are fairly low as a contractor/consultant, you will rarely need to claim back the VAT. So, you can sign up to the flat rate scheme. This basically allows you to still charge VAT on your invoices, but you cannot claim it back for purchases (unless it meets certain rules). However, it does let you pay HMRC 16.5%, rather than the full 20%. This massively simplifies your admin, which saves you time :)
Get an accountant
When I first set out, I thought I could do all of the accounts myself. Then I started buying a friend pints to do it for me (he used to be an accountant)… but in reality, you can't beat someone who does the job day in, day out. You want a whole package, and ideally someone that specialise in small businesses and contractors.
Not only will they do a significant amount of the administration for you (end of year accounts for example!), they also offer a tax planning service, that lets you plan your salary, dividends, pension contributions and provide consultancy on any decisions you need to make when it comes down to your legal requirements within HMRC.
I have used JF Financial for several years, and can't recommend them enough. John and the team have helped me with planning my tax, fixing my self assessment and even helped with ways to structure my limited company based on the work I was doing.
Another big bonus with JF Financial, is they can provide a managed instance of FreeAgent. This is the accounting software I use for running my business (more on that in the next section). It does cost a monthly fee, so having it included makes it much easier to budget. It also gives John the ability to see an accurate picture of my business, ensuring any advice is up to date and available.
Get accountancy software
As you probably guessed from my previous point, getting accountancy software is critical! Long gone are the days where you had to capture everything in a spreadsheet.
Your software will be the hub of your business, acting as a CRM, invoicing portal, accounts and expenses, and even managing your payroll. I personally use FreeAgent, which lets me send customised invoices, accept payments, complete my self assessment, do my VAT return and even document the goings on in my bank account.
If you wanted something a little beefier than FreeAgent, take a look at Xero. I use it for my other business, and it feels like it is aimed as larger than independent consultancies... but is an option!
Bank accounts
Having a bank account is a no brainer. You need to be able to receive your fancy consultancy fees, dont you? I highly recommend you get a separate business account for your limited company. This keeps everything tidy, and lets you view all your in and out goings in a single location.
There are hundreds of options on the market, from big high street brands such as HSBC and Santander, to the new start-ups like Monzo. Personally, I use Starling Bank. They really are pushing the boundaries when it comes to bank accounts... following the open banking philosophy, that easily integrate with my accounting software (bank feeds are instantly available to the software), and they dont have any fees. I can quickly send money around the world, and hold different currencies if needed. The best bit? All done via a easy to use, feature rich mobile application.
My referral link above also means they will plant a tree on our behalf, so worth signing up, just for that :)
Insurance
This is something I wouldn't scrimp on. Insurance is critical to you and your clients when running a business. Not only does it cover your tech, it protects you from making errors, health and safety mistakes and even tax liability.
There are some key ones I would recommend you get:
- Professional Indemnity - In case you screw up, big time.
- Employer Liability - Protect yourself if you subcontract, or even hurt yourself (remember, you are an employee!)
- Public Liability - Protect from issues relating to the general public... like someone tripping over a cable you left out!
- Tax Liability insurance - In-case HMRC disagree with your tax status, and you loose the fight.
- Sickness Cover and income protection - In case you get ill, and need to be paid.
For each of these, I use QDOS Contractor (https://my.qdoscontractor.com/code/QCL48913)- a specialist provider for contractors. They have always been brilliant, with loads of great advice, and are competitive in teh market. They also spend time fighting for the rights of the self employed, so any sales help towards that.
Another great feature with QDOS, is the ability to have your contracts reviewed by a specialist who understand complicated laws and regulations such as IR35. I never start an engagement or project until I have had the experts look at it, and make recommendations on what needs changing! They even validate working practices.
Signing up from my link will get us both a cheeky Amazon voucher!
IPSE Membership
Professional membership is a nice to have, and in no way critical. However, I have been a member of IPSE since the beginning. This is for a few reasons. The main one is their ability to protect me against HMRC and the dreaded IR35 regulations (more on that in a min). As part of the membership, you can raise a request with them to work with you in the event of HMRC raising a case against you. They also spend significant amounts of time lobbying the government for rights for freelancers and independents.
You are also joining a large group of similar freelancers in your world. So they have ecomonies of scale. For example, they have several perks you can sign up to (similar to those of a permanent employee elsewhere), and a group pension. So defo work giving them a shout. It works out just over £200 a year for the piece of mind.
My referral link will give you £50 off as well. Which is nice!
The dreaded IR35
Now, I won't go into detail here, as this is a minefield! However, you should do your research and spend time getting your head around it! Basically, HMRC brought in a framework that validates your working practices, with the aim to capture 'disguised employees'. They see freelancers who are doing the exact same job as an employee, should be taxed accordingly.
If they win a tribunal against you, the implications can be massive. They can go back for up to 6 years, and charge you PAYE, National Insurance etc. on your companies turnover! Which can be a lot of money.
Be careful here. My main advice is to deliver services as a company. Remember, you arent an employee. So don't go to 'team meetings', or have 'line managers'. Keep control of your delivery, and make sure you define a scope up front. If a customer wants to change it, follow a process and document that it is a change in scope.
Make sure you have all your contracts and working practices reviewed to make sure you are covered. Should the worse happen, utilise services from IPSE and QDOS to protect yourself.
Speak to your accountant for more information on this! They are usually well versed in it.
Become a partner
Now this is something that took me a while to get my head around, and actually use. Software is not cheap, and as every organisation needs email, video calling and Microsoft office, you should get the best software available. Now, depending on the industry and technology you work with, it may depend who you partner with. As I am assuming you touch Microsoft technology in some fashion, becoming a Microsoft Partner adds great value to your business.
As an example, if you sign up your business as a Microsoft partner, you get access to great training, ability to raise certain pre-sales tickets or support tickets on their products, and even grow your practice with marketing materials. You also get access to purchase the 'Action Pack', which for a sensible sum of money each year (around £300 if I remember correctly), you get Microsoft 365 licenses, operating systems and extra support hours to utilise. Highly recommended!
Should your company grow, you can start building out the practice, and get even more benefits.
Good Luck!
There, I think I have covered most of the tips in this post... however, I am sure I will add to it as time goes on. So remember to keep checking back in the near future. Good luck, and remember to enjoy being a small business owner. The risk scan be great, but the rewards far outweigh them!
Feel free to drop comments below if you want to know more.
