Talk Archive: Tuesday 10th September 2013
Freelancer or small business, or thinking of striking out on your own?
Want to know how to keep your numbers straight when freelancing? When is the best time to make the leap from sole trader to Limited company? What would you need to earn as a freelancer to match what you earn as a full time employee? How should you register any earnings you’re making on the side of full time work? Can you claim for that walrus polishing kit you bought against your tax next year?
Bring all your accounting questions to Worthing Coworking on 10th September and Nilden Ozkan will answer them, and any other questions thrown at her (if accounting or tax related.) The questions start at 8pm, and there will be networking time around 9ish, or whenever Nilden goes hoarse.
About the speaker
Nilden Ozkan is an accountant specialising in freelancers and small businesses, and publishes To Do, a magazine for freelancers and small businesses in Brighton. You can find out about her company’s services and copies of the magazine at http://www.nldaccountancy.com
Notes from the event
On 10th September, 2013, we were joined by Nilden Ozkan, an accountant specialising in freelancers and small businesses who is based in Brighton, UK. You can find her through her website, NLD Accountancy, and at many business networking events around the city.
Note: Any mistakes in these notes are most likely mine, not Nilden’s. Consultant an accountant before acting on anything you read here for extra safety.
Q: I’m a Sole Trader, at what point should I get a Limited company – when does that save me money?
A: On my website we have a tax calculator, and that will let you compare what you pay in tax as a Sole Trader or Limited company, if you put your profit in (your income minus your expenses) it will show you the difference in tax paid so you can work out if it’s worth it. If you are growing, roughly £20,000-£25,000 profit and it’s probably worth it.
Your accountancy fees increase if you’re a Limited company, so you need to take that in to account if the difference is small.
Q: What does an accountant normally do for a freelancer?
A: Usually you get:
- Accounts – the preparation of income, expenses and balance sheet, who is shareholders, taxation owed, tax return for Customs & Excise.
- Personal tax returns (an accountant doesn’t have to do this, you can do it yourself if you’re comfortable with that.)
How much you pay varies depending on how well you keep your records. If you record everything correctly then it’s cheaper than if things are recorded out of order, or things are missing from being recorded that you spent.
General opinion in the audience was an accountant pays for themselves in the money and worry they save you.
Q: I have multiple ways of making money and have some under me as a sole trader, and some under my Limited company as they are unrelated.
A: Try to put them all under the same Limited company, but keep the expenses for each part of what you do separate in your paperwork, so you have two or more Profit and Loss sheets, one for each thing. This keeps your accounts clear and easy to understand, and lets you see which parts of your work are doing the best.
Q: I am writing a book and have been paid a third up front, and will get a chunk more when the first draft is delivered, how do I put that through my books?
A: The first third should not be treated as income yet, as you have a liability – you have to deliver the book or you will need to return the money, so book it as deferred income. You will not have to pay tax on the income until it is sure you will not need to return the money.
Q: As a Sole Trader if I wanted to go Limited now, would someone be able to look back over my past accounts, see what I’ve done and get a repayment on the money I’ve paid out if I’ve paid too much?
A: You can have a review and amend a tax return before you file it, but it’s probably not worth it for anything previously filed.
Q: What is the home allowance and how much can you claim?
A: Home allowance is for if part of your home is given over to your business. You can work out how much of your house is taken up by the business (for example one room, from 9-5 every day.) Then you can work out your mortgage interest and electricity/light/heating/internet bills, work out what proportion of them that room takes and the hours, and claim that back accordingly.
Q: How much more work is the paperwork for a Limited company than acting as a Sole Trader?
A: As a freelancer, the difference isn’t really that much as you are mainly claiming the same expenses for the same business activity, so when you pass that to your accountant they do not need to do very much.
In both cases you have to record your incomings and outgoings properly in a very understandable format. If you do something you shouldn’t, i.e. paying expenses out of a personal account for your Limited company, or don’t bother recording things in an understandable way, then an accountant has to spend a lot more time trying to get at this information. Then your fee will go up.
Q: What are Dividends and how are they worked out?
A: Dividends are paid out to shareholders of companies. If you owned shares in BT, if they have profit over a year after they’ve paid their tax, they may distribute some of that profit to their shareholders. How much you get depends on how many shares you have.
When you are a Limited company, you’re a shareholder of your company, so you can pay out profit from the company after all expenses and taxes are paid, if you want to.
As a freelancer, you’ll keep money in the company for cash flow, but take dividends when you can. But you don’t have to, i.e. if you would move in to the high tax band if you pay out more dividends, you don’t have to.
Various people in the group had their spouse as a shareholder in the company, so they could get paid profit from the company without the main shareholder going over the limit to the high tax band.
Someone mentioned FreeAgent, prompting the question:
Q: What is FreeAgent?
A: It is online software for recording your accounts. Lots of freelancers and small businesses used to use Sage, which isn’t well suited to this and is difficult to use. FreeAgent is good for certain types of small business where you don’t have a large number of transactions (i.e. sales) a month, and is very easy to use compared to most accounting software.
One of audience members also uses FreeAgent for time tracking and feeding that in to the invoicing part.
The several people who used it in the audience and Nilden all thought FreeAgent was very, very good for bookkeeping and helping with your accounts.
Someone also recommended Receipt Bank, which is a phone app and service where you can take a photo of a receipt for your company, and they will scan it, turn it in to text, and either send it to your or (I think) FreeAgent can pull it in automatically. With this you don’t have to worry about keeping track of your paper receipts any more. They also have a service where you can send in your receipts for scanning, no phone app required.
Q: When you pay for something with a card, do you need to keep the card receipt or just the normal receipt for your expenses?
A: You just need to keep the normal receipt
Q: What is the VAT ‘flat rate’ scheme and is it worth using?
A: You can go VAT registered before you are required to (you’re required to if your sales are over £79,000 http://www.hmrc.gov.uk/vat/start/register/ ) if I’m going to recommend someone registers before then, I normally recommend they go on the standard scheme because there’s a financial benefit where if you’re hiring a lot of sub-contractors who charge VAT you can reclaim that, and other things.
Normal scheme – you charge 20% VAT on top of your fee and pay that over to the Revenue.
Flat rate – you charge 20% VAT, but you pay a different percentage over. For web developers (a lot of the audience were web developers) that is 13.5%. So say you charge someone £2,000 and then VAT, so £2,400 total. You pay 13.5% of that as the VAT – £324 paid instead of £400.
But, on the Flat rate scheme if you buy something which has VAT added to it, you can’t reclaim the VAT, unless it’s over £2,000 as a single item. Someone asked about buying related products together, and apparently this is pushing things and gets complicated. If you buy a laptop and printer together and neither is over £2,000 on their own then no, you can’t reclaim the VAT. If it was a laptop and software for it – probably OK, but someone had the situation where the laptop was shipped separately as the software was out of stock, and they weren’t allowed to claim as they had been issued two separate receipts.
A person in the audience who is on the Flat rate scheme was asked by their accountant how much equipment they bought and as it wasn’t much the Flat rate scheme worked out. Nilden pointed out how important it is to do the calculation for your situation, and they do not have to be difficult calculations.
Someone else pointed out FreeAgent can help with your VAT return, and tell you how much you would have earned if you were VAT registered vs being unregistered. Basically the event was a big love-in for FreeAgent from the people who used it.
Q: Is going First Class on the train claimable?
A: Yes, if you can show that you worked, no if you can’t. You have to be able to make a good case for why you did it.
One person in the audience said he always books a First Class seat when going to meetings in London as it means he will definitely get a seat at a table and be able to work on the way there.
Notes by Paul Silver.