Owner of limited company and freelancing contract

[sgtslippers]

I have a limited company, and I am the sole owner and director, offering Software Engineering services. I'm currently in discussions with a potential overseas client who is trying to persuade me to sign a contract as a freelancer rather than through my limited company. The expected income from this contract will likely exceed £90,000, which is above the VAT threshold.

The proposed setup would penalise me as I plan to reinvest the earnings to scale my business. However, my main concern is that signing as a freelancer could lead to legal issues with HMRC or at least result in significant administrative work.

Does anyone have insights into the complications of signing with them as a freelancer instead of through my limited company, particularly regarding VAT registration and HMRC responsibilities? I have consulted my accountant, who advised that it should suffice to declare the additional income on my tax returns, but I'm still waiting for more information on the VAT implications.

Thanks!

 

[Joyous]

I have a limited company, and I am the sole owner and director, offering Software Engineering services. I'm currently in discussions with a potential overseas client who is trying to persuade me to sign a contract as a freelancer rather than through my limited company. The expected income from this contract will likely exceed £90,000, which is above the VAT threshold.

The proposed setup would penalise me as I plan to reinvest the earnings to scale my business. However, my main concern is that signing as a freelancer could lead to legal issues with HMRC or at least result in significant administrative work.

Does anyone have insights into the complications of signing with them as a freelancer instead of through my limited company, particularly regarding VAT registration and HMRC responsibilities? I have consulted my accountant, who advised that it should suffice to declare the additional income on my tax returns, but I'm still waiting for more information on the VAT implications.

Thanks!

There's no reason why you can't be the director of a limited company and self employed at the same time. As your accountant says it's just another schedule on your tax return. If it's a condition of getting the business then it doesn't seem you have much choice. Presumably you have correspondence from the client stating their preference for a freelancer should HMRC come knocking?

 

[StevensOnln1]

What do you mean by signing the contract as a freelancer? Freelancer isn't a legal status. Do you mean signing as a sole trader? If so, you would have to declare the income on your personal tax return. You might want to check that any professional indemnity insurance you have will cover work undertaken by you personally and not just work carried out by your company.

 

[sgtslippers]

There's no reason why you can't be the director of a limited company and self employed at the same time. As your accountant says it's just another schedule on your tax return. If it's a condition of getting the business then it doesn't seem you have much choice. Presumably you have correspondence from the client stating their preference for a freelancer should HMRC come knocking?

Many thanks for your reply. Yes, I have correspondence from them stating their preference for a freelancer, I was also trying to convince them to do it through my limited company. Do you know if this will have any implications regarding VAT registration, noting that they are not UK based? Income through this client will likely exceed the VAT threshold.

 

[sgtslippers]

What do you mean by signing the contract as a freelancer? Freelancer isn't a legal status. Do you mean signing as a sole trader? If so, you would have to declare the income on your personal tax return. You might want to check that any professional indemnity insurance you have will cover work undertaken by you personally and not just work carried out by your company.

Thank you for the reply. They wanted me to sign the contract as a person rather than as a director of my limited company so I believe this mean I'll act with them as a sole trader. I'll make sure to check the insurance cover.

 

[Newchodge]

Many thanks for your reply. Yes, I have correspondence from them stating their preference for a freelancer, I was also trying to convince them to do it through my limited company. Do you know if this will have any implications regarding VAT registration, noting that they are not UK based? Income through this client will likely exceed the VAT threshold.

You would have to register for VAT as a sole trader.

 

[Joyous]

Do you know if this will have any implications regarding VAT registration, noting that they are not UK based? Income through this client will likely exceed the VAT threshold.

On the face of it you'll have to register, although whether or not you have to charge VAT will depend on if the supply is B2B or B2C.

There might be scope to apply for a registration exception if it's a one off contract and you can prove that you're only exceeding the threshold temporarily.

 

[Daybooks]

There may be favourable tax consideration in the country of your customer influencing their request. Sometimes it is simply who wants who the most.

There is nothing illegal about the proposed set up: as always just make sure you pay all the due taxes. Extra administration too as you recognise.

Ask your accountant to explain what “outside the scope” means in terms of VAT registration and recoverability of inputs. Also make sure you understand the term disaggregation or artificial separation.

Lastly crunch some forecast numbers to see whether VAT registration might be advantageous. You’ll need the answer to some of the points above to do this properly but then you will be making an informed decision.

 

[sgtslippers]

There may be favourable tax consideration in the country of your customer influencing their request. Sometimes it is simply who wants who the most.

There is nothing illegal about the proposed set up: as always just make sure you pay all the due taxes. Extra administration too as you recognise.

Ask your accountant to explain what “outside the scope” means in terms of VAT registration and recoverability of inputs. Also make sure you understand the term disaggregation or artificial separation.

Lastly crunch some forecast numbers to see whether VAT registration might be advantageous. You’ll need the answer to some of the points above to do this properly but then you will be making an informed decision.

Thank you for all the keywords.

I won't be making any money through my limited company while under contract with this potential client, so hopefully, "disaggregation or artificial separation" will not apply to me. But in the worst case scenario, I'll register for VAT as a sole trader and will also register my limited company for VAT to avoid any issues with HMRC if one of them goes above the threshold.

Since this is a one off opportunity, I want to ensure that I'll be able to deregister easily from VAT as a sole trader. I don't want to be handling admin for both the limited company and the sole trader business for years just because of a one off contract.

 

[sgtslippers]

Thank you all for the replies. My accountant informed me that I don't need to register for VAT as a sole trader because my client is a business based overseas. I believe this falls under "outside the scope" of VAT and therefore doesn't count towards the VAT threshold. Am I understanding this correctly?

Since this will be a one off contract as a sole trader, I assume the only admin I have to do is accounting for this in my tax returns (in addition to invoicing as a sole trader). I also assume that deregistration as a sole trader won't apply to me since I'll still need to file tax returns as a director of my limited company. Is that correct?

 

[Newchodge]

Thank you all for the replies. My accountant informed me that I don't need to register for VAT as a sole trader because my client is a business based overseas. I believe this falls under "outside the scope" of VAT and therefore doesn't count towards the VAT threshold. Am I understanding this correctly?

Since this will be a one off contract as a sole trader, I assume the only admin I have to do is accounting for this in my tax returns (in addition to invoicing as a sole trader). I also assume that deregistration as a sole trader won't apply to me since I'll still need to file tax returns as a director of my limited company. Is that correct?

Despite what HMRC tell you, you do not HAVE to file self assessment just because you are the director of a ltd company. However, just keep filing self assessment returns until HMRC tells you that you do not need to do so, or fails to ask you to do so.

 

[Daybooks]

Despite what HMRC tell you, you do not HAVE to file self assessment just because you are the director of a ltd company. However, just keep filing self assessment returns until HMRC tells you that you do not need to do so, or fails to ask you to do so.

I thought HMRC had woken up to the fact several years ago that their “you must file a tax return if you are a director” did not have the force of law. Are they using it once again?

Don’t have the actual legislation to hand but it is along the lines of “you have to do one if the Commissioner request you to do one; otherwise if you have untaxed income then you have to advise them such” at which point they’ll request you do a tax return. Therefore failing to do a tax return simply because you were not asked to do one is not an excuse if you have untaxed income.

 

[GraemeL]

But why are they asking to trade in this way? It definitely increases your risk should anything untoward happen.

 

[sgtslippers]

But why are they asking to trade in this way? It definitely increases your risk should anything untoward happen.

I'm not sure why. It's maybe better for them in term of taxes as highlighted by Pi Daybooks before. I'll look into getting a sole trader insurance to protect myself.