How do I open a company? How do I start trading and make sure that I stay compliant with all the laws? Who do I need to talk to? How long does it take? How much does it cost?
These are just a few questions I had in mind when I decided to go contracting: in this post I’ll go through the answers and show that, after all, running a small company is not that difficult.
Disclaimer: I started contracting not long ago and am no expert. I had to go through all the initial setup and decisions recently though, so I thought I’d put everything down in case I had to do it all over again. Feel free to pick and choose what you feel can be helpful for you.
I won’t touch on the reasons why becoming a contractor may or may not be the best course of actions, but I will go through the steps that I think should be followed once someone has decided to go contracting through his or her own limited company. Since the technicalities of getting all up and running are usually the reason why this decision is delayed, clarifying the steps may help someone take the leap.
Getting ready to being able to sign a contract doesn’t require a massive amount of time or effort, but there are a few things that need to be done correctly in order to set you up for success: following are the steps I wish I had followed when I decided to go contracting.
The first step to get into contracting is to open your own limited company.
There are other ways, like trading under an umbrella company or running as a sole trader, but the LTD is the most common option for contractors (and the only one I have experience with).
If you want to compare different options, you may find this article helpful.
Incorporation in the UK is an easy process and can be done online: you need to have a name ready, know where your company will be based (I’ll touch on this in a sec), what type of LTD will it be (Limited by shares is the standard for contractors) and who will be part of it (just you probably).
Once you have all the required info, there are a few options for filing the company:
- Online on the Companies House website: it costs £12 and can be paid by debit or credit card or Paypal. Your company is usually registered within 24 hours. The process is easy enough and you will get your company registered quickly.
- Online using a company formation agent: there are tons of services online that take the burden of registering the company off of you. They usually cost more than Companies House (ranging from £10 to £100+) because they bundle other services together with the basic incorporation.
- Using your accountant, if they offer the service: this is probably the easiest way, but if you’re a control freak like me you’ll go for one of the options above.
I decided to go for option 2 and used Companies Made Simple Privacy package at £29.99+VAT.
I did this for a couple of reasons:
- I was opening the company but didn’t want to hire an accountant (and start paying the fee) before I absolutely needed one (which is after I secured a contract and started to work)
- I wanted to keep my personal address private
I incorporated my company as soon as I started to look for a contract and didn’t know how long it would take, so starting to pay the accountant’s fee didn’t make sense.
To be able to accept a contract you only need a company name (and number, assigned to you by Companies House) and indemnity insurance, so that was exactly what I was going to do.
The second point deserves some more explaining: all limited companies and directors must provide Companies House with a UK address, which can be your home address if you want. To avoid the risk of identity fraud, though, I highly recommend you don’t expose it to the public.
The privacy package I chose includes the “Director Service Address” which basically allows me to use a central London address and keep the residential address off the public register.
Also, all official government mail (from Companies House, HMRC and Government Gateway) is scanned and emailed straight to me in digital form.
This is also useful if your rental property agreement doesn’t allow business use.
The second thing I needed to be able to sign my first contract was an indemnity insurance.
Working as a contractor through a limited company means the company is liable (and you as director/shareholder) and a client may come after you if you committed an error delivering your services.
Many companies just won’t work with a contractor that is not covered by insurance, so it is mandatory.
Your clients will let their liability requirements known before you can take the contract, but I found that the following is well accepted in the private sector:
- Public liability: £2,000,000
- Professional indemnity: £1,000,000
I decided to go for Crunch and paid about £300 for one year of cover.
With the LTD and insurance ready, and about £330 invested, I was able to sign my first contract and start working.
As I was starting from scratch in the contracting world with pretty much no idea of what I was doing or what I had to do, finding an accountant was both an important and intimidating task.
Accountants take care of all the admin, deal with HMRC for you and make sure you stay compliant with the everchanging laws: they can make your life easy or miserable so it is important to choose carefully.
Changing accountant is possible so no decision is final, but to avoid disruptions it’s better to do your research beforehand.
Nowadays accountants offer cloud based tax and accountancy services, providing a high level of autonomy and transparency. Attached to that they offer a (more or less) personalised service where you get ongoing business support and accountancy advice.
On a daily basis you’d be using an app or website to record expenses, issue invoices and record payments, handle tax and VAT while having an overview on how your business is performing and what are the next important dates.
Cloud companies that offer the mentioned services are FreeAgent or Crunch to name a couple, but there are more out there.
I ended up asking for advice to the contractors I was working with and Crunch (ref.) seemed like a popular choice: they offer a good online tool, are not expensive and on the Basic package, responsive enough to queries.
The process of setting up the account with them was to go through the company details during a call, I then got access to my online account in a couple of days. They have a really good knowledge base where you can find answers to most of your questions, but are available via email or phone just in case.
You’ll have to fill a few forms and send them to HMRC to authorise Crunch to deal with them on your behalf for all your VAT and tax affairs.
Although not necessarily needed before you sign your first contract, a bank account will be needed as soon as the first invoice is raised (your client/agency will need to know where to send the money).
Note: you are not legally required to have a separated business account, but if you use your personal account it’ll be difficult to distinguish company money from personal money.
In some cases the process can take a few days and there may be delays if you decide to go for a high street bank, so it is better to start the process earlier rather than later.
There are a few things that I checked before opening my business accounts:
The Financial Services Compensation Scheme (FSCS) is the UK’s statutory Deposit insurance and investors compensation scheme for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it.
It’s important that your bank of choice offers FSCS protection. The scheme will cover up to £85,000 if anything happens and the bank is not in a position to give you your money back.
As your bank account balance grows, you may want to open other accounts (with different providers) and keep a maximum of £85k in each of them to make sure the funds are always covered (although investing would be a much better option in that scenario).
Open Banking is the secure way to give providers access to your financial information.
Being able to access and import bank transactions into your accounting software will give you a clear view on how your company is doing money-wise and will be helpful when it comes to reconciling expenses with bank transactions.
Open Banking is still in its early days, but many banks are quickly adding support for it, making it possible for tools like Money Dashboard (ref.) to give a bird’s eye view across different accounts, all in one place.
This is a no brainer, so make sure you check your app store to see how your next bank’s app is rated. You’ll probably be using it to handle 95% of your banking affairs, so having something that works is paramount.
High street vs Online
Being a business account, you may feel you want someone that you can go and talk to one to one if needed, so in this case a high street bank could be your choice.
Online companies like Starlings or Tide don’t ask too many questions, have a good customer service and offer accounts that are usually easy and quick to open, but you can’t walk into a branch and this may put someone off.
I decided to open a traditional account for now and wait for Monzo to finalise their business offerings ?.
I chose Metro Bank: the fact that they’re open every day (Sundays included) made a big difference as I wanted to make sure I could just walk in and have a chat when I needed.
To open the account I had to go into a branch (no need to book an appointment, you can just walk in, waiting times are usually within 15’) and sit down with one of their advisors: I got asked a lot of questions about the nature of the business, how I intended to grow it in the future, how I usually find new contracts.
It took a couple of hours (I know…) and after a few days I got a call to confirm that my application was accepted: I had to walk in to the store again to pick up my welcome pack and my debit card (which they print in store, how cool!).
Not a straightforward process, but easy enough and they are there 7 days a week should something happen. Also their app is a pleasure to use.
That’s it for now, hopefully this post helped clearing things up a bit for anyone interested in going contracting.