Guide To Freelancing 7.0

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CM
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ACKNOWLEDGEMENTS
PCG, the voice of freelancing would like to thank the following organisations for reviewing this
document and recommending refinements and amendments where appropriate:
Abbey Tax Protection
www.abbeytax.co.uk
Randell Dorling Ltd
www.randelldorling.co.uk
Hiscox
www.hiscox.co.uk
Wealth Matters
www.wealth-matters.co.uk
ContractorFinancials
www.contractorfinancials.com
DISCLAIMER
This document is for general guidance only and is not a substitute for professional advice where
specific circumstances can be considered. Whilst every effort has been made to ensure the
information contained within this publication is correct, PCG does not accept any liability for any
errors or omissions contained herein or any action taken or not taken in reliance upon the
information provided in these articles.
No part of this publication including any article or graphic in whole or part may be reproduced
without PCGs express permission. PCG neither endorses nor provides any indemnity regarding any
product, service or organisation mentioned within this document unless specifically stated.
It is strongly recommended that you consult the appropriate legal and accounting professionals for
advice about your specific circumstances before making important decisions.
UPDATES
This Guide to Freelancing is updated from time to time, and you should visit the PCG website
www.pcg.org.uk regularly to make sure that you have the latest version, or, better still, join PCG
as a member.
Whilst every effort is made to ensure that the information herein is correct at the time of
publication, it is inevitable that certain information may be superseded very quickly.
SECTION 1: INTRODUCTION
1. About this guide (page 4)
Who its for and how to use it
2. About freelancing (page 5)
Career paths and how to go about it
3. If you do nothing else, do this... (page 7)

The freelance checklist
SECTION 2: SETTING UP YOUR FREELANCE

BUSINESS
4. Setting up in business (page 11)
Important rules and regulations, including IR35 and
Employment Status
5. Limited company: why you might want one (page 17)
Why many freelancers decide to set one up, what the
implications are and how to go about it
6. Alternatives to a limited company (page 22)
Other options explained, including sole trader, partnership,
limited liability partnership and umbrella company
SECTION 3: THE BOOKS

7. Accountants (page 28)
Why it pays to get one, what to look for and where to find
one
8. Bookkeeping (page 30)
How and why to maintain proper records
9. Money in the bank (page 33)
Setting up a business account, how to submit invoices and
tips for chasing outstanding debts
10. Money in your pocket (page 38)
How to pay yourself from the business
11.Money out (Page 41)
What you can and cant claim as a legitimate business

expense
Copyright PCG September 2011
Guide to Freelancing Version 7.0
SECTION 4: PAYING THE TAXMAN

12. Value Added Tax (VAT) (page 46)
The registration threshold, normal VAT accounting, VAT
schemes, charging and paying VAT
13. Taxation of limited companies (page 50)
National Insurance, personal income tax and corporation
tax
14.Taxation of sole traders,
partnerships and LLPs (page 53)

Tax rates and tax returns, NICs, Schedule D and E
SECTION 5: RUNNING THE SHOW

15. Where is your HQ? (page 56)
Choosing where to base yourself: a home office, a pod in
the garden, a shared office or at the clients site
16. Winning work (page 60)
Top tips for landing new clients and growing your business
17. Managing the workload (page 69)
Maximising your time, the briefing process and managing
the project lifecycle
18. Financial planning (page 72)
Financial buffers, savings, mortgages and pensions
SECTION 6: RISK PREVENTION

19. Assessing risk (page 76)
Tools to prevent or mitigate financial meltdown and other
disasters
20. Compulsory insurance (page 77)
When you are legally obliged to take out insurance
21. Recommended insurance (page 79)
Insurance policies that should be seriously considered by
most freelancers/contractors
22.Worth considering (page 82)
Insurances for those who want comprehensive cover

against all risks
SECTION
1
Introduction
This section covers:
1. About this guide
Who its for and how to use it
2. About freelancing
Career paths and how to go about it
3. If you do nothing else, do this...
The freelance checklist
Hello and thank you for choosing the PCG Guide to

Freelancing. Please bear in mind this guide is aimed at UK
freelancers, so any tax issues and other legalities mentioned
here are governed by British rules. All content within this guide
is correct at time of print and relates to figures for the financial
year 2011/12.
If youre just starting out...
Are you thinking of starting up as a freelancer, contractor or
consultant? Some of the heavier tax and regulatory matters can
seem rather daunting if youre not familiar with them but it
doesnt all have to be done in one go. Give the whole guide a
quick scan first and then come back to individual chapters later,
scheduling a separate chunk of time for each section. If you
put things in practice bit by bit, you will become much more
fluent over time developing that broad business savvy is one
of the most rewarding parts of being your own boss.
If youre already established...
The guide is a useful reference source to keep abreast of
current regulations.
Either way, dont skip...
The freelance checklist at the end of this intro section. If youre
just starting out it will help you plan your launch and if youre
already established it will help you to review your current set
up.
If you want to get interactive...
There are hyperlinks wherever you see this text. If you are
reading this guide electronically simply click on these links to be
taken to relevant information on our website. If you are reading
a hard copy of our guide simply go to www.pcg.org.uk and
resources>toolkit>PCG Guides>Guide to Freelancing to
access all the links contained within this guide.
TAKING THE PLUNGE
Its easy to delay and
make excuses about

not being sufficiently
prepared. Id say if you
have a clear idea of
what you want to be
doing, the skills to do
it, and you have a
financial buffer in
place, just jump in and
give it a go. I honestly
think one of the
biggest hurdles to
starting out is worrying
too much about being
prepared. It cant hurt
to read a few guides
and talk to people, but
when it comes down to
it if youre suited to
freelancing, youll soon
find out. If not then
you can always just
find yourself a regular
job nothing wrong
with that. Long story
short, just get out
there and do it.
FRANK G.
FREELANCER
And dont forget, were here if you need us.

PCG is the UKs only not-for-profit association dedicated to supporting, representing and protecting
the freelance community. So far 20,000 UK freelancers have joined PCG because it helps them get
ahead in business. To find out more visit www.pcg.org.uk/join.
I cant tell you how much admiration I have for people who leave the comfort of a regular wage to
strike out on their own. It takes a lot of courage, and without that courage this country would be a
much poorer place, said Prime Minister David Cameron on National Freelancers Day 2010.
The world is changing. Freelancers are increasingly being recognised as key drivers of wealth
creation in the country. You no longer have to belong to a large company to be credible. In fact,
big brands are fragmenting and the personal brand is emerging as the force of the future. Experts
are saying that, in the networked economy of today and tomorrow, individuals are as important as
a big company.
DIFFERENT WAYS OF FREELANCING

Freelancer is a broad term covering many different ways of working independently. Some people
work on long term contracts, doing a full week at a single client site for several months until the
contract is finished or renewed. Others work with several clients at a time or on a series of fast
turnaround projects.
Freelancers use different terms to describe what they are, e.g. freelancer, contractor, consultant,
independent professional, interim, portfolio worker, self-employed, business owner. They use a
range of legal forms to run their businesses, including limited companies, sole traderships,
partnerships, umbrella companies and others. They might brand themselves using their own
name, or else create a completely separate business brand and logo, presenting themselves as a
small business rather than an individual. Some work through agencies, others directly with their
clients. Some charge by the hour, some by day or week, and others give a fixed project fee. The
unifying factor is that freelancers are their own bosses and have commercial, business-to-business
relationships with their clients.
To go freelance, you dont necessarily have to work in the traditional areas associated with
freelancing such as media or IT. More and more people are finding creative ways to exploit their
skills in all sorts of areas such as business development, environmental consulting or even offering
training in niche areas, for example selling to government departments.
BUILDING YOUR OWN CAREER LADDER

Freelancing is not for everyone. There are risks. Its not an easy option. In fact, the survey
conducted by PCG in 2010 showed that the general population was happier with working hours,
time for themselves and time with family, than freelancers.
However, with risk comes reward. In the same survey, freelancers were shown to be happier
overall than the general population. PCGs annual membership surveys consistently show that
most people go into it because they want to, not because they are forced into it through
redundancy, while only three percent plan to use it as a stopgap while they find a permanent
position. Moreover, two thirds of freelancers continue to work as freelancers because of the
autonomy it gives them.
Anyone choosing the independent route will need to build their own career ladder and work out
how to structure their business in a way that frees up their full potential. The business will also
need to be supported by some kind of promotional activity to ensure a sustainable level of work.
And when it comes to deciding which marketing technique works best, there is no magic wand.
There are almost as many views on effective marketing as there are freelancers. As with so many
things, you have to take what works for you, adapting the techniques that best fit your style and
industry the section in this guide on winning work will give you some ideas to try out.
It is certainly worth experimenting with different approaches until you are able to narrow down
those that deliver the best results for you.
Its a good idea to revisit your goals and long term plans regularly, benchmarking your journey
and adjusting course if necessary. There is nothing wrong with switching business models or reinventing yourself completely at different points in your career. For example, someone starting out
as a programmer can later morph into a project manager and eventually into a management
consultant charging a premium fee.
AS A FREELANCER YOU
ARE, AT THE END OF THE
DAY, FREE TO CHOOSE.
MAKE SURE YOU EXERCISE
THAT CHOICE.
I don't know a single person under
30 who wants to work for someone
else. People of this generation see
themselves as their own P&L, their
own brand. And its not just young
people. Older people, whether by
accident or design, have also become
individual capitalists. Theyve left
their company and are working from
home and through virtual receptions,
Skype or serviced offices. They are
operating a freelance career and have no intention of working for anyone else again.
JULIE MEYER, ONE OF BRITAINS MOST SUCCESSFUL

ENTREPRENEURS
THE FREELANCE CHECKLIST

Time estimate
THE GRAND STRATEGY
About a day
Do a simple business plan. Template available to PCG members
Couple of hours
Do a financial forecast. Template available to PCG members
Under an hour
Write down a cash flow strategy to mitigate against late

payments or income gaps.
Time estimate
ADMIN MATTERS
Couple of hours
Decide whether to set up as a sole-trader, limited liability

partnership, limited company, or under a PAYE umbrella.
Big decision.
Allow a day or
so.
Source an accountant (unless you went the umbrella route). Ask

for recommendations and referrals on the PCG legal & accounting
forum. Check whether the service includes a basic record keeping
and invoicing system.
An hour or less
If your accountant doesnt provide one, source a record keeping

and invoicing system. Ask for recommendations on the PCG legal
& accounting forum.
A few days
Get a bank account set up in your company/business name.
Couple of hours
Send relevant forms to HMRC (ask accountant for assistance). If

in doubt, call the PCG tax helpline.
An hour or less
Consider the VAT Flat Rate Scheme discuss merits with

accountant and if applicable, apply.
Check
Check
FREELANCE CHECKLIST CONTINUED...

Time estimate
IT & SYSTEMS
Can take weeks
Install internet and email. Ask for help on the PCG technical
forum.
1 week
Get business phone line, mobile phone and, if necessary, a fax.
A few days
Source computer/s, printer, backup system and any other

equipment needed - ask for help on the PCG technical forum.
Several hours
Install software.
Half a day
Set up a professional base to work from.
Time estimate
THE BUSINESS DRIVE
Half a day
Review business plan and decide which business model, price

bracket and marketing tactic to focus on
A few weeks
Launch a new business drive based on the above
A few days
Follow up hot leads
Several hours
on and off
Review results and decide whether to continue or switch tactics.

Swap ideas with others on the PCG contracting issues forum or at
PCG Real Life Meetings (RLMs)
Check
Check
FREELANCE CHECKLIST CONTINUED...

Time
estimate
GETTING READY TO DELIVER
20 minutes
Understand the project lifecycle from the clients perspective.
Couple of
hours
Develop a project briefing template to send to clients to help them

specify objectives, deliverables and project milestones.
About an hour
Understand the concept of a business-to-business working

relationship and draft a policy (for own record) establishing how
this will be achieved with potential clients. If in doubt, call the PCG
tax and contract helpline.
A few minutes
If planning to work directly with clients, download the A05-10

Direct service provider client agreement template to seal deals
with. If planning to work through agencies, download the A05-01
Direct service provider agency agreement. For shorter projects,
ask for a purchase order from the client.
Under an hour
Download Terms and Conditions template and customise so it is

ready to append to proposals and quotations.
A few minutes
Download Mutual Secrecy Agreement template for any projects

that might have confidentiality issues.
Check
SECTION
2
Setting up your
freelance
business
4. Setting up in business
Important rules and regulations, including IR35
and Employment Status
5. Limited company: why you might want one
Why many freelancers decide to set one up,
what the implications are and how to go about it
also what to do if you eventually want to close
the company down
6. Alternatives to a limited company
other options explained, including sole trader,
partnership, limited liability partnership and
umbrella company
10
Once you go freelance, you enter a new realm of laws and regulations.
The word freelance is a laymans term, not an official category used by the Government to
classify workers. Therefore, going freelance actually means setting yourself up as a business by
establishing a trading structure and letting the tax authorities know what youre up to.
These are the trading structures through which you can operate:
Trading structure
Legal category*
Your tax status
Limited company
Incorporated
Company director and/or employee

of your company
Sole trader
Unincorporated
Self-employed
Partnership
Unincorporated
Self-employed
Limited liability partnership
Incorporated
Self-employed
Umbrella company
Incorporated
Employee of the umbrella
* An incorporated business is a separate legal entity. You can think of it as being like a separate
person it can own things, have bank accounts in its own name, and it can be liable for debts or
lawsuits. If you are unincorporated it means that you and the business are one and the same
there is no legal separation.
Each of these structures has its own tax and legal implications. All of them can be set up fairly
quickly, but some are quicker and easier to set up and run than others (see the following
chapters). Whichever way you chose to operate its essential to start thinking in terms of the
business, not you as an individual. You should think about having a business telephone line
installed separately from your private line and/or using a business mobile phone. If you already
own a desk, computers and other office equipment, you should consider selling these to your
business, initially recording the value as a personal loan to the business from you, in the form of
set-up expenses.
11
AVOIDING PROBLEMS WITH THE TAXMAN: EMPLOYMENT STATUS

Employment status is an important issue to understand fully as it could influence decisions
regarding your set-up.
Your employment status decides whether you should be treated as employed or self-employed for
tax purposes. You might think you are freelance or self-employed, but that doesnt necessarily
mean that the taxman will agree with you. The tax authorities can challenge your employment
status on any particular client contract if they think that you are behaving as if you were that
clients employee in other words, not a real business. This is known as deemed employment. If
you do all your work for one client, or if you have very long contracts with particular clients, you
could be vulnerable.
The implications of being deemed employed can be expensive because HMRC will seek to recover
the higher levels of tax and NIC that are payable by employees. Who they choose to recover the
tax from, depends on your chosen business structure.
In addition your employment status also has an effect on other laws such as the Agency Workers
Directive for more information visit PCGs policy website pages.
Implications for sole traders and ordinary partnerships
Sole traders and ordinary partnerships are known as unincorporated businesses in other words,
you are self-employed as opposed to having a separate corporate structure. As a result sole
traders and partners in a business report their income on their own income tax self-assessment
return. Sole traders will complete a self-employment page and the individual partners will
complete a partnership page.
If, as a sole trader or partnership you are deemed employed then your client will be liable for
tax and NICs on the fees they have paid you. This can be charged retrospectively for as long
as the engagement took place, even if that means several years. It can be very expensive and
probably wont do your client relationship much good if the situation should arise.
Implications for limited liability partnerships (LLP)
Under an LLP structure the Intermediaries Legislation (IR35) will apply and thus if the engagement
is deemed by HMRC to be employment, the partnership itself will be liable for the extra tax and
NICs both employers and employees.
Implications for limited companies
If you are the director of your own limited company through which you bill your client(s), and the
taxman says you are deemed employed, then the IR35 legislation can kick in, allowing HMRC to
reclassify the engagement between you and your client as IR35 caught.
If you are working with more than one client you are less likely to be caught by IR35 however it is
not impossible for IR35 to apply to one or more of them since IR35 is assessed engagement by
engagement.
The typical relationship involving a freelancer trading through a limited company is:
Engaging organisation (the client) limited company service provider (your company/the
intermediary) the worker (you), and there may be an agency between your company and the
Client.
12
What the IR35 Intermediaries legislation allows HMRC to do is create a hypothetical contract
which asks the question: If the intermediary (your company) was removed from the business
relationship and the worker (you) were engaged directly by the end client what would that
relationship be?
If HMRC can successfully argue that the relationship would most closely represent a contract of
service (employment), then only for tax purposes and only for the engagement(s) in question, you
will be deemed an employee. And in this scenario, you can only be deemed an employee of
your own company!
The taxman will then insist that your own limited company should have deducted PAYE tax and
NICs on the all of the fees paid by the client, as if the fees were salary payments. The additional
tax due can be charged retrospectively going back up to six years. They may also charge interest
and penalties, and there are likely to be accountancy fees to sort it all out. Thats how contractors
can find themselves owing tens of thousands and sometimes even hundreds of thousands in tax
and NICs that they werent expecting.
How HM Revenue & Customs assesses your employment status
Currently HM Revenue & Customs (HMRC) use three key status indicators to decide whether you
are a genuine business or whether you are in fact a disguised employee of your client. The
principle is that if you have an engagement where you have to provide your personal service,
where there is an obligation to offer and accept work and where you can be controlled by the
engager, then a contract of service (employment) exists.
Where any one of these three elements is missing, then it cannot be a contract of employment and
so logically it must be a contract for services (self-employment). In an ideal world, it would be
best to pass all three key tests, but passing two is better than one. But where these status
indicators are inconclusive, one should also consider in business factors or factors which show
that a freelancer is taking the kind of financial risk that would not be required of an employee. In
essence, the more factors in your favour the better.
Being in business can be most easily demonstrated by the type of expenditure you incur; for
example, most employees do not need to invest in office equipment and stationery to do their job.
It is highly unlikely that an employee would need liability insurances or to submit invoices in order
to get paid. Also most employees will receive some form of employment benefits and have the
protection of employment law. If you are IBOYOA you will have to make provision for all of these
things and face the prospect of contracts terminating at short notice and with no guarantee of
finding future work etc.
The key is to think of yourself as a business and act as one. This goes beyond business structure its a principle that actually starts in your head. You are you, and the service you offer is your
business. In short, genuine freelancers are in business on their own account and bear the
responsibility for the success or failure of their business. They are not disguised employees.
Ultimately, a number of factors can come together to create a whole picture of your employment
status. So rather than relying on any single factor to protect you from being wrongly accused of
being an employee, make sure the whole picture of your status can reasonably be said to be that
of a business. For more information, PCG provides a wealth of resources for its members, including
tax and legal helplines, and specific guides to IR35 and the Agency Workers Regulations.
13
THE EMPLOYMENT STATUS TESTS USED BY HMRC

TEST 1: Personal service
Employees are obliged to do the work

themselves, whereas, suppliers are
not. HMRC will, therefore, scrutinise
whether you genuinely have the
choice to appoint a substitute to
deliver work for clients.
TEST 2: Mutuality of obligation
Employees are obliged to turn up for
work and there is an obligation to pay
them, even if the work is not up to
standard, or if the work dries up.
TEST 3: Direction and control

Employees may be directed in how to
carry out their work, whereas,
suppliers' exercise their professional
judgement in how to carry out their
work.
How to pass this test
If you have a right of substitution and can send a

suitably qualified substitute, you are not an employee.
If, however, the client wants you personally to do the
work, and will accept nobody else, this is an indicator
that you may be viewed by the tax office as deemed
employed
Are you obliged to keep on doing the work, and is the
client obliged to keep on offering you the work? If yes,
this is an indicator that you may be deemed employed.
If, on the other hand, either you or the client can
terminate the engagement relatively easily, this means
you are not.
Does your client tell you what to do? Do they check up
on you? Do they provide you with a desk and/or the
equipment you need? If so, there is a danger they
think of themselves as your boss, which would fail the
test. You should be the one proposing solutions based
on your expertise and bearing the risks associated with
running your own business.
14
Specify your working relationship by means of a contract

In a dispute the courts will look at the contract between
your business and your client to infer whether or not you
are actually an employee by another name. Therefore, its
essential to draw up a contract for any large project you
take on. Furthermore, it should be a contract for
services with your business, not a contract of service
with you personally. This contract should accurately
reflect the relationship between parties, and should
include clauses that demonstrate your ability to send
substitutes, the lack of mutuality of obligation, and that
you have direction and control over your work.
It is really important to have one professionally drawn up.
PCG members can download a template 'contract for
services' at www.pcg.org.uk/resources
PCG members can download a comprehensive guide to
IR35 from www.pcg.org.uk/resources.
CASE STUDY: EXPERIENCING A TAX

INVESTIGATION
Robert is a freelance project manager and infrastructure consultant. Out of
the blue he was contacted by HM Revenue & Customs (HMRC) who wanted
to review the PAYE records of the limited company he operates to check he
was paying proper tax and NI. As a PCG member he knew straight away
what they were really interested in checking his contracts to see if they
could deem him to be IR35 caught. HMRC suggested he call them, but
instead he called the PCG help-line which advised him on his next steps.
The tax inspector asked to see his books and records for the last six years
and spent two hours going through them. He wanted a complete breakdown of expenses and
asked Robert to highlight any mobile phone calls that were personal. Robert duly went through
them and found 4 of personal phone calls out of receipts totalling hundreds of pounds. Assuming
the inspector would dismiss this as an insignificant amount, Robert was surprised to hear him say
Ill have to think what to do about that. Then the request came to view his client contracts for
the previous five years. As expected, the inspector announced that they were being passed to the
IR35 compliance department.
PCG provided Robert with an expert adviser, Jacqui Mann from Abbey Tax Protection. As a former
tax inspector, Jacqui advised Robert and his accountant throughout the IR35 investigation process
and dealt with the authorities on Roberts behalf. The cost of this representation was covered
thanks to his PCG Standard membership. In the end the case was closed without Robert being
liable for additional tax or penalties.
I felt very panicky at the beginning, but being a PCG member has definitely helped the situation,
says Robert. Having Jacqui to represent me was very reassuring, and on top of that I was able to
discuss it on the PCG forums with others who have been through the same experience.
For more information on what to expect from a tax enquiry visit
www.pcg.org.uk/resources
15
IN A NUTSHELL: SETTING UP IN BUSINESS
Going freelance essentially means that you are setting yourself up as a

business. To do this, you have to formally set up a legal business structure and
let the tax authorities know how you are operating
Freelancers can operate as a limited company, sole trader, partnership, limited

liability partnership (LLP) or umbrella company
The tax authorities scrutinise your client relationships and can challenge your
employment status if they think you are not genuinely in business on your own
account.
If you are the director of your own limited company or operate as an LLP,
through which you bill your client(s), you need to be aware of the risks of IR35
Working relationships with clients should be specified by means of a

professionally drafted contract for services PCG members can use the PCG
template contract
PCG members are covered for tax investigations if a revenue officer asks to
meet for an informal chat, you are under no legal obligation to do so instead
ring the PCG help-line for advice.
Please visit PCG website policy pages for more information about employment
status and Agency Workers Regulations
16
Although its perfectly possible to freelance as a sole trader or partnership, a large proportion of
freelancers prefer to incorporate in other words, to set up a limited company.
One of the main reasons for this is that some clients are wary of working with unincorporated
businesses because it puts them at risk under the employment status rules. However, its not the
only reason. Having a limited company lends certain credibility. It is a separate legal entity, which
helps to create a division between the person and the business. It also protects any personal
assets if the company goes bust or gets sued, creditors cant take your possessions as long as
you havent acted fraudulently or negligently, in which case they might be able to seize your
personal assets (as specified in The Companies Act 2006).
IMPLICATIONS
A limited company is a distinct legal entity in its own right. It has rights and responsibilities and
can own property or equipment. This means that there are more rules and regulations to running
a limited company than an unincorporated business. A number of returns need to be made within
a strict time limit:
Company tax return
Company accounts and a computation of taxable profits
Form P35 in relation to salaries including directors remuneration
A form P11D (return of taxable benets and expenses) for each director/employee
Personal tax return for the company directors.
However, with the help of a good accountant, this isnt unduly onerous. It will cost you a bit more
than running an unincorporated business, but on the other hand a company gives you a certain
amount of control over when and how you pay tax which can result in legitimate savings.
17
WEIGHING UP THE BENEFITS OF A LIMITED COMPANY

PROS
Overcomes the hurdle of clients

who wont deal with sole traders or
partnerships
Personal assets are protected

against company debts*
You can control how you pay

yourself to ensure tax efficiency
If you are working through a

recruitment agency, the agency or
the client can pay your limited
company gross. A recruitment
agency must pay all others as if
they were employees by applying
PAYE
Its easier to set up trade accounts

with suppliers
Owner managers can get Statutory

Sick Pay, Statutory Maternity Pay
and similar benets**
Entitled to R&D tax credits
Can have occupational pension

scheme and NIC relief for pension
payments
A limited company can raise funds

through Venture Capital,
Enterprise Investment Schemes or
sale of equity
CONS
There are more rules and regulations
If you get hit with IR35, you get stung

with the bill, not the client
There is more admin due to the legal

reporting requirements and number of
returns that have to be made
Accountancy fees tend to be slightly

higher for a limited company
The penalties for getting it wrong or

submitting returns late are greater
than for sole traders
You cant just withdraw money from

the business without formally
recording it as salary, dividend or loan
Your company must pay a 25% tax on

any money you borrow from your
company if you dont repay it within
nine months of the year end (this is
repayable after the loan has been
repaid)
The company has to pay corporation

tax on gains made if you sell company
assets.
* As long as you havent given any personal guarantees or acted negligently

** 10% of Statutory Maternity Pay is paid to small employers, so the owner managed company can claim the cost back from
the Government with a 5% margin. As the cost is borne by the company and then recovered, the margin remains within the
company. Sole traders cannot claim Statutory Maternity Pay but if you are registered self-employed and are paying Class 2
National Insurance Contributions (NICs), you will be eligible for Maternity Allowance (MA) which pays a standard weekly rate of
128.73 or 90 per cent of your average gross weekly earnings (before tax), whichever is the smaller. MA is paid for a
maximum of 39 weeks. For more information about maternity pay please visit http://www.nidirect.gov.uk/nil-17a.pdf
THE RULES
The company must have at least one director and a registered office, and must have Limited
or Ltd after its name.
Private limited companies are not obliged to appoint a company secretary unless the
company's articles contain a reference to the company having a secretary.
Ownership in terms of the split of shares in the company is up to you but many freelancers
split the shares with their spouses. HMRC have previously attempted to challenge this type of
set up, in particular, with the infamous Arctic Systems case, which HMRC lost at the House of
Lords. Following the case HMRC proposed a new set of rules to combat what they called
income shifting; however, these have not yet come into force. In general, it is considered
best to make the split when the company is rst formed and in the case of a husband and
wife, ensure that the shares subscribed for or provided to the spouse are full ordinary shares.
PCG members can download the guide to Family Business Tax for more information.
18
The registered office is the companys legal address and it can be your accountants office,
your own office premises or your home office. In the case of a home office, it is important to
check the terms of any lease or mortgage agreement to make sure there are no restrictions
regarding commercial operations.
The registered office must be within the jurisdiction in which the company was incorporated.
So a company formed in Scotland must have a registered office in Scotland and a company
formed in England or Wales must have its registered office in England or Wales. Legally, a
plaque or sign must be displayed outside the building to show that this is the company
registered office, although PCG does not know of any freelancers who have been prosecuted
or investigated for failing to comply.
A limited company must le annual accounts with Companies House and also a corporation tax
return accompanied with the accounts to HMRC. The limited company must also complete an
annual return to Companies House. This document conrms details of the shareholders and
directors of the company.
Finally, any company with an annual turnover in excess of 73,000 from April 2011 must
register for VAT. More information on the requirement to register is given in the VAT section.
THE ROLE OF THE COMPANY DIRECTORS

As a company director you are legally responsible for making sure the company is run properly,
according to the law and in the interests of the shareholders. The latter shouldnt be too hard
given that you and/or your spouse are probably the only shareholders.
A director of a limited company is not strictly an employee of that company unless he/she has a
contract of employment. Although not a legal obligation, some freelancers draw up a contract of
employment as it can help make the case that you are not IR35 caught. However, bear in mind
that employment leads to such responsibilities as the provision of the minimum wage and other
statutory benets. Your accountant may have a standard contract that you can tailor to your
specic needs or it may require you to engage the services of an employment law contract
specialist to create one.
QUESTIONS TO ASK YOURSELF
How long are you intending to freelance or contract for? (If its just a few months, its
probably not worth setting up a limited company)
Can you handle the legal responsibility of being a company director?
Can you set up proper business to business relationships with your clients so as to avoid being
IR35 caught?
Can you simplify the admin with the help of a good accountant?
HOW TO SET UP THE LIMITED COMPANY

Some freelancers consider putting some of their own personal money into the business as a loan
from you to the business. This can be repaid later as the business begins to generate income. If
your business subsequently folds you may then lose your investment.
The easiest way to set up a limited company is to ask an accountant to set one up for you, or to
use the PCG Start-up package. Accountants usually charge around 100-150, although some do
it for free.
You can also do it yourself, which can be a bit cheaper - around 40 (or 100 for a same day
service). You can find out more about this in the guidance booklets available via the Companies
House website www.companieshouse.gov.uk.
19
WHAT TO DO IF YOU WANT TO CLOSE THE COMPANY

If, for whatever reason, you decide you want to close down your company, you will need to
complete a Striking Off Application (DS01) form available on the Companies House website
(www.companieshouse.gov.uk) you need to have stopped trading at least three months before.
If there are any funds left in the company, you need to decide how to take it out. There are three
options: 1) take it out as dividends or 2) take it out as capital 3) make a company pension
contribution. Option 2 should, in a typical scenario, be the more attractive than Option 1. Check
with an accountant, financial planner or tax planner to make sure the principle works with your
specific situation.
Option 1: Take all the money out as dividends
All remaining funds in the company after payment of all liabilities are treated as a final dividend
distribution and allotted to the shareholders as usual. As with any other dividend, for basic rate
taxpayers there is no further liability to tax. Higher rate taxpayers will pay an additional 25% of
the net dividend received that falls into the higher rate bracket, additional rate taxpayers will pay
an additional 36.11%. Careful planning is required here as you might not know what other income
you will receive in the rest of the tax year.
Option 2: Take all the money out as capital
To do this you need to let HMRC know that you intend to make a claim under Extra Statutory
Concession ESC C16. Essentially this concession treats the final distribution of the company as
capital, rather than revenue and is therefore subject to Capital Gains Tax (CGT) rules.
There are two useful reliefs for CGT:
1. The first 10,600 of annual capital gains are exempt from tax, and this applies to each
taxpayer.
2. There is also Entrepreneurs Relief. Normally, gains between 10,600 and 35,000 are charged
at 18% and gains above 35,000 are charged at 28%. However, with Entrepreneurs Relief the
tax rate on the gain is only 10%. You can claim this relief if:
the company is your personal company, i.e. you own a minimum of five percent of the
voting shares, and are an employee/director of the company
the company is a qualifying trading company. There are limits on the amount of non-business
assets the company can hold in order to meet the criteria accumulated reserves count as
non-business assets.
Option 3: Make a company pension contribution

If you have a pension shortfall, you can make a lump sum contribution of up to 50,000 into a
pension. This should reduce your Corporation Tax bill for your last year of trading, as they are an
allowable expense under the revenues Wholly and exclusively rules. It will also reduce the CGT
bill in Option 2 as the lump sum will be taken out of the business before it is closed down.
20
Comparison between dividend and capital distribution

A husband and wife are both 50/50 shareholders of their limited company, so the funds are
divided equally. They decide to close the company and there is 75,000 left in the company after
all liabilities have been paid. They have no other capital gain occurring in the year and are eligible
for Entrepreneurs Relief. Therefore, they are able to create significant savings by distributing the
funds as capital rather than dividends.
The dividend route
The capital route
Dividends
75,000
Capital
75,000
Taxable amount
75,000
Taxable amount after

allowance of 21,200
53,800
(10,600 x 2)
Tax liability
If at 25% rate
If at 36.11% rate
18,750
27,082
Tax liability
10% if claiming
Entrepreneurs Relief
5,380
Important note: HMRC can enquire into a company tax return up to two years after the
end of the accounting period. If you are a PCG member and you have decided to stop
freelancing, you are, therefore, advised to maintain your membership to cover the
two year window in order to remain protected in case of a tax investigation.
IN A NUTSHELL: LIMITED COMPANIES
Incorporating or operating as a limited company is a popular route for

freelancers - many clients have a policy of not working with sole traders
Because of the admin involved, it is not worth setting up a limited company if you
only plan to freelance for a few months
Running a limited company is a big responsibility you need to understand the

rules
An accountant can help you set the company up
HMRC can investigate company accounts up to two years after the end of the
accounting period, including the accounts for the year you cease to trade.
21
SOLE TRADER
A sole trader, or sole proprietor, is defined as a business that is owned and controlled by one
person who takes all the decisions, responsibility and profits from the business which they run.
Sole traders were previously referred to as schedule D workers. The schedule system no longer
exists so sole traders are now technically known as self-employed.
Operating as a sole trader is more straightforward than a limited company because there is less
paperwork. You pay tax and NICs on the business profit, regardless of how much you draw, so
the accounting side of your business is very straightforward.
As a sole trader you are protected from the risk of IR35 because, if HMRC decides that you are
deemed employed, they will hit your client with the tax bill, not you. However, for precisely that
reason, clients might refuse to engage you, so you could be limiting your market. In some
industry sectors this is more of an issue than others its a good idea to compare notes with
other freelancers in your field.
Another potential disadvantage of the sole trader route is if you work via an agency and the
agency settles your bill then they must by law pay you as an employee. This can be problematic
because you pay tax under PAYE as an employee but without receiving employee benefits such
as holiday or sickness pay. This makes it harder to build the financial buffers required to weather
the risks of being self-employed.
Finally, be aware that personal assets, including your home, are potentially at risk because you
are personally liable for any business debts, including lawsuits its advisable to mitigate these
risks with suitable insurance cover, such as Professional Indemnity. Sole traders pay tax twice a
year under the self-assessment system known as payment on account.
If you do decide that the relative simplicity of being a sole trader is the way to go then you must
register as self-employed. This can be done online at the HMRC website:
http://www.hmrc.gov.uk/selfemployed/register-selfemp.htm. You must register within three
months of the commencement of business or you will be fined!
SOLE TRADER IS A GOOD CHOICE IF...
Youre working on your own
You dont want the responsibility of being a company director
Your actual or prospective clients dont mind working with an unincorporated business
Your fees arent paid by a recruitment agency
Your activities arent likely to put your personal assets at risk
You protect your personal assets by taking out adequate insurance cover, for example
Professional Indemnity in case of a lawsuit.
To set yourself up as a sole trader, visit
http://www.hmrc.gov.uk/selfemployed/register-selfemp.htm
22
PARTNERSHIPS
A partnership is a simple way for two or more people to work together.
There are two types of partnership that you can set up:
1. Ordinary partnership
2. Limited liability partnership
Ordinary partnerships
Like a sole trader, an ordinary partnership is an unincorporated business. This means that the
business is not a separate legal entity and the partners are personally liable for the business
debts. Partners are jointly and severally liable so, if youre in business with someone with no
personal assets then you could also find yourself liable for their share of any business debts.
A partnership can continue even if one partner resigns or dies as long as there are at least two
other existing partners left. If there is only one partner left, the partnership must be dissolved,
however, the remaining partner can continue on the trade as a sole trader. If one partner takes on
a debt, all the partners are jointly liable for repayment of the debt. If one of the partners resigns,
dies or goes bankrupt, the remaining partners will still be personally liable for any outstanding
debts. However, for tax purposes each partner is taxed on their own share of the profits and
therefore, each partner is personally responsible for ensuring they pay the correct amount of tax
on time through their own tax returns.
Limited liability partnership
An LLP is different from a traditional partnership in that it is a legal person separate from its
members. It has members rather than partners and must be formally incorporated to exist. Like
a limited company, an LLP has to submit accounts and an annual return to Companies House each
year. This requirement is more demanding than for normal partnerships and specic accounting
rules may lead to different prots from those of a normal partnership. However, unlike a limited
company there are no requirements for board meetings or decision making by formal resolution,
nor does an LLP have a memorandum or articles of association.
Partners and members of an LLP can join and leave at any time without the partnership being
dissolved. However, to be a partnership there would have to be a minimum of two
partners/members present.
How partners are paid and taxed
For tax purposes an LLP is treated exactly the same as an ordinary partnership despite having
limited liability. Each partner is taxed personally on their share of profits through their own selfassessment tax returns which will be subject to income tax and class 4 NICs.
Whether you are a partner in an ordinary partnership or a member of a limited liability
partnership, you are classed as self-employed and taxed on your share of any profit made by the
business*. Your drawings from the business are not subject to PAYE and do not need to be
processed through a payroll system.
* For this to apply to LLPs, the business must carry out a trade or profession rather than being
simply an investment vehicle.
23
Setting one up
Although it is not a legal obligation, partnerships should have a comprehensive member
agreement in place and take legal or professional advice about the issues covered in the
agreement.
As a member of a partnership you need to register as self-employed, which can be done online via
the HMRC website. See www.hmrc.gov.uk/partnerships.
To set up an LLP you also need to incorporate the partnership you can find out more here:
http://www.companieshouse.gov.uk/about/gbhtml/gpllp1.shtml
Alternatively you can appoint an accountant as your agent they can advise you on the
implications and handle the set-up process for you.
A PARTNERSHIP IS A GOOD CHOICE IF...
Your current or prospective clients dont mind working with an unincorporated business
Your fees arent paid by a recruitment agency
Your activities arent likely to put your personal assets at risk
You protect your personal assets by taking out adequate insurance cover, for example
Professional Indemnity in case of a lawsuit
You dont want the responsibility of being a Company Director
You and your partners have compatible skills and a clear, shared vision
All of the partners have high levels of trust in each other
You have a partnership agreement professionally drawn up.
A limited liability partnership is a good choice if...
You want the reassurance of having your personal assets protected
You dont mind the extra admin involved in sending accounts to Companies House
You dont want the extra responsibility of running a limited company.
Find out more at www.hmrc.gov.uk/partnerships or appoint an accountant to set one up

for you
24
UMBRELLA COMPANY
An umbrella company is a service for people who dont want to or need to run their own limited
company. By joining an umbrella service youre handing over the responsibilities and admin to a
service provider. You become an employee of the umbrella company the umbrella then bills your
client through its own limited company structure and pays you a salary, with PAYE tax deducted at
source, based on the work you do for your clients. You still have to land your own work, but they
do the rest, such as payroll, debt collection and paperwork.
Its very easy, saves time, and removes the need to be aware of the legal requirements and risks
involved with running a limited company.
The downside is that its not your own company and, therefore, its harder to build your own
brand. Its also less tax efficient because all the money is paid as employment income. Also, the
Agency Workers Directive, which is due to come into force on 1 October 2011, has the potential to
limit the use of umbrella companies.
However, if you are intending to contract for a short period, say a few months, this could prove to
be the best option. If you are unavoidably IR35 caught it may also represent a good choice
IR35 becomes irrelevant because the fees you earn from the client have the full PAYE tax deducted
at source when they are paid to you as salary.
Make sure that the umbrella company you choose is a PAYE Umbrella. Any providers that claim to
be able to pay you gross, without deducting tax at source, are likely to get you into hot water with
the tax authorities. If you decide to go the umbrella company route do your research, seek peer
recommendations and consider carrying out credit checks. You should also be very wary of any
offshore solutions - PCG has a policy of advising against aggressive tax avoidance schemes.
Will an offshore company protect me from IR35?
Some freelancers have been told that they can use an offshore company to avoid IR35. It does
not matter where your company is incorporated as this does not affect how HMRC determines IR35
status. There are freelancers working in the UK with companies incorporated in countries such as
Ireland, the Netherlands and so on. There are reciprocal legal and tax agreements between the UK
and these countries. However, some agents and clients are nervous about dealing with foreign
companies.
Certain offshore schemes have used an umbrella structure and divert bonuses or other income into
loans or employee benefit trusts, whilst PCG cannot comment on specific cases, arrangements of
this nature are subject to very close scrutiny by HMRC (particularly since the June 2010 Budget
and the subsequent anti avoidance legislation that has either been passed or proposed) and indeed
some schemes have been successfully challenged by HMRC with retrospective taxation applied.
Careful investigation should be applied before entering into any of these arrangements, schemes
of this nature are not covered under PCGs tax investigations insurance policy.
25
An umbrella company is a good choice if...
You dont want the responsibility of being a company director or the hassle of handling
your own business admin
You are only planning to freelance for a short time
You are unavoidably IR35 caught
If you wish to have a taste of freelancing without committing to setting yourself up in

business
26
SECTION
3
THE BOOKS
7. Accountants
Why it pays to get one, what to look for
and where to find one
8. Bookkeeping
How and why it is important to
maintain proper records
9. Money in the bank

Setting up a business account, how to
submit invoices and tips for chasing
outstanding debts
Money in your pocket

How to pay yourself from the business
10. Money out

What you can and cant claim as a
legitimate business expense
27
WHY IT PAYS TO GET ONE

Legally there is nothing stopping you from keeping your own accounts if you so wish, using an
accounting package such as Sage or QuickBooks. Sole traders, for example, may be less inclined
to get an accountant. However, many freelancers do prefer to have their accounts done by a
professional, so they can get on with doing what they do best. At the end of the day it is your legal
responsibility to make sure your accounts are correct, so it really is worth the cost. Using a
qualified professional also helps show the tax authorities that you are taking extra steps to comply
with the rules.
An accountant can provide tax advice, complete the relevant tax returns and, if you have a limited
company, produce the mandatory end of year accounts, which includes the P&L and balance sheet.
Some accountants may also offer additional services, such as bookkeeping, including recording
and processing of receipts and expenses and invoicing.
For the basic service, a good business accountant will usually charge between 70 and 120 plus
VAT per month to draw up the end of year accounts and tax returns for a limited company. VAT
returns are sometimes included in this fee as well. If you operate as a sole trader or partnership,
your accountancy needs may be more simple and you could therefore be charged less.
Tax is a complex area and the rules for freelancers can change from one year to the next. Good
accountants are an excellent source of advice. For complex issues, its often worth getting a
second opinion as well - PCG members can contact the tax and legal help-lines with any
queries.
WHERE TO FIND A GOOD ACCOUNTANT

Go to www.pcg.org.uk and browse the list of PCG Accredited Accountants they have been given
specialist training in freelance-specific issues and have undertaken and passed an exacting training
and assessment programme. If you are a PCG member, you can also ask for
recommendations from other freelancers on the PCG forums people tend to reply very
quickly, sometimes within minutes.
WHAT TO LOOK FOR IN AN ACCOUNTANT

Do they understand freelancing?
Dont be afraid to ask about the firms experience of freelancing. Also, question the accountants
knowledge about specific freelance regulation, such as IR35. It is important that you feel confident
in the service they provide.
Do they suit your individual business requirements?
Consider how you prefer to work and then ask relevant questions in order to make sure the service
is suited to your specific needs. You may wish to enquire about typical response times, how
contact will be maintained, who will manage your account and act as your main contact. Run
through your business plan and detail any areas in which you would like the accountant to be
involved, such as business advice, financial reporting, tax and auditing work. Find out if they offer
any additional services you may require, such as management accounts, cash flow forecasting,
advice in respect of other business activities/investments or tax planning.
28
Do they come well recommended?

If possible ask to speak to freelance clients who are currently on their books. Other freelancers in
your network can also provide vital insight that will help you avoid potential pitfalls when choosing
an accountant.
Do they belong to one of the Chartered Institutes?
This will offer you more protection against malpractice. Remember that anybody can call
themselves an accountant but the main professional bodies all insist that their members carry
adequate Professional Indemnity insurance, as well as running their own strict disciplinary
schemes (including dispute resolution).
Do they charge fixed fees, monthly or hourly?
You need to know what youll be charged so that youre not caught by hidden extras. Make sure
you are clear about what is included in your package and any additional charges that you might
incur. Fixed fees are becoming increasingly common although some accountants do charge on an
hourly or monthly basis. If possible try and meet your new accountant face-to-face. It will help
build the relationship, moving the arrangement beyond being simply an accounts processing
service.
You simply can't be a one-man accountant, lawyer and all the rest, AND do the thing
that you're very good at doing.
Michael Darby, Freelance branding consultant
IN A NUTSHELL: ACCOUNTANTS
Use an accountant its a more efficient use of time, resource and expertise
Shop around carefully for the right accountant its an important decision
Dont forget you are the client ask questions until you are satisfied with the
answers
Budget between 700 and 1500 plus VAT per year for accounting, depending on
whether youre a sole trader or running a limited company
Visit www.pcg.org.uk to source specialist freelancer accountants
If youre a PCG member, it can often be worth getting a second opinion from the PCG tax
and legal help-lines.
29
SETTING UP A SYSTEM
Bookkeeping is the first stage in the overall accounting process and is usually done by the
freelancer, although it is possible to outsource it to your accountant. Bookkeeping involves
recording, analysing and filing all the financial information generated by the business, such as
income generated through invoices, expenses and bank transactions. Not only does this provide
essential figures to help you stay on top of your business you also need it so that you or your
accountant can complete the relevant accounts and tax returns. And if you are inspected by the
tax authorities, you need to show that you have a proper system in place.
Your accountant may provide you with a system. Alternatively, there are a number of excellent
systems available that allow you to do everything from project estimating, timesheets and
invoicing, through to calculating VAT and producing profit and loss and balance sheet statements
(see next page). If youre a PCG member, ask for recommendations on the forums. You can
also download the PCG bookkeeping spreadsheet from www.pcg.org.uk/resources.
The implications of not keeping proper records
As of July 2011, HM Revenue & Customs (HMRC) will be investigating up to 50,000 SMEs a year to
seek out what it refers to as poor record keeping. Penalties include fines of up to 3,000
imposed for significant record keeping failures. You can keep up to speed with any changes via
the PCG newsletter.
A selection of bookkeeping systems for freelancers can be found here on the PCG
website.
As well as being a legal requirement, proper
financial records help you stay on top of your
business. There are many useful systems on the
market to help you keep your paperwork in
order.
30
KEEPING RECORDS
What records should be kept?
The short answer is, keep everything. The law doesnt prescribe what records to create, but does
say that if you create any records in your business, these should be retained. You may not always
get evidence, such as a receipt, for small cash expenses, but if this happens, make a brief note of
the amount you spent, when you spent it and what it was for. The record must be made
contemporaneously, in other words near the time of the event rather than retrospectively.
If tax authorities were to inspect your records, they might ask to see any of the following:
A list of all sales income and other business receipts as they come in, plus supporting records,
for example, invoices, bank statements and paying-in slips to show where the income came
from
A list of all purchases and other expenses as they arise, with supporting receipts or invoices
(unless the amounts are very small)
All purchases and sales of assets used in your business
All amounts taken out of the business bank account, or in cash, for your own or your familys
personal use
Business diaries, mileage logs, minutes of Board Meetings, i.e. supporting records as well as
the primary accounting records
All amounts paid into the business from personal funds, for example, the proceeds of a life
assurance policy.
Do they have to be kept in paper form?

You dont have to keep hard copies of the records if you dont want to accumulate a warehouse full
of physical receipts. HMRC says the following about scanning or storing records electronically:
You can keep most records on a computer or use any storage device
such as CD-ROM, USB memory stick or a network drive. You may not
need to keep the original paper records as long as the method you use
captures all the information (front and back) on the document and
allows the information to be presented to us in a readable format, if
requested.
31
How long records need to be kept

The law specifies different time periods according to the type of record. These are the main ones:
Payments cash book
6 years (Companies Act)
Purchase invoices (revenue items)
Purchase invoices (capital items)
Purchase ledger
Petty cash records
7 years (Companies Act, VAT)
Bank paying in counterfoils
6 years (Statute of Limitations)
Bank statements
Receipts cash book
Sales ledger
Remittance advices
Deeds of covenant
Income tax and NI records
6 years (Taxes Management Act)
Payroll and payroll control account
Staff personnel records
7 years after cessation of employment

(Statute of Limitations)
Expense accounts and records
Title deeds, leases, searches etc
12 years after interest in property ceases

(Statute of Limitations)
Fixed assets register
Indefinite (Companies Act)
Agreements (under seal)
12 years after expiry (Statute of Limitations)
Agreements (other)
6 years after expiry (Statute of Limitations)
IN A NUTSHELL: BOOKKEEPING
You can be fined up to 3,000 for each year you fail to keep proper records
Keep all records you generate any receipts you claim, invoices you send out,
bills you receive, payslips, dividend vouchers
Records can be computer based you dont need paper versions of receipts and
invoices as long as all the information is there and readable
Use one of the many systems available to keep everything organised.
32
GET A BUSINESS BANK ACCOUNT

Before charging any money to clients, you need a dedicated business bank account. If you have a
limited company, then you are not the same in legal terms as the company, so the company
needs an account in its own name. The money in that account doesnt belong to you until it is
formally paid to you by the company.
Sole traders also benefit from having a separate business bank account. Although a sole traders
business is not a separate legal entity in the same way that a limited company is, you still need to
keep your personal affairs separate from those of the business. Having a separate business bank
account will help you do that.
Choosing a bank
Some people prefer to have the accounts in separate banks so that the bank cant use knowledge
about your business to make decisions regarding your personal nances. However, others prefer
to develop a relationship with a particular bank. This can also make it easier to transfer money
between personal and business accounts.
You dont need to choose a bank with a local branch. There are specialist small business accounts
and high-rate business savings accounts available over the internet and from non high street
banks. A bank that offers internet banking can also be very convenient check whether you can
download statements in a .csv or Excel format that could speed up your bookkeeping as you
wont have to enter transactions manually.
Many freelancers choose to run two accounts a business current account for everyday
transactions and a business deposit account to set aside money for tax and VAT. Look for
accounts that offer free banking and a good rate of interest on cash savings you may be keeping
thousands of pounds of tax money in there. Rates vary but should be within a couple of
percentage points of the current Bank of England rate.
See www.pcg.org.uk/banking for suggested providers.
ISSUING INVOICES
What to put on the invoice
1. A clear header saying invoice.
2. A unique identification number if your business is VAT registered, it is advisable that this
needs to be a sequential number, in other words, part of a series, so that the next invoice
follows on from the last.
3. The name that you regularly use for the business. If its a limited company you also need
to include the full name of the company as it appears in the certificate of incorporation
(you can put the main brand name at the top and the officially registered name as small
print in the footer). Limited companies can, if they want to, include the names of the
company directors on their invoices, as long as all the directors names are included.
4. Your business address. This must be an address where any legal documents can be
delivered to you. If your business is a limited company and the business address is
different to the registered address, then the registered address should also be included in
the small print.
5. Your company registration number if your business is a limited company.
6. Your VAT registration number if your business is VAT registered.
33
7. The company name and address of the customer you are invoicing.
8. The date that the invoice is being issued (the tax date).
9. A clear description of what goods and/or services were delivered.
10. The date the goods or services were provided (supply date).
11. A column showing the number of units of the goods or services supplied (for example 3
hours), a column showing the price/rate per unit and a column showing the total for each
item without VAT.
12. If your business is VAT registered, then add three more columns: the percentage of VAT
that applies to each item, the total amount of VAT payable per item and then the total
amount of each item including VAT.
13. At the bottom show a grand total of all items without VAT, the total amount of VAT owed
and finally, a grand total of everything including VAT.
Many agencies will ask you to sign a self-billing agreement. This just means that they will
prepare a combined invoice and payment confirmation for you, based on your timesheet. This
saves you the bother of having to bill them.
Many electronic bookkeeping systems include an invoicing function that lets you
customise a template, generate invoice numbers, issue invoices and track payments.
PCG members can also download an invoice template from www.pcg.org.uk/resources
34
Invoicing clients outside the UK

If youre supplying services to a client outside the UK, theres the issue of what to do about VAT.
Heres what to do if your business is based in the UK and you are invoicing a client with an address
in the EU:
1. Dont include any VAT on the invoice, irrespective of the fact that you are VAT registered in
the UK
2. Put the letters GB either before your invoice number or in front of your VAT Registration
Number
3. Include the recipients EU VAT registration number on the invoice. If they dont have one
you need to prove it is a business transaction by asking them to send you a purchase
order or official company request, which you keep on file in case you are ever challenged
4. Include the following phrase on the invoice: These services are outside the scope of UK
VAT and are subject to reverse charge arrangements
5. Bear in mind these principles apply to the supply of most traditional freelance services if
its not a business to business transaction, or if youre supplying goods, then that will
change things and you should seek advice (if youre a PCG member the tax help-line is
a good port of call).
Invoices sent to clients in countries outside the EU can be slightly more complex. They are also
outside the scope of UK VAT, so in theory whatever local VAT is payable is the clients problem.
However, some countries may have special rules that could make it your problem as well. For nonEU countries its therefore best to double check with that countrys tax authorities. As a starting
point, try the PCG forums as members work all over the world and there is usually
someone who can point you in the right direction.
STAYING ON TOP OF CASH FLOW

For any business, cash flow is extremely important. Every year lots of profitable businesses go
bankrupt because they dont have cash at the right time. A good invoice system and easy to
understand payment terms are key to healthy cash flow. These are some tactics to consider:
Send out your invoices promptly, and ensure that they are sufficiently clear and detailed, and
that they reflect the terms of your contract, so that the client does not have any reason to
query the invoice or delay or withhold payment
Make sure that your terms and conditions are clearly outlined in your contract with the client,
and that there is no scope for ambiguity
Ask for a deposit payment in advance, of 20% or 50%, for example
Dont assume that you have to offer 30 day payment terms try offering 14 days
instead, and where third party expenses recharged at cost are involved, insist on repayment
within seven days
Offer early discount settlements
Chase outstanding invoices and keep dated notes of all conversations.
Getting the terms and conditions right

To protect yourself from late payment make your credit terms clear in the original contract. Its
also a good idea to vet new clients that dont have a visible track record. This could mean asking
for references from some of the clients other suppliers, or doing a professional credit check. PCG
members can get discounted rates on credit checking from Creditsafe.
35
Your terms and conditions should cover your costs, your delivery arrangements and your payment
terms. For example, do you want full or part payment in advance or payment in arrears? If you
are prepared to give credit say 30 days, then say so here. Many businesses give credit to clients,
but if youre not certain that the client will pay up then you can ask for payment upfront.
You can also state your right to charge interest on late payments and to claim compensation for
debt recovery costs. You need to make your client aware of, and agree to, your terms and
conditions at the outset and give the client the opportunity to discuss any problems they may have
before you submit your invoice. Make sure your terms and conditions are also sent out with the
invoice once the work is complete.
PCG members can download template terms and conditions from
Tackling late payments
Credit vetting, terms of trade, accurate invoices and a good rapport should all form part of the
structured approach you take when dealing with your customers, says Philip King, director
general of the Institute of Credit Management.
However, even with a good system in place, sooner or later most freelancers and contractors will
have to chase up a late payment. When that does happen, it helps to be armed with the latest
information on your clients legal requirements.
Since November 1998, small companies have been able to charge business customers interest on
late payments, under the Late Payment of Commercial Debts (Interest) Act 1998. Small
businesses can charge other businesses interest at eight percent over base rate. If you have not
specified a credit period in your contract it will be assumed to be 30 days from delivery or invoice,
whichever is later. If payment is not forthcoming, after the credit period is up you need to follow
up the invoice with reminders, which can be phone calls, letters, emails or faxes.
Remember, when it comes to tackling late payments you generally deal with the accounts
department rather than your direct client so it can make the process less awkward.
During the collection process you may encounter customers who either cant or wont pay. You
may need to impose collection sanctions such as stopping supply, reviewing the credit limit,
imposing interest, use of a collection agency or legal action.
For customers who genuinely cant pay, it is important to determine the cause of the problem and
how serious it is, what is being done to resolve it, what you can do to help and what, if any,
assurances can be offered in return for your help, suggests King.
It may be in your interest to negotiate a settlement such as a payment plan. For customers who
simply ignore requests for payment, or make endless promises to pay you may need to threaten,
or even take legal action. Take the advice of a solicitor before taking legal action.
If you do have to take legal action to recover a debt then you may be able to do this online via the
Courts Service Money Claim Online service; visit http://www.hmcourtsservice.gov.uk/onlineservices2/mcol/index.htm
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Debt collection top tips

Be courteous
Remember that every contact you make with your client can add to your existing relationship. A
professional but friendly approach can earn your debtors respect and cement loyalty.
Convey urgency
Emails and faxes are useful tools in the collection armoury as they convey urgency and often beat
defensive barriers when letters are being ignored or phone calls diverted.
Be systematic
Incorporate phone calls into your collection strategy. A good strategy will timetable appropriate
dates for issuing invoices, making phone calls and issuing reminders.
Be prepared
Check that the information relating to the outstanding debt is correct and that the information is
readily available when making phone calls i.e. the account number, the invoice date and the
balance due.
Be organised
Log the details of the phone call to remind you what action to take next, but make sure that you
do not log any information that contravenes the Data Protection Act 1998. The website of the
Office of Public Sector Information includes further details on this Act.
For further information see also CreditSafe's fee recovery service and PCG's Guide to Credit
Management and Control
With new clients I often call the accounts department before an invoice is due to check
that its in the system. Many organisations have fixed days when they do payment runs
I time my invoicing accordingly. It tends to be the suppliers who are politely
persistent who get paid first.
Charlie Bradburn, copywriter/consultant
IN A NUTSHELL: MONEY IN THE BANK
Set up a dedicated business bank account - for a list of possible providers visit
www.pcg.org.uk/banking
Make your credit terms clear in your initial client contract. Terms do not need to
necessarily be 30 days
Create an invoice template which meets all legal requirements
Different rules apply when invoicing clients outside the UK
Errors on invoices are likely to delay payment, check the details with the client
before submitting your invoice
Send invoices promptly and have a system in place for following up on late
payments.
37
Once clients have paid their invoices, there are various things you can do with the money sitting in
the business account:
1. Use it to pay bills, expenses or taxes.
2. Keep it in the business for a rainy day or to invest in growth.
3. Extract it from the business for your personal use.
EXTRACTING MONEY: SOLE TRADERS AND PARTNERSHIPS

Extracting money from the business is straightforward if youre an unincorporated business (i.e.
youre self-employed rather than a company). Any profit left over after tax can be drawn from the
business account if you wish.
To calculate the taxable profit:
A. Add up your invoices (excluding VAT).
B. Add up all your legitimate business expenses (excluding VAT).
C. Subtract the expenses total from the invoice total thats your profit.
Set aside any money for tax and bills that you owe (plus VAT if applicable see the section on
VAT). Any money left over is yours.
Note that partners in a partnership are taxed on their share of the profit.
EXTRACTING MONEY: LIMITED COMPANIES

If you run a limited company, the money received by the business isnt yours. It still belongs to
the company. To transfer any profits to your personal bank account you need to formally record
the transaction as either a salary or a dividend. There are tax implications when doing this.
Paying yourself a salary
When you receive a salary, your salary is subject to certain taxes that must be accounted for by
your limited company. They are:
PAYE (Pay As You Earn) Income Tax.
Employees National Insurance Contributions (NICs).
Employers National Insurance Contributions (NICs).
The process for paying yourself is as follows:

1. Decide how much to pay yourself each month. They can be varying amounts, but usually
people set a monthly amount payable on a fixed date - this can be topped up by one-off
bonuses as needed.
2. Transfer the amount from the business to the personal account on the agreed date.
3. Record the transaction as salary on your bookkeeping system, including the date and the
amount.
4. Tell your accountant what salary you paid yourself each month the accountant will issue a
monthly pay slip showing the tax deductions.
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5. Pay all three taxes (PAYE, Employees NICs and Employers NICs) to HMRC from the business
bank account this is usually done monthly by direct debit. Your accountant can advise on the
due dates. These payments must be made electronically and the cleared funds need to be in
HMRCs bank account by the 19th day of the month after the salary was paid.
Paying yourself a dividend
Dividends can be paid to the owners (shareholders) of a company from the retained (post tax)
profit provided that the correct procedures are followed. This involves the Board of Directors
having a meeting, formally voting the dividend and providing a written record of that decision.
There must also be documentation in the form of a dividend voucher which is then issued to the
shareholder(s). Dividend paperwork must conform to the law PCG members can download a
dividend voucher from the tax advice section of www.pcg.org.uk/resources.
The advantage of paying yourself dividends is that neither employee nor employer NICs are
payable. However, the total paid out in dividends cannot exceed the retained profits of the
company. Your accountant can assist you with calculating funds available for distribution and
preparation of the appropriate paperwork.
Dividends can be declared as often as you like, although if you are paying yourself regular
dividends of the same amount (e.g. 1,000 once a month) there is a risk that the taxman could
reclassify the payments as salary, which would negate any benefit from receiving dividends upon
which neither employee nor employer NICs are payable.
The payment of a dividend should be completely separate from other payments; i.e. do not fall
into the trap of transferring one monthly amount from your business to your personal bank
account which is a composite figure of salary, expenses and dividend. If HMRC see such a
payment, they may try to argue that it is all salary!
Calculating dividends
The value of the gross dividend which can be distributed depends upon the realisable profit of the
company. In any one year, the realisable profit equates to the Company income less Expenses +
Corporation Tax. Bear in mind that some of the realisable funds may need to be invested in the
business. See also the section regarding tax on dividends.
Deciding whether to pay salary or dividend
As a company director you can decide how and when you are paid. There are various strategies for
doing this based on the relative tax implications. If you havent drawn up a contract of
employment between you and your company (and youre not obliged to), then you are not subject
to the National Minimum Wage rules, which means you can set a salary of your choice.
Some freelancers opt for a policy of taking a low salary and topping it up with dividends. The
salary will be between 5,304 and 7,072 as any salary between these two points ensures a credit
for NIC purposes which helps in terms of future state pension and other benefits, whilst remaining
below the point where the salary is taxed. This takes advantage of the lower rate of tax for
dividends. Not everybody operates this way your accountant can advise on the best route for
you.
Another factor to consider is corporation tax. Any salary you pay yourself is an allowable expense,
which reduces the company profit and consequently the corporation tax due. Dividends cant be
claimed as an expense, so they dont reduce corporation tax.
How you pay yourself should also take into account a number of factors including your pension
provision and the amount of money you wish to retain in your business for future investment.
39
Possible payment scenario (2011)
A salary of 589 a month would not incur any tax or national insurance liabilities whilst
maintaining your entitlement to the basic state pension.
Assuming you dont have any other income, you could then pay yourself a net dividend of
31,866 each year before having to pay additional income tax.
Paying salary to a partner or spouse

Until 2007 HM Revenue & Customs (HMRC) attempted to penalise businesses where one partner
was the main fee earner and the other received dividends or a profit share. Many freelancers do
this in order to benefit from their partners tax allowance if two people each declare 30K
income, they pay a lower rate of tax than one person who declares 60K.
The tax authorities tried to prevent this by re-interpreting an old piece of legislation known as
S660A. PCG fought off what later became known as the Family Business Tax by supporting the
landmark Arctic Systems case all the way to victory in the House of Lords.
As a result of the court case, it is still legal to pay a partner as described above however, the law
could change and its important to keep an eye on it. PCG's Guide to Family Business Tax
includes full background information and details of the current legal position.
Paying yourself when youre caught by IR35
Caught by IR35 means that the tax authorities deem you to be working as if you were an
employee of your client, so consequently they want the tax that you would be paying if you were
employed by the client. IR35 impacts those who provide services through a limited
company in which they own more than 5% of the shares, or a partnership in which they
alone or with one or more relatives take more than 60% of the fees billed to a client. IR35 status
is determined by employment tests focusing on whether you have a right to substitution, mutuality
of obligation within the contract and issues of control. More guidance is available from the PCG
website.
If you have established that you are IR35 caught, ask your accountant to calculate the payments,
or else use HMRCs guidance at www.hmrc.gov.uk/manuals/esmmanual/ESM3146.htm
IN A NUTSHELL: MONEY IN YOUR POCKET
For sole traders and partnerships, your taxable profit is the total of your invoices
(ex VAT) in the tax year, minus the total of your business expenses (ex VAT) in
the tax year
If you operate via a limited company, money is transferred from the company to
you, the owner, via salary/bonuses or dividends
NICs are payable on salary/bonuses, but not on dividends
Salaries/bonuses are offset against corporation tax dividends are not
Currently, paying a salary to a partner or spouse enables you to benefit from

their personal tax allowance
Keep up to speed on IR35 or you could end up being asked to pay tax as if you
were an employee of your client.
40
HOW TO PAY BILLS AND EXPENSES

When setting up your business bank account you should decide whether you need a card in the
company name. Many freelancers use their personal credit cards for expenses and then claim
these back from their company. In this case, be careful to separate business and personal items.
One of the most common mistakes that small business owners make is to mix business and
personal finances, for example, using petty cash or a business credit card to buy personal items,
and then not accounting correctly for the transactions. Once you start mixing your business and
personal money, HMRC is entitled to consider that your personal accounts may constitute part of
the business records, and can ask to see your personal bank records. This is something to be
avoided at all costs.
It is therefore advisable to:
Pay for business expenses using your business bank account, business credit card or petty
cash.
Pay for personal expenses using your personal bank account, personal credit card or cash.
This is not always possible in the early stages of setting up your business, but the sooner you
establish business accounts and use them for all business expenses, the better.
ALLOWABLE AND NON-ALLOWABLE EXPENSES

Allowable expenses are those that may be deducted from your turnover for the purposes of
reducing the tax liability of the business. Expenditure is normally allowable within the companys
accounting period in which it was incurred. You should ensure that all claims are supported by
receipts to justify that the cost was actually incurred.
For expenses paid by a company to be allowable, the basic rule is that they must be incurred
wholly and exclusively for purposes of trade. Expenses paid by an employee or company director
are allowable only if they are incurred wholly, exclusively and necessarily in the performance of
the companys work.
It is, however, accepted that certain assets will be used principally for business purposes, but may
also be used personally (e.g. cars & vans). In this case it is important to be able to distinguish
between the business and personal use and apportion the costs accordingly. Keep a record of
business mileage or fares in connection with business journeys in order to be able to identify and
justify business expenditure. If no record is kept, HMRC is entitled to disallow any business
expenditure.
Benefits in kind: items for personal use
Where a company buys things for the private use of directors or employees these are classed as
benefits in kind, which are taxable. So if your company pays for your private holiday for you and
your family, this should be treated as salary, incurring tax and National Insurance charges
accordingly.
Duality of purpose: items for business and personal use
The general principle is that HM Revenue & Customs (HMRC) does not, as a rule, regard any
expenditure that has a dual purpose element to be allowable for taxation. For example, a suit or
dress purchased to wear at work has a dual purpose in that you need to wear clothing anyway, so
tax relief is not available on the expense.
41
Capital items: computers, cars, furniture, equipment, property

Generally, capital items are those items that will have enduring benefit to the company, such as
computers, motor vehicles and office furniture. If they are connected to the trade, it may be
possible to claim capital allowances over a period of time, based on percentages specified by
HMRC, but you may not claim their whole purchase cost as an expense.
Legal and professional fees
Accountancy fees for preparing your company accounts are allowable because they relate to your
business. In the case of a sole trader, the preparation of the accounts would be allowable, but not
the completion of the sole traders personal tax return. Preparing the accounts of the partnership
and the partnerships return would be allowable, but not the cost of preparing the returns of the
individual partners. If the company pays for an employees personal tax return, this would count
as a benefit in kind.
The costs of recovering debts, defending business rights, preparing service agreements and
appealing against rates on business premises are allowable. Legal fees incurred on taking on a new
lease or acquiring property are not allowable because they relate to capital items.
Subscriptions
Subscriptions to professional and trade associations on HMRCs approved list are allowable, as are
trade magazines.
Debts, taxes, penalties and fines
Specific bad debts written off are allowable, whereas a general reserve for bad or doubtful debts is
not. If the company is not VAT registered, the full amount of the expense including VAT is
allowable. Interest and penalties relating to income tax, PAYE, NIC and VAT are not allowable, nor
are fines and other penalties for breaking the law.
If interest is due because your companys tax return has been submitted late, the interest is an
allowable expense. Similarly, if HMRC make a corporation tax repayment to your company which
includes interest, the interest would need to be treated as taxable income.
Interest
Interest on debts incurred to finance the business is normally allowable as long as it isnt used to
pay the directors. In certain circumstances, interest on funds borrowed in your personal capacity
and introduced into the business will also be allowable, provided that it doesnt involve overdraft or
credit card interest, and that you can prove that the money was borrowed for the business.
Entertainment and gifts
You cant claim the cost of entertaining clients, nor the cost of gifts to clients, unless they are 50
or less in value and carry a conspicuous advertisement for the business. Gifts of food, drink,
tobacco, vouchers and tokens exchangeable for goods are specifically excluded.
Staff entertainment is allowable provided that the cost per head is less than 150 per annum and
the event is open to all staff. This means that if you are employed by your own limited company,
you can claim that amount for something like a Christmas party, without it being classified as a
benefit in kind. Unfortunately this doesnt apply to sole traders or partnerships.
42
Travel
If you run a limited company, your company may reimburse you, the director, for travel costs
incurred wholly, exclusively and necessarily for the purpose of the duties of the job. Medical
expenses incurred whilst working abroad as part of your duties can be paid by the company
without being rated as a benefit in kind.
Travel to a temporary workplace is allowable unless the assignment is expected to last for longer
than 24 months, in which case it is classified as ordinary commuting and therefore not allowable.
In order to put the 24-month rule into context, you have to determine whether the site you are
travelling to is your permanent or temporary workplace. Home to office travel is defined as
ordinary commuting, and it is, therefore, important to establish where the business is being
operated from. If you genuinely operate from home, you can normally claim travelling expenses
when visiting clients. PCG members can get more information on the 24 month rule.
Employees who use their own cars for business purposes may claim 45p per mile for the first
10,000 businesses miles and 25p thereafter in each tax year. Sole traders and partnerships with a
turnover below the VAT threshold can also claim these mileage rates as well as the interest on a
loan to purchase a car. Where the business turnover is above the VAT threshold, the method is to
claim business mileage by claiming a percentage of the actual costs incurred, such as petrol,
capital allowances, the interest on a loan to purchase a car, insurance, oil, maintenance and road
fund licence. The percentage must be justifiable, and therefore it is best to keep a detailed mileage
log of actual business and total mileage. The London congestion charge is allowable provided that
it is incurred exclusively for business purposes.
Accommodation and subsistence
The cost of overnight accommodation is allowed if solely for business purposes, and you may also
be reimbursed for incidental costs such as laundry, newspaper and telephone calls home, up to 5
per night in the UK or 10 per night outside the UK.
If youre away on business and stay overnight, you can claim subsistence up to reasonable levels:
this will usually cover the cost of a meal with reasonable alcoholic and non-alcoholic drinks; and
tea, coffee, and soft drinks between meals. Subsistence not related to an overnight stay can
present problems in terms of the duality of purpose rules: you are expected to eat to live, not
eat to work. There are arguments for claiming such meals, but this is definitely a grey area.
Use of home for work
If you work from home, you may theoretically claim a proportion attributable to business use of
lighting, heating, cleaning and insurance, as well as a proportion of rent, business rates, council
tax and (in Northern Ireland) domestic rates.
You should be extremely wary of this though, as it could create capital gains problems for you
when you sell your home. It may be better to consider claiming a nominal amount, such as 156 a
year, instead. HMRC automatically accepts 3 per week as being reasonable without the need to
produce receipts to justify the claim.
Salaries
If your limited company pays you a salary, that is allowable. A dividend is not.
For salary payments, you should issue a P60 at the end of the year to support the amounts paid,
and ensure that the level of remuneration is justified for the work done, as HMRC may disallow
remuneration paid to employees that it considers excessive. Salary payments to a spouse should
be made to an account in his or her sole name, not to a joint account. Money withdrawn by sole
traders and partners is not allowable for tax purposes.
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Training
Where the purpose of training is to provide a business owner with new skills, the cost is treated as
capital and is not allowable for income tax. If the purpose is to update existing skills, then the
expense is allowable.
Where the IR35 rules apply, training expenses may be included within the five percent allowance
for general expenses but not claimed separately in their own right.
Telephone and internet
If a mobile phone is invoiced to the company, the full cost is allowable and there is no benefit in
kind, even if there is an element of private use.
If it is invoiced to the employee, then the benefit in kind is assessed on the portion attributable to
private use. It is helpful if you have itemised bills to prove the split between business and private
use. Note that the deduction is allowed only if you can identify a specific cost relating to the
business calls. For example, if the employee takes out a monthly contract with the telephone
company and pays 50 per month to cover rental and 100 free calls. If the bill for the month is
only ever 50, i.e. not all of the free calls are used; it will not be possible to claim anything even
if half of the calls are business.
The cost of broadband and other internet services is allowable, and if invoiced to the company
then incidental use by the employee does not rate as a benefit in kind. If the service is invoiced to
the employee and reclaimed, the element of private use by the employee may be treated as
earnings.
Insurance
Business insurances are allowable, as are life insurance, personal accident insurance, permanent
health insurance and private medical insurance for employees. A sole traders or partners own life,
accident, permanent health and private medical insurance expenses are rarely allowable.
IN A NUTSHELL: MONEY OUT
Keep business and personal expenditure separate
For expenses paid by a company to be allowable, the basic rule is that they must
be incurred wholly and exclusively for purposes of trade
You cant claim for entertaining clients, but if you have a limited company you
can give yourself a Christmas party, up to 150 per staff member.
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SECTION
4
Paying the
taxman
11. Value Added Tax (VAT)
The registration threshold, normal VAT
accounting, VAT schemes, charging
and paying VAT
12. Taxation of limited companies
National Insurance, personal income
tax and corporation tax
13. Taxation of sole traders,
partnerships and LLPs
Tax rates and tax returns, NICs,
Schedule D and E
45
VAT stands for Value Added Tax. Most things you buy in the UK contain VAT, except for loans,
some property transactions, insurance and certain types of education and training. There are three
rates of VAT in the UK: normal rate at 20%, reduced rate at 5% and zero rate at 0%. Any goods
you import into the UK are liable for VAT, as well as some services sourced from overseas.
As a freelancer VAT affects you in the following ways:
1. If your turnover reaches what is known as the VAT threshold (73,000 as of April 2011)
then you are legally obliged to register for a VAT number, which means you then have to
add VAT to your invoices.
2. If you are VAT registered (youve obtained your VAT number) then you can claim back any
VAT on your businesses purchases.
3. As a VAT registered business you have to submit a VAT return to HMRC every quarter. The
amount you pay is the difference between your output VAT (the VAT on your invoices) and
the input VAT (the VAT you have paid on purchases).
4. When registering for VAT, you can choose from a number of different VAT accounting
schemes, including the Flat Rate Scheme, which is specifically designed to simplify admin
for small businesses.
5. You can opt to register for VAT before you reach the VAT threshold some freelancers find
that can work to their advantage as it allows you to reclaim VAT on purchases.
THE VAT REGISTRATION THRESHOLD

By law you have to register for VAT if your taxable turnover reaches or is likely to reach a set limit,
known as the VAT registration threshold. VAT registration is not dependent on your legal structure
- in other words a limited company has to register if it hits the threshold, as does a sole trader and
partnership. As of April 2011 the threshold was 73,000. Turnover is classied as the amount of
money going through the business, not just the prot. The threshold is calculated on a continual
12 month rolling basis and not just in the tax year or accounting year. One should notify HMRC
within 30 days of the end of the month in which the threshold was crossed.
To find out about registering for VAT, ask your accountant or visit:
http://www.hmrc.gov.uk/vat/index.htm
CHARGING VAT TO CLIENTS

When invoicing clients you should charge VAT at the normal rate for the supply of your services.
So for most freelancers, that means adding 20% VAT on top of your fees, but you should check
HMRCs list in case the services (or perhaps even goods) you are supplying are exempt or lower
rated supplies: http://www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm#1. Be aware
that you are required to include any zero rated sales invoices in your list of outputs for the
purposes of calculating VAT owed.
If your clients are VAT registered it means that the VAT that you charge them doesnt actually
make you more expensive, because they claim the VAT back from HMRC. See the chapter on
invoicing (money in the bank) for an example of a VAT invoice.
The VAT return can be submitted online. See www.hmrc.gov.uk/demo for further guidance
46
WAYS OF ACCOUNTING FOR VAT

Cash accounting
The cash accounting scheme is for businesses with an estimated taxable turnover in the next tax
year of up to 1.35 million. You can continue to use cash accounting until your turnover exceeds
1.6million. The key benefit is that in the cash accounting scheme you only pay VAT when
your customer has paid you. So if your customer never pays you, you will not have to pay the
VAT for that invoice. If you have clients who do not pay promptly, this scheme can help you
manage your cash flow more efficiently.
The disadvantage of the cash accounting scheme is that you cannot reclaim VAT on purchases
(such as start-up costs) until you have paid your suppliers which could cause cash flow problems
if you buy goods and services on credit. Also if you reclaim more VAT than you pay, you will
usually receive your repayment later under cash accounting than under standard VAT accounting.
Beware that if you choose to leave the cash accounting scheme you will still have to account for
any outstanding VAT due including bad debts.
Invoice accounting
Beyond the freelance community, most businesses operate VAT on what is known as Invoice
Accounting. This means that you apply VAT to outbound invoices (currently at 20%) and your
VAT liability arises when you raise the invoice, rather than when you receive the payment. Each
quarter you calculate the VAT that you have charged, deduct any VAT that you have paid on the
invoices that your suppliers have issued and the VAT element of your other business expenses and
pay the difference to HMRC. You can claim the VAT on purchases as soon as they have been
made, even if you have yet to pay the supplier.
Annual Accounting VAT Scheme
The Annual Accounting Scheme is also for businesses turning over up to 1.35 million. This
scheme involves making nine monthly or three quarterly interim payments over the course of the
year. You then file a single annual return in which you make a balancing payment or receive a
balancing refund from HMRC. This scheme is designed to make it easier to manage cash flow and
reduce paperwork. You also get two months rather than one month to file and pay your annual
VAT bill. In addition you can continue to use this scheme until your estimated VAT taxable
turnover exceeds 1.6 million. However, if you frequently reclaim VAT, you will only get one
repayment per year. Also if your turnover decreases, your interim payments could end up higher
than your VAT payments would be under the standard VAT accounting. You would then have to
wait until the end of the year to receive the refund.
47
THE FLAT RATE SCHEME AND ITS ADVANTAGES

If you are earning under 150,000 excluding VAT you can opt for the Flat Rate Scheme.
Introduced with the aim of simplifying VAT for small businesses, the VAT Flat Rate
Scheme allows you to pay VAT as a percentage of your turnover instead of having to
work out the VAT on all your sales and purchases.
This can help to simplify your record keeping there is no need to separate out the gross, VAT
and net values in your accounts. There are few rules to follow no problems about what input
tax you can and cannot reclaim. It also gives you peace of mind you always know how much of
your takings you will need to pay to HMRC and with few opportunities for mistakes, you will have
fewer worries.
You are eligible to join the Flat Rate Scheme if your turnover is under 150,000 (exclusive of VAT),
but there is a level of tolerance so that you can stay in the scheme if in the next 12 months your
turnover does not exceed 191,000 (inclusive of VAT). However, once your turnover exceeds
230,000 (inclusive of VAT) you will have to leave the scheme and go onto the normal VAT
accounting method.
Most traditional freelance businesses find that the Flat Rate Scheme can work in their favour the
difference between the VAT paid to you by clients (typically 20%) and the VAT you pay to HMRC
(see below) can result in significant savings. However, you should ask your accountant to assess
this for you based on your specific circumstances as this doesnt work for all small businesses.
Savings made on VAT using the flat rate scheme are treated as income for the purposes of
calculating your corporation tax or personal tax liability.
Although you cannot reclaim VAT on purchases via this scheme, you can reclaim VAT on a singletransaction purchase of capital assets (such as a laptop) of over 2,000 including VAT.
PAYING VAT TO HMRC UNDER THE FLAT RATE SCHEME

Every quarter you have to pay a percentage of the total amount of VAT you charged to clients in
that quarter. To work out which percentage to use, you need to look at the categories published by
HMRC, and decide which one best describes what your business will be doing in the coming year.
These are some of the categories:
Entertainment or journalism 12.5 %
Photography, publishing 11.0 %
Computer repair services 10.5 %
Accountancy or bookkeeping 14.5 %
Advertising 11.0 %
Architect, civil or structural engineer or surveyor 14.5 %
Computer and IT consultancy or data processing 14.5 %
Lawyers or legal services 14.5 %
Management consultancy 14 %
Financial services 13.5 %
Printing 8.5 %
To see the full list please visit: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#4
48
You can deduct one percent off the flat rate that you use for your rst year of VAT registration. On
the rst anniversary of your VAT registration, the rate will revert to the standard percentage.
To fill out the VAT return you need to know your total sales and VAT amounts for the quarter. This
can be calculated in one of two ways:
a) A cash basis: add up the amounts actually received from clients in the quarter.
b) An invoice basis: add up the amounts invoiced to clients in the quarter.
To register for the Flat Rate Scheme, ask your accountant or visit:
http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#10
IN A NUTSHELL: VAT
Freelancers earning over 73,000 (VAT threshold) have to register for a VAT
number and add VAT to invoices
UK VAT is currently 20%
The flat rate scheme is generally the best option for freelancers earning up to
150,000. It is relatively hassle free and can result in savings (these are treated
as income for the purposes of calculating your corporation tax or personal tax
liability)
You can account for VAT based on the time you invoice or the time you are paid.
49
There is one very important point to remember you and your limited company are two
separate legal entities. You have your own tax responsibilities; personal income tax and
employees National Insurance Contributions (NICs). The company has tax to pay too. A company
pays three main types of tax: VAT (covered in the previous section), corporation tax and
employers NICs.
PERSONAL INCOME TAX PAYABLE BY THE DIRECTORS

PAYE and NICS
Directors and employees of limited companies pay income tax on their taxable income. This will be
deducted monthly through PAYE (Pay As You Earn), which is HMRCs system for collecting income
tax from the pay of employees, including directors, as they earn it. An employer is required to
deduct income tax and NICs from its employees pay and to submit the deductions to HMRC. This
usually needs to be done by the 19th of each month, unless your average monthly payments are
likely to be less than 1,500, in which case you may be able to pay them quarterly. Ask your
accountant to set this up for you.
Tax on other income
If you are working through your own company then you will need to complete a Self Assessment
Return, including any dividends your company has paid you, as well as any benefits in kind (such
as medical insurance or company car) that you have received from your company, which should be
shown on your P11D for the year. Each year, HMRC will send you a tax return that is tailored to
your circumstances. You should receive this in April, and if you do not, contact your tax office.
You need to fill in your tax return with details of all sources of taxable income, taxable gains,
reliefs and allowances.
If you want HMRC to work out how much tax you need to pay, you must submit your return by
31 October following the issue in April. The deadline for the submission of the Return is
31 October (if a paper return is being completed) and 31 January (online filing, but
please allow at least 10 days to register with HMRC for online filing) following its issue to
avoid paying a penalty but if you submit the form after 31 October you will also need to calculate
the tax due and pay the amount by 31 January.
EMPLOYEES NATIONAL INSURANCE CONTRIBUTIONS

Your limited company has to deduct class 1 contributions from salary it pays you over a certain
level. It also has to deduct class 1A NICs on benefits in kind, such as medical insurance or
company cars. These are declared annually via a form P11D. NICs for company directors should be
calculated based on an annual, or pro-rata annual, earnings period.
Lower Earnings Limit (LEL): 102 per week
This is the minimum level of earnings that an employee needs to qualify for benefits, such as
Retirement Pension and Jobseekers Allowance. If your salary is between 102 and 139 per week,
you will not pay NICs but will be treated as having paid them when claiming state benefits. For this
reason, you must keep details of an employees earnings at or above the LEL on a form P11 or
equivalent record and report them at the end of the year on a form P14.
Primary Threshold (PT): 139 per week
When earnings exceed the above level, NICs are deducted from the employees salary at 12%.
50
Upper Earnings Limit (UEL): 817 per week

Where earnings exceed the UEL, the employee pays NICs at 2% on those earnings above the UEL.
EMPLOYERS NATIONAL INSURANCE CONTRIBUTIONS (NICS)

These are payable when the company pays salary to an individual of more than 136 per week.
Currently the rate for Employers NICs is 13.8% (2011).
CORPORATION TAX
This is like an income tax for companies which is payable on the profits that the company makes.
Once a year you will need to complete an annual tax return (CT600) and also supply a signed set
of accounts to Companies House.
Corporation tax is currently charged at a much lower rate than personal income tax. There are
three tax bands, according to the companys annual profit.
The rates are as follows:
Taxable profit
Corporation tax rate
Up to 300,000 per year
20%
300,000 to 1.5 million per year
27.5%
Over 1.5 million per year
26%
TAX ON DIVIDENDS
Dividends can only be paid out of retained profits. Also, the correct paperwork must be completed
and you need to follow the procedures as detailed in section 3.
The dividend taxation rates are as follows (2011):
10% for dividend income received below the higher rate income tax threshold (35,500)
32.5% for dividend income received below above the higher rate income tax threshold
(35,500)
42.5% for dividend income received above 150,000
Important note: you wont actually pay these rates as dividends automatically receive a 10% tax
credit (because corporation tax has already been paid) basic rate taxpayers wont have to pay
anything, higher rate taxpayers is 25% of the net dividend, additional rate taxpayers 36.1% of the
net dividend.
For further information and to find out how to calculate dividend tax liability, PCG members
can check out the resources section of www.pcg.org.uk.
51
THINGS TO BE AWARE OF
Penalties
Many statutory forms (Self Assessment, P35 Employers Annual Return, etc.) carry a deadline. If
you miss the deadline, you will receive an automatic fine. You may also void any possible claim
that could be made under any Professional Expenses Insurance that you hold.
Tax investigations
The tax authorities may perform various forms of investigation into both the tax affairs of
companies and individuals. These include PAYE and VAT reviews; the former has been seen to be
used as a cover for IR35 investigations. It is important to keep paper records and an audit trail of
every single transaction, such as purchasing equipment or declaring dividends. Whenever you take
on a contract, get it reviewed and come to a rational decision on its IR35 status. Make sure you
have good professional representation in dealings with the authorities.
PCGs website includes a document explaining how to take reasonable steps to determine
your IR35 status. For further comprehensive information please visit the PCG website tax
advice section
IN A NUTSHELL: TAXATION OF LIMITED COMPANIES
Companies have to pay corporation tax, employers NICs if they pay salary, and
VAT if they are VAT registered
The Corporation tax rate for small companies with taxable profits of up to
300,000 per annum is 20%
Directors who receive salary from their company must pay employees NICs and
income tax this is deducted from the salary and submitted to HMRC, usually by
the 19th of each month unless your average monthly payments are likely to be
less than 1,500 in which case you may be able to pay them quarterly
Directors also need to submit an annual self assessment tax return by 31 October
for paper returns and 31 January for online returns
Automatic fines are imposed if you miss the deadline for the submission of
statutory forms.
52
Sole traders, partners and members of limited liability partnerships are classified as self-employed
and pay income tax and National Insurance Contributions on their respective shares of the profits
and gains of the business. The tax rates for individuals are:
20% on taxable income up to 35,000
40% on taxable income 35,001 - 150,000
50% on taxable income in excess of 150,000
Your taxable income is the difference between gross income and allowable deductions. Gross
income is the sum total of client fees paid plus any other income such as dividends or interest. The
allowable deductions are your business expenses, as specified in the bookkeeping section of this
guide.
Declaring income via the Self Assessment tax return
To declare this income you need to complete a Self Assessment tax return with details of all
sources of taxable income, taxable gains, reliefs and allowances. If you want HMRC to work out
how much tax you need to pay, you must submit your return by 31 October following the issue in
April. The deadline for the submission of the return is 31 October (if a paper return is being
completed) and 31 January (online filing) following its issue to avoid paying a penalty, but if you
submit the form after 31 October you will also need to calculate the tax due and pay the amount
by 31 January.
Sample Self Assessments can be found here:
Main return: http://www.hmrc.gov.uk/forms/sa100.pdf
Partnerships: http://www.hmrc.gov.uk/forms/sa800.pdf
Individual partners statements: http://www.hmrc.gov.uk/forms/sa104f.pdf
NATIONAL INSURANCE CONTRIBUTIONS (NICS)

Self-employed people pay two classes of NICs:
Class 2 contributions. This is a flat rate of 2.50 payable weekly (2011/12) and counts towards
Incapacity Benefit, state retirement pension and Bereavement Benefit.
Class 4 contributions. This is paid on profits and gains at or above a set level and applies to all
people who are normally self-employed, aged 16 or over, and under state retirement age. Class 4
liability does not cease until 5 April following retirement age. Class 4 contributions are based upon
your taxable profits for that year, which you will show on your annual Self Assessment tax return.
They are worked out as a percentage of your annual profits between a lower and upper limit and
are paid twice a year as part of your annual tax return.
Class 4 NIC limits and percentages (2011/12)
Lower limit
7,225
Upper limit
42,475
Rate on difference between upper and lower limit
9%
Rate above upper limit
2%
53
Employing someone else

If youre self-employed, you can still employ someone else. If you do employ someone, you have a
legal responsibility to deduct tax and Class 1 NICs from their pay and remit it to HMRC. You will
also be responsible for payment of Class 1 employers NICs.
MAKING PAYMENTS
Most self-employed people make two payments on account for the tax year before the return for
that year is due, on:
31 January in the tax year, and
31 July following the end of the tax year
Each payment includes half of your income tax and Class 4 contributions bill for the previous year.
Any additional or balancing amount due is paid on 31 January, the filing date for the Return.
CLARIFICATION OF THE TERMS SCHEDULE D AND SCHEDULE E

The schedule system does not exist anymore. However, references to Schedule D and Schedule E
do make things nice and simple and the terms are still used in historical contexts.
Schedule D is now known as Trading Income: it is the income from a trade, profession or
vocation. Tax on trading income is paid by a sole trader, partner or limited company or partner or
the profits earned by a trading limited company.
Schedule E is now known as Employment Income and covers employed people. If you are
employed, you pay tax by Pay As You Earn (PAYE) and make NI contributions at the Class 1 rate,
whether you are employed by your own company, someone else's company or an agency.
IN A NUTSHELL: TAXATION OF SOLE TRADERS, PARTNERSHIPS

AND LLPS
The tax rates for individuals are: 20% on taxable income up to 35,000, 40% on
taxable income 35,001 - 150,000, 50% on taxable income in excess of
150,000
Income must be declared via a self assessment tax return. The deadline is
31 October for a paper return in which HMRC calculates the amount owed, or
31 January for online submissions in which you (or your accountant) calculate
the total tax payable
If you are self-employed, you will need to pay class 2 NICs of 2.50 per week and
Class 4 NICs as part of your annual tax return
Self-employed people make two payments on account: 50% of your income tax
and Class 4 contributions on 31 January and the remaining 50% on 31 July
following the end of the tax year.
54
SECTION
5
Running the
show
14. Where is your HQ?
Choosing where to base
yourself: a home office, a pod in
the garden, a shared office or at
the clients site
15. Winning work
Top tips for landing new clients
and growing your business
16. Managing the workload
Maximising your time, the
briefing process and managing
the project lifecycle
17. Financial planning
Financial buffers, savings,
mortgages and pensions
55
In a 2011 PCG survey, 12% of freelancers said they worked from home, and a quarter commute
between 20 and 50 miles a day, usually to their clients premises. Other options include renting or
sharing an office, using one of the many workhubs or workspaces springing up around the country,
or even building a dedicated pod in the garden.
WORKING FROM HOME

If properly implemented, giving up the office can work like a dream, but you need to be
disciplined, organised and have access to the right technical equipment.
Some of the benefits:
Low-cost way of launching a business
No nightmare journeys on commuter trains or gridlocks on motorways
Flexibility of working methods and hours
Increased productivity levels without typical office interruptions and chat gaps
Low operating costs
The ability to accommodate family demands
The chance to stroll in the garden for a 10-minute break
Having your own office helps show the tax authorities that you are In Business On Your Own
Account.
A wireless network means that I can work anywhere at home. However, work-in-progress is also
stored on remote servers, so in an emergency (like when builders accidentally cut the phone line).
I can resume work from anywhere with an internet connection. I usually keep normal office hours,
although I have the flexibility to meet client needs regardless, whenever they arise.
Derek Pattenson of Small Office Solutions
Winner of the Remote Workers Freelance Consultant Award in 2009
Potential drawbacks
Home working doesnt suit everyone. For some people, the drawbacks outweigh the benefits:
Feeling isolated and bored
The chance of increased pressure and longer hours
Clashes between business and family demands
Not being able to switch off
Poorer rewards if the working from home holds back development

of the business
Interruptions from family, neighbours and friends who do not respect work regime.
Some people create a separation between work and the family by converting their shed
into an office or building one in the garden. Freelancer Phil Thane works from this selfbuilt home office in Wales. Its also possible to buy purpose built garden pods, for
example www.roostuk.com or www.officepod.co.uk
56
10 Top tips from experienced home workers
Treat your working time as seriously as if you were working at an office
Make sure those you share your home with see it that way too
Aim for a definable, permanent workspace not the kitchen table
The right furniture and equipment are essential investments - get a good chair, especially if
you work long hours at a computer
Installing a separate telephone line lets you make a clear distinction between your work and
home life - when you finish working, let business calls go to voicemail
VOIP telephony like Skype or Vonage can deliver considerable savings - calls between Skype
users are free, and calling traditional landlines or mobiles from Skype is relatively costeffective
Remember to get specific insurance cover for your business equipment
Make time to socialise, network and meet new people, particularly if you live alone
If you are freelancing, arrange the occasional meeting with those you work with - personal
contact is so much more memorable than email or phone conversations
Timetable breaks - include sessions away from work to eat, exercise and socialise
I love the freedom and comfort of working at home. Thirty minutes in the garden is better than
any coffee break round a machine real coffee instead of plastic coffee. A 10 metre commute.
Not having a formal dress code. No office politics. Adjusting my timetable to fit my personal life
and family commitments. I never feel lonely as I can still be in touch with the world when I want
to be by phone, Skype and email. Over 90% of my work is done for companies based in mainland
Europe.
Nina Downes
Paying business rates on home offices
There are new rules in place since 2003, which means that you dont normally have to pay
business rates on a home office provided that:
You only use the kind of equipment you might find in any domestic study
You have not made structural alterations
You dont employ people from the premises
You dont have frequent business visitors on site.
For further information visit:

http://www.voa.gov.uk/publications/public_fact_sheets/working_from_home.html
Each case will be considered on its merits, and the Valuation Office Agency, which is responsible
for assessing the ratings, will consider the extent and frequency of business use in each individual
case.
57
ALTERNATIVES TO THE HOME OFFICE

Some freelancers prefer to rent commercial office space that is completely removed from the
household and 100% dedicated to work. This can be anything from a hot-desk or shared space to
fully serviced offices. As it is your business you can choose the location to suit your needs you
may be able to find a professional and affordable space within walking distance from your home.
Workhubs are also becoming very popular, for example THECUBE in Londons Commercial Street
offers freelancers, professionals and small businesses flexible workspace and facilities in an
environment that facilitates collaboration and networking.
Similar co-working spaces are popping up all over the UK. Old Broadcasting House is located in the
heart of Leeds, The Hub Bristol is situated on the harbour-side, while Manchesters FlyThe.Coop
and the Werks in Hove are also engaging in a new spirit of community where freelancers can find
affordable, flexible space and benefit from one another. Its this collaboration that differentiates
co-working spaces from hot-desking options.
Workhubs Network is a consultancy service that
offers specialist advice on the creation of coworking spaces. The organisation has produced a
national report on the impact workhubs can have
to support home-based businesses. The report
found that both occasional and full-time users
actively prefer to work in a building where they
can network and form flexible business
partnerships, and the research also suggested that
this often leads to new, unplanned business
opportunities.
PERSPECTIVE
I was attracted to co-working, and the short commute
gets me into the work mindset. Even though Ive only
been here a few weeks Ive noticed a significant
increase in my productivity. I read a study that showed
that mixing in diverse social groups produces more
innovative thinking and I feel thats an important aspect
of co-working. On a more practical level, the email
group has proved helpful people will chip in with
advice. Im also starting a personal branding exercise,
so those different perspectives will be helpful.
James Holloway, Lighting Consultant
I was attracted t
58
WORKING AT THE CLIENTS SITE

It may be necessary for you to work at the clients premises and use the clients equipment.
However, having your own office and your own equipment, helps to demonstrate to the tax
authorities that you are genuinely In Business On Your Own Account and that your client
relationship is not one of disguised employment (IR35 caught) an issue that could affect you if
you operate a limited company.
It is therefore worth weighing up the decision carefully and discussing it with your client. Are there
valid reasons why you need to be there every day? For example, do you need to plug into
specialist equipment housed at the client site, that you could not supply yourself? Do you need
daily face to face contact with the project team, or would it work better to have periodic project
update meetings?
If there arent compelling reasons, you may be better off using your own base to work from.
IN A NUTSHELL: WHERE IS YOUR HQ?
In order to separate work from home life, create a dedicated work station or
office. If space and budget permit, a pod or office in the garden can be an
excellent solution
Invest in a good sized desk and a proper office chair to protect your back
An alternative is a shared space or workhub. These are springing up across the

country and research has proven that mixing with diverse sectors produces more
innovative thinking
Have proper backup systems such as a remote server to store work in progress in
case of power failures or IT problems
Insure your business equipment and check that working from home doesnt
invalidate any home insurance policies
Generally speaking you do not have to pay business rates on a home office
It may be necessary for you to work at the clients premises, but there should be
good reasons. You are a business in your own right, so there is no need for the
client to be keeping an eye on you as if you were an employee.
59
Sales and marketing is a core function in any business - freelance businesses are no different.
However, without the resources and budget of a large company, freelancers generally cant afford
large scale marketing efforts. Prospecting for clients therefore needs to be highly targeted to be
cost and time efficient.
When starting out as a freelancer, agencies can be a good source of work, especially if you dont
have an established network. Agents are basically outsourced talent scouts for clients the better
ones also act as an outsourced marketing service for you.
You dont have to work through agents if you are able to find client work directly. As you become
more experienced you may find that you get better rates and potentially more interesting projects
working directly with clients.
Having a positive attitude and believing in yourself are very important. Not only that, but planning,
organisation and persistence will pay dividends. Never forget that people buy from people - always
treat your business contacts as you would like to be treated. Listen carefully to what they want,
ask them for feedback, keep your promises, and be thoroughly professional in all your dealings
with them. Your reputation is everything.
In a 2010 survey commissioned by PCG 668 business leaders were asked how they usually find
freelancers. Recruitment agencies proved to be the most popular route, while 42% of business
leaders usually find freelancers through referrals. A similar pattern emerged when freelancers were
asked how they land work.
KNOW YOUR WORTH

If you think its expensive to hire a professional, wait until you hire an amateur
Red Adair, The worlds most famous fire fighter
60
WORKING THROUGH RECRUITMENT AGENCIES

How agencies operate
Depending on the recruitment agency, the relationship can work as follows:
1. The agency pays you and charges the client your fees plus commission.
2. You invoice the client directly and the agent charges the client a separate commission for
finding you.
There are also a growing number of online portals that operate an agency style model some
even charge a fixed fee to act as the matchmaker.
How to choose good recruitment agencies
Some agencies have gained a poor reputation among freelancers, but equally there are many good
ones that can prove very valuable for finding work. When dealing with an agent, remember that
fundamentally they are salespeople. They want to sell you a contract and to sell you to the client.
This is how they get their commission. They are businesses, first and foremost, in a competitive
world.
Its worth registering with several agencies to increase your chances. Start by looking at agents
offering a work opportunity you may be interested in. Its important to meet them face-to-face. A
good agent should take time to get to know you and your skills so they can sell you effectively.
However, you can maximise your chances of getting work by:
Returning calls fast.
Providing a brief summary to explain why you are suited for a project (particularly if its a
project that particularly interests you).
Following up on every single project for which you have been put forward (it shows that you
care and is also a good reason to get in touch).
Try to find out as much as you can about the project from the agent before you give permission to
send your details to the client. Dont let agents put you forward for a role for which you are not
suitable - agents are required to ask your permission before submitting your details to a client.
A list of agencies is published on PCGs supplier directory. PCG members regularly share
experiences about agencies and can point you in the direction of good ones. Have a look
on the PCG forums.
Note to PCG Plus members: remember you can claim up to 7,500 if your agency goes
bankrupt and owes you money.
Things to check if the agency pays you directly
Remember, if you are a sole trader, you cant be paid by a recruitment agency, only by the end
client.
If you are a limited company the recruitment agency can pay you gross, without deducting tax and
NICs. This gives you more control over your tax situation. However, its essential to check the
agency contracts. Nowadays, a good contract is outside IR35 and on true business-to-business
terms. A bad contract contains clauses that restrict your ability to work for clients or place
personal liability on you or your family. Typically, this sort of contract will look more like a contract
of employment than a business contract.
61
Your engagement on a project will usually involve an upper level and a lower level contract. The
upper level contract is the contract between the agency and the client and the lower level contract
is the agencys contract with you. Both of them should feature proper business terms and
conditions.
PCG publishes a list of agencies using PCG approved contracts. If your agency isnt on
the list you can refer them to the PCG Approved Contract Scheme or ask if they would be
willing to use PCGs approved contract templates.
In terms of how the agency pays you, this is usually done on the basis of timesheets signed by a
representative of the client. The exception will be fixed-price work, although even here the
timesheet may be the recognised indicator of progress. Many clients also have project time sheet
systems. Typically a freelancer will raise an invoice on a frequency agreed at contract negotiation
time, usually weekly or monthly, which is reconciled with the signed-off timesheets. It is in the
interests of all parties that timesheets be filed regularly and accurately as they are the basis for
clients and agents cash flows and ultimately your income.
Finally, if you are asked to supply information relating to the Agency Workers
Regulations, check the guidance in the policy section of pcg.org.uk.
Negotiating rates
The agent will usually be paid commission as a percentage of your hourly rate, anywhere from
5% to 25% (although it can be higher), depending upon industry and sector. So the agent gets
paid only if you get work. Some clients have agreements with agencies to supply freelancers on a
fixed level of commission. In this case, the agents margin is usually non-negotiable, so if you
want more money it will need to come from the client. You therefore need to push home your
competitive advantage during the initial discussion with the client. If the client really wants to hire
you, this puts you in a stronger position to negotiate a larger share of the money being paid to the
agent.
Like all sales meetings, it helps if you have researched the potential client it will impress if you
clearly understand what they do and their market. Also make sure you ask all necessary questions
to understand the task you are looking to undertake and clarify the nature of the relationship
between the client, the agency and you, for example, with whom you should be discussing
contractual issues versus project issues.
At this stage its worth finding out how much commission the agency charges as this can
sometimes have an impact on the client relationship. Lets say you are getting paid 25 per hour
and the client is paying 50 per hour for your services. All clients expect to pay an agency margin
but, because some agents have two-sided non-disclosure clauses, the client may, in this case,
think you are a 40-an-hour freelancer. This will have an impact on the level of expertise the client
will expect you to have. This, in turn, could have a significant effect on the relationship you have
with your client during the contract.
Contract negotiation is not just about getting more money. You may want to secure an IR35
friendly contract, which can reduce your tax and NI liability. You could also consider negotiating
the right to work from home, more project control and so on. A rate will often be slightly higher if
you accept payment terms of 30 days rather than seven.
If you are nervous about the thought of going for lots of interviews or negotiating, remember that
it is just a normal part of freelancing and gets easier with practice. Do not take it personally you
are no longer an employee, so this is a straightforward business-to-business negotiation. See the
top tips on negotiating rates at www.pcg.org.uk/resources. PCG Plus members can take
advantage of Freelance MBA resources from Ashridge.
62
Legal Considerations:
Agencies are often subject to a number of laws designed to protect low paid temporary workers
from abuse. Though as a freelancer, typically running your own business, you are usually not the
intended target of such legislation, it is worth taking the time to familiarise yourself with the rights
you are entitled to, and with the way these laws might affect your relationship with an agency.
The Agency Workers Regulations (usually known simply as the AWR) are laws which guarantee
certain agency workers similar working conditions and protections (particularly in terms of pay,
holiday, and working time) as if they were employed permanently. They do not affect the
genuinely self-employed or freelance individuals who are in business on their own account, so for
most freelancers, they will not apply. For more information visit employment status on page 12 of
this guide
In order to ensure that they do not have to provide you with any additional rights under this law,
an Agency may take steps to ensure you are definitely a business, by providing a business-friendly
contract, or by ensuring you fill out a questionnaire for example. It is also in your interest to be
treated as a business as it may help prove to the tax authorities that you are definitely a business,
as opposed to an employee. For more information on the AWR, visit www.pcg.org.uk/agencies,
where you can download a full guide to the law.
Other legislation which may affect you includes the Conduct of Employment Agencies and
Businesses Regulations. They are often known simply as the Conduct Regs, or sometimes,
confusingly, the Agency Regs or EAA regs. These regulations are designed to protect those who
work via an agency from unfavourable contractual terms such as handcuff clauses or temp to
perm fees. Freelancers can choose to opt out of this protection. Many choose to do this as it
provides a further pointer that they are genuinely operating a business. Some do wish to be
protected by the Conduct Regs and if so there are various obligations an agency must fulfil. For
more information on the Conduct Regs, a guide for PCG members is also available to download
here and at www.pcg.org.uk within the resources.
HOW I WORK WITH RECRUITMENT AGENCIES

I use the phone a lot to build and maintain relationships with agents. I also use the online
portal Jobserve. I think its important to be very clear about how you will market yourself.
When I started out I had a long list of things that I could do but was in danger of being seen as
a jack of all trades and expert in none.
My "silver bullet" was to market myself as a project manager. Clients
understand what this means. Once you are in the organisation you can
turn your hand to lots of other things - once they get to know and trust
you. You have to establish yourself first with a new client to gain trust
through what you can do and bring to the party. I treat my business as
a business and run it as such. It sounds trite, but how many of us take
time out for training to keep our skills up to date or regard time spent
at networking or other events as valuable marketing expenditure to
expand our contacts and grow our opportunities for renewals. Thinking
of yourself as Jo Smith Ltd and doing all of the things that companies
do to increase their presence in the market place does, literally, pay
dividends.
Chris Bell, Freelance project manager
You can download more advice about planning a freelance career at
http://www.nationalfreelancersday.org.uk/downloads/Freeing_up_potential.pdf
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APPROACHING CLIENTS DIRECTLY

Some freelancers prefer to work directly with the end-client, without a recruitment agency or third
party in between. The end-client may also be an agency such as advertising, marketing agency or
consultancy which tends to work with freelancers a lot. Freelancers often find that working directly
with the client gives them more control over their rates and simplifies the relationship and lines of
communication.
This means you have to work a bit harder to build your own network. One way to do this is to set
up a three tier contact system: an electronic database of names. A Customer Relationship
Management (CRM) tool can help, for example www.salesforce.com or www.brightpearl.com (the
latter includes an integrated bookkeeping and invoicing system).
Tier one: hottest prospects
Your first tier of contacts should include every person and organisation you know who is personally
capable of offering work. Include everyone you have ever worked for in the past. This list
represents your hottest prospects. Contact them directly. Tell them youve gone freelance and
a bit about what youre doing. If you havent already got a recommendation or testimonial from
them, ask them to send you one as a) it will remind them why they liked working with you and
b) you can use it to market yourself to other clients. This first tier has the greatest potential to get
you going quickly, and to keep you going profitably for many years.
Tier two: people who could refer you to someone else
Your second tier should include everybody you know who might know someone else who could
offer you work. Dismiss no one - include people you haven't spoken to in months or even years.
Drop these people an email with a brief update on what youre doing and ask them if they know
anyone who might benefit from your service. If you use LinkedIn, you could also connect with
them on that this helps you stay in touch.
Tier three: wish list of clients you would like to work with
Your third tier should include the people or organisations that you do not know personally but
would want to work with - they might include the leading companies in your industry, or
competitors of companies you no longer work with. This is your wish list of possible clients. Use
directories, libraries, guides or whatever resources are available. You can then plan a targeted
mailing or phone campaign (see the next section on promotional techniques).
PROMOTIONAL TOOLS AND TECHNIQUES

The following tools and techniques apply whether you work via agencies or go directly to the
client. In both cases, proactive marketing is the key to consistent workflow, better rates and
interesting projects. Marketing isnt just about getting more work its also about getting better
work. The more proficient you become at presenting yourself, the better you can convince people
to give you the juiciest gigs in town.
The phone
Cold calling can be very effective as long as its extremely targeted you dont want to be calling a
huge number of completely random companies. Research specific organisations and departments
that you think could benefit from your skills. The better you know their industry and challenges,
the less cold the call will be. Call reception to identify the best contact and subtly find out the best
time to reach them. Do some desk research into that person and their work. Know what you are
selling and how that could be useful to the person you want to speak to. Then call them.
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Building rapport is ESSENTIAL. If you know they are just back from holiday, ask how it was. If
youve been there too, share an anecdote. Find out what makes them tick and you can almost be
guaranteed that they will get back to you.
Make it light-hearted but dont ramble. Introduce yourself and explain in a nutshell what you can
offer (pitch it professionally but in a relaxed way so it doesnt come across as too formal). If you
have worked with a similar organisation, tell them what you did for that company. Also, focus on
their possible pain or pressure points which should come from your research or your conversation
with the receptionist (e.g. they are always in meetings, travel a lot, are a team member down,
about to launch a big product).
It can help to say, you may not have a need at the moment, however if its OK, I would like to
send you my CV/LinkedIn page and perhaps you could forward it to anyone you think might be
interested.
There is a certain art to cold calling and not everyone is comfortable doing it. If you are, then you
have a fantastic asset. If not, you might be able to outsource it try typing lead generation for
freelancers into Google.
Email campaigns
Targeted marketing via email can also be effective, and cost very little.
According to the EU anti-spam rules it is ok to send unsolicited email to business owners and
company employees without their prior consent, as long as:
You dont conceal your identity
You provide an easy (free of charge) way for the person to opt-out of receiving further
communications from you
You provide a valid address for opt-out requests.
The rules for emailing private, non-business individuals are different you cant email them
without their prior consent. However this shouldnt affect you if you are using the email campaign
to land B2B clients in a traditional freelance capacity.
When crafting your email, spend some time working on a good headline for the subject box. Its no
good saying something like CV attached because at the end of the day, why should they care?
If you have researched their pain you should be able to come up with something very specific
that addresses their problem and hints at a solution. So for example, lets say youre a French
speaking PR specialist in the UK. Do you know any UK companies selling to France? Have they got
PR covered, or could they use your help?
If your research indicates that they lack the know-how, your subject box could say something like:
How to earn press attention in France. If you think they have the expertise in-house, but are
stretched for time and could use some help, it could be: Need help writing French press releases?
The trick is also to keep it short enough so the subject doesnt disappear off the edge of the
persons screen (bear in mind they might be reading it on their mobile).
Individual targeted emails are likely to have a higher response rate, but if you want to do wider
blanket mailings, services such as www.graphicmail.co.uk can be used to set up and track the
campaign.
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The CV
Instead of presenting your career in reverse chronological order with half a dozen bullet points
underneath each job; write each major project you have done as an evidence based case study
and create a section titled Portfolio.
This is the most effective framework for professional contractors to write their CV it breaks your
career down into individual pieces of work. You may identify 30 pieces of work and decide that 15
of them are up to date and relevant. Once you have identified the key pieces of work, write them
as short case studies (no more than 6 lines long), ideally using the STAR methodology (Situation,
Task, Actions, Result).
The CV then becomes a portfolio of case studies and you are able to change the order around
depending on what roles you are applying for. Of course, recruiters will still want to see your dates
of employment or contract engagement, so put a career chronology section after the case studies
with the date, company name and your job title. This framework will provide you with much more
flexibility and allow you to tailor the CV to the roles you are applying for in a much more effective
way.
Networking
For freelancers, networking can be one of the most effective ways of finding new business. After
all, people buy from people, so face-to-face contact is likely to work much better than cold calling,
advertising or other forms of promotion. A recommendation by someone who knows you can be
extremely influential indeed. See the top tips on networking at www.pcg.org.uk/resources. Also
check the PCG events calendar for a networking event near you.
In terms of networking, one of the things

Ive actually done is to create groups where
like-minded individuals come together. We
meet up on a monthly basis and we actively
discuss whats going on, OK what are you
doing? Can I actually up-sell something with
my skills? What am I doing? Do I actually
need some Java skills or some Six Sigma
skills?
Manav Mehan, Change Management

Specialist
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Website
In the 2010 National Freelancers Day survey findings, clients ranked website and/or online
presence as the least important factor when selecting a freelancer. Qualifications, price and
evidence of training came top.
So in terms of your immediate priorities, spending a lot of time and money on a website might not
be top of the list youll be able to judge whether you need one by the reactions of any
prospective clients or agencies. Are they asking to see your website?
That said, sitting down to plan your website forces you to really think about how you communicate
your offering. If you include a clear call to action a reason and a means to get in touch with you
it can be an effective complement to your overall marketing approach. It need not cost the earth
either. Blog platforms like wordpress.com allow you to set one up for free and it doesnt have to be
in blog format as the software lets you create normal web pages as well. Theres also
www.about.me a neat way to create a single webpage to link to any of your other online
resources, such as pieces of work youve created.
Social Media
Some freelancers use their LinkedIn page instead of a website its a free, quick and easy way of
creating an online profile that is always up to date. You can also set up a custom URL on LinkedIn
so you can publish a personalised link to your profile. Crucially, this enables you to maintain
contact with past clients and build your network. Asking for recommendations from past colleagues
or clients is a good reason to get in touch and keeps you on their radar. For top tips on
maximising your LinkedIn presence, see the section on boosting your marketability in
You can also create a company page on either LinkedIn or Facebook. Twitter is another
alternative excellent for assessing the market, gathering information, developing your reputation
and building relationships. Visit the PCG website for tips on using Twitter to get more clients
PCG often runs seminars on using social media effectively keep an eye on the events
calendar at pcg.org.uk or subscribe to the newsletter for updates
PR
You dont have to be a big company to use PR. Here are some of the things you might consider
doing:
Public speaking
Make yourself available for interviews by positioning yourself as an expert in your field
Look for press opportunities in relevant trade journals
Write white papers and technical articles
Consider writing a blog and contributing to other popular professional blogs
Write case studies about recent projects
Issue short press releases on recent successes.
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HOW I USE PR
Public speaking is a useful way of building a reputation
provided that you help others by giving useful information, not
by directly selling services. Within most communities
knowledge sharing is a valued way to behave, while overt
marketing is poorly received. Other ways to share knowledge
and information include publishing articles, contributing to
podcasts, giving webinars and video.
In 2009 I invested in the professional production of a video
case study about a large project. This was used as part of the
entry for an international design award, which ended up taking
me to San Francisco for the Awards event with help from UK
Trade & Industry. That video keynote, which has been used at
international industry events that I could not attend in person, has been instrumental in
securing extra business and has resulted in more invitations to speak at international events.
Colin Butcher of www.xdelta.co.uk is a consulting engineer specialising in mission
critical systems. More advice on building your career can be found in The Freelance
Career Ladder: seven business models to help you plan the journey at pcg.org.uk
IN A NUTSHELL: WINNING WORK
Agencies can be a good way of outsourcing the task of finding clients

particularly when youre starting out
Its important to check the agencys credentials ask for recommendations. Also
check the contracts they are using are based on sound B2B terms
Finding clients directly usually takes more marketing effort, but can lead to
higher rates, a more straightforward relationship and clearer lines of
communication
People buy people: working your personal network is the most effective way to
land work keep in touch with everyone you have ever worked with
LinkedIn can be used as a good alternative to a website and is an excellent way

of staying in touch
Dont ignore the power of PR are there any opportunities for you to speak at an
event or write an article to show your expertise? Remember that in PR, the goal
is to give useful information, not to sell
Watch the videos at www.nationalfreelancersday.org.uk to get a feel for the wide

range of marketing techniques used by freelancers.
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Freelancers often complain about the fact that their workload is either feast or famine. After a
couple of years you will probably start to see some trends.
If you are overwhelmed with work, dont be afraid to say, I cant fit it in now, however I could
start the project in three weeks time. If the client really wants to work with you, there is a good
chance they will agree. If a project mushrooms, dont be afraid to discuss an updated budget with
the client. If you state your case clearly, they are likely to agree and you will feel more motivated
to do a good job.
Schedule holidays, business planning and new business activities for the quieter periods and dont
be afraid to take the odd day off to re-charge your batteries. Some freelancers build time into their
schedule to do something completely different such as a training course or even voluntary work.
Variety helps you meet new people, which could lead to a new brief.
When you sit down to work, concentrate on one thing. Multi-tasking has been shown to be
counterproductive. A widely reported study by research firm Basex put a price tag on what they
termed the modern attention deficit, which, they estimate, consumes nearly a third of each
workers productive day: 28 billion man-hours lost annually to unnecessary interruptions cost U.S.
businesses $650 billion per year.
Its rare for anyone to be able to focus completely on one thing for more than 50 minutes, so it
makes sense to work in batches of 50 minutes, or less if you find your attention wandering.
Schedule five minute breaks in between and you should find you get more done.
Also, rather than wasting time trawling the internet for resources, use the PCG website, help-lines
and forum to answers your tax, legal and freelance/contracting related questions. Also, dont
forget you can download useful documents such as non-disclosure agreements, contract templates
and guides saving you a lot of time and hassle.
I have to make sure that I dont bite off more than I can chew, taking on
work that I cant deliver against. Conversely, its important to keep
enough in the forward order book. When theres enough work coming in
and you can manage it, its not stressful, but if it goes too far in either
direction it can get quite stressful you learn to strike the right balance.
Stuart Mealing, freelance contractor. Read Stuarts case study at
www.pcg.org.uk/join
Here are some suggested stages in the project lifecycle:

Nail down the brief before the project starts
Ask the client to send you a written brief outlining their end goal the problem they need to solve.
The brief should include parameters such as deadlines, budget and responsibilities. Ask them to
convey the details they already know and also any areas of uncertainty. This encourages them to
adapt the brief as new information comes to light. If your client is very busy or is a new client, be
proactive and make it easier for them by offering to discuss the project over the phone and then
drafting the brief for them to adjust as required. It also helps keep momentum and increases the
chances of the project actually happening. This works particularly well for smaller projects smaller projects often lead to bigger briefs.
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Draft a written agreement to ensure clarity for all parties

A written agreement can be initiated by the client or the freelancer. Include a statement of work
detailing deliverables, costs and timescales. Don't use an employment contract - use a contract for
services to define a B2B relationship. Using a proper contract avoids IR35 and employment law
issues. Members can download contracts from the PCG website.
For smaller projects, a purchase order can be an appropriate alternative. Less defined projects can
be split into stages - agree the deliverables at each stage and to avoid misunderstandings further
down the line, it is important to put any changes or additional requirements in writing.
Ensure the client has everything in place for you to start work on the project
Have you covered everything off with the client? For example:
Lines of communication
The sign-off process and who is responsible for ultimate sign-off
Access to other team members or external suppliers
Access to systems
Where you will work
Who is providing the necessary equipment, you or the client?
Manage the project proactively

Remember you are not an employee you should manage yourself and not expect to be managed.
Freelancers are judged on results and its your responsibility to deliver against the brief, on time,
on budget. Good freelancers earn their client's trust and go to great lengths to maintain it - a winwin relationship built on mutual respect helps resolve any potential conflict.
Communicate regularly
A daily or weekly dialogue with the client encourages a collaborative relationship. Schedule regular
review points to check everyone is still in agreement and to make any necessary adjustments as
new information comes to light. For larger projects, regular review meetings involving the whole
project team gets everyone working together and irons out any problems early.
Frequency of meetings can be ramped up as the project nears its critical phase/launch or be
reduced when things are on track and people are short of time.
Whilst face-to-face contact is important, particularly if you are working remotely, sometimes a
focused phone or Skype conversation will suffice. If you do decide that a face-to-face meeting is
the best course of action, make sure it is as productive as possible by checking that key decision
makers will be present and sending all parties a detailed agenda beforehand which includes the
desired outcomes and timings.
Evaluate the results once the project has been delivered
Once the project is completed find out what impact it had. This will help you plan any future
improvements. However, bear in mind it is the results that should be evaluated, not your personal
performance. Freelancers are businesses and therefore shouldnt receive employee-like
performance reviews. Instead you should aim to co-evaluate the impact of the project with the
client (see the advice of success coach John Niland on page 25 of The Freelance Career Ladder).
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A good way of doing that is to send the client a short project impact questionnaire to help
identify the main learnings from a project. This is also useful for capturing positive
client endorsements for promotional purposes.
IN A NUTSHELL: MANAGING THE WORKLOAD
Partition your time so that you work on a specific task for 50 minutes without any
distractions, its far more efficient than trying to multi-task
Write a project brief at the start of any project to ensure clarity and focus for all
parties
Use a contract for services to define a B2B relationship, this avoids IR35 and
employment status issues
For smaller projects, a purchase order can be an appropriate alternative
Once the project is underway, schedule regular review points to check that
everyone is still in agreement with the direction the project is taking make
adjustments as required
Face-to-face contact is important but make sure any meetings are 100%
productive by planning carefully and ensuring you know what you are hoping to
get from it
Get feedback evaluate the project impact so you can plan improvement.
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PLANNING FOR DOWN-TIME AND NON-BILLABLE TIME

As a freelancer there is no such thing as holiday pay. In fact, you do not get sick pay either.
When a company takes on an employee, it will usually include a cost margin to cover these
eventualities, so the employees annual salary will generally include a given number of paid
holidays. Some companies even take out insurance against employees becoming sick.
You need to factor these additional costs into your revenue calculations. You will not work 365
days a year. Apart from your holidays, there are many reasons why you may not be earning. You
may be between contracts for a period of time. You or a family member may fall sick and you
may have to take time off work.
You may be able to insure against illness (be careful to ensure you understand what exactly you
are covered for in case of sickness) but you can also insure yourself by having savings set aside.
This brings us to your buffer. As a rule of thumb, some freelancers assume that they will be
working 150 days per year.
A financial buffer
Every freelancer needs a buffer. Use your freelancing income to build up a cash reserve fund in
your company sufficient to pay you enough to cover your living expenses for a prolonged period
(e.g.at least six months. You need to allow for tax in your calculations as the taxman will expect to
be paid on time. Remember also you may have VAT to pay in the future as well as other standing
business expenses such as insurance, accountancy fees, software support agreements, telephone
bills, and so forth, even though your company may not be generating any income.
By building up a cash buffer you will protect yourself against any breaks in freelancing. You will
never be forced to take an unsuitable contract and you will never have to worry too much about
short-term breaks due to illness or circumstances. You can take out Permanent Health Insurance
to protect yourself against being unable to work for longer periods of time due to ill health.
PLANNING FOR RETIREMENT

As a freelancer, you are responsible for your own retirement there is no corporate pension
scheme you can join, unless you set one up yourself. However, if you are director of your own
company, you have more options than a standard employee. For contractors who operate through
a limited company, turning company pension contributions into a pension represent one of the
most tax efficient ways of getting money out of the business as it can save National Insurance
Contributions (NICs), income tax and corporation tax.
Personal pensions
A personal pension is a type of private pension that is approved by HM Revenue & Customs and
receives certain tax advantages. You take out a personal pension under a contract with a pension
provider and contribute to it yourself.
Personal pensions are money-purchase arrangements in which your money and any additional
contributions from a third party, such as an employer, is invested to build up your pension fund.
Most personal pension providers require you to make payments on a regular basis, or lump sums,
for example at the end of your tax year.
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The value of the final pension you receive in these schemes depends on the amount invested, the
time invested and the quality of the funds you invest in. You, as an individual, bear any risk on the
investment returns in these schemes.
Stakeholder pensions
A stakeholder pension scheme is a flexible and portable personal pension arrangement that must
meet strict Government standards. The main differences between stakeholder pensions and other
personal pensions are:
Annual management charges capping as set down by law.
The charge capping means that some providers choose to invest in simple tracker funds that
do not provide the wide range of investments many unit-linked personal pension funds offer.
State pension
In addition to any occupational schemes and personal pension arrangements, you may be able to
benefit from basic pension provisions made by the State, which currently comprise:
Basic State pension. The Pension Service (part of the Department for Work and Pensions) will
pay your basic State Pension based on your National Insurance record. You may also qualify
for the additional State Second Pension based on your earnings and National Insurance
contributions.
State Second Pension (S2P). An additional State Pension on top of your basic State Pension,
paid by The Pension Service. This was called SERPS, but since 2002 it is called the State
Second Pension. Self-employed people cannot build up a State Second Pension, but salaried
directors can. Contracting out will end for nearly all schemes in April 2012.
For a state pension forecast visit www.thepensionservice.gov.uk
TAKING PENSION BENEFITS

There are now many ways that you can draw an income from a pension. Traditionally, individuals
took 25% Tax Free Cash (TFC) and the balance as an annuity. However, annuity rates are very
poor, they lack flexibility and are often offered poor death benefits. New rules allow more flexible
options, including taking part of your pension whilst you slow down to a part time role, but leaving
the balance to grow, or using Drawdown to take an annual income from your pension. The rules on
taking benefits for pensioners over 75 changed in April 2011 are there is now no need to take an
annuity from age 75. The new rules affected the level of contributions that can be made and the
total size of allowable pension pots. For more information see the PCGs Guide to Pensions
(members only) on www.pcg.org.uk/resources.
Although your pension contributions attract tax relief, the payments you receive when you retire
will be taxable. There will be no NI to pay.
PENSION ALTERNATIVES
There are disadvantages with pensions, such as the lack of flexibility, management charges and
the fact that you can take only 25% of all your pension arrangements as a tax-free lump sum.
There are many alternatives to a standard pension for a company director see the paragraphs
about WRAPs and SIPPs further on. Or, if you would prefer your retirement income, rather than
the contributions you make today, to be tax-free, you could take out an ISA, although overall this
is less tax efficient. Of course there are other options as well, such as building up a large property
portfolio, where you can benefit from the power of gearing, but being a landlord is a decision not
to be taken lightly.
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As a freelancer, your lifestyle will be quite variable. You may end up working abroad and could
even retire overseas. You can use your companys surplus funds to save for your retirement. To do
this, simply leave the money in the company by using a corporate savings account. However,
growth rates are unlikely to keep pace with inflation, and this is far less tax efficient than company
pension contributions (see the PCG Guide to Pensions for an explanation on how your
company can make pension contributions on your behalf and claim them as an allowable
business expense).
WRAPs and Self-Invested Personal Pension Plans (SIPPs)
WRAP is an investment concept that originated in Australia. The idea is that the client has
investment freedom and can hold other assets on the platform, such as Individual Savings
Accounts (ISAs), Unit Trusts, Bonds, etc. Typically, fund performance can be monitored online.
Holding all assets on one platform greatly reduces the effect of charges and allows movement
between the different asset classes, without the need to disinvest. Typically, a contractor would
work with a Financial Planner when using a WRAP.
A SIPP is a personal pension with a wide choice of investments. It lets you choose from a wide
range of funds and other investments. You can hold individual stocks and shares in a SIPP should
you wish. The SIPP wrapper provides the tax advantages and legal framework for your collection
of investments for retirement. What you hold within the SIPP wrapper is up to you. You are able to
choose and switch between a wide selection of funds and permitted investment types. With a
stakeholder and many personal pensions you can choose only from a limited selection of
investment funds.
SIPPs and WRAP allow an enormous range of investment options to be exploited for those with the
desire, time and confidence to manage their assets individually. Alternatively a professional
adviser can help with some ground rules, asset allocation strategies and guidance.
SEEKING FINANCIAL ADVICE

If you wish to obtain advice about a pension or retirement planning, you should use an
Independent Financial Adviser. It is usually best to work with a fee based, rather than commission
based adviser. You can find an IFA close to where you live through the www.unbiased.co.uk
website. Check that the adviser has the G60 or J04/J05 pension qualification if you want someone
that has specialist advice. Ensure that the adviser understands the rules on company contributions
to pensions. PCG is affiliated with Wealth Matters (www.wealth-matters.co.uk) who have been
providing pension advice to PCG contractors for over six years.
MORTGAGES FOR FREELANCERS

The fear of not being able to get a mortgage is often a reason people cite for not going freelance.
Indeed most online mortgage providers are geared towards employed workers. The challenge is
that often high street-lenders dont understand how freelancers work or fail to appreciate that your
accounts will not necessarily reflect your full capacity to re-pay a mortgage.
Its well worth trying an Independent Financial Advisor (IFA) which specialises in freelance or
contract working. They should be able to help secure you a competitive fixed or variable rate
mortgage at up to four times your contractor rate with high-street lenders. In addition, you may
not be charged a broker fee.
ContractorFinancials, for example, has been able to negotiate underwriting that works from a
multiple of your hourly/daily rate rather than using your last three years accounts.
A list of PCG affiliates specialising in mortgages are contained in the supplier directory
at www.pcg.org.uk
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6
Risk prevention
18. Assessing risk
Tools to prevent or mitigate financial
meltdown and other disasters
19. Compulsory insurance

When you are legally obliged to take out
insurance
20. Recommended insurance

Insurance policies that should be seriously
considered by most
freelancers/contractors
21. Worth considering

Insurances for those who want
comprehensive cover against all risks
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Running a business can be risky. Thats why many people prefer to have a boss than to be their
own boss. However, savvy freelancers are aware of the risks and do everything necessary to
minimise them. Risk assessment forms the basis of a Business Continuity Plan, so that your
business doesnt collapse the first time it encounters the inevitable storm.
The steps are as follows:
1. Highlight high priority risks to your business.
2. Work out the best way of preventing them.
3. Work out how to soften the blow if they happen, despite your efforts to prevent them
this usually involves taking out some kind of insurance.
PCG members can download the risk buster: an assessment tool to plan for potential
mishaps
Using insurance to minimise fall-out from a bad situation
When it comes to insurance bear in mind it isnt always optional. The following chapters outline the
insurances that are required by law as well as those that make sense from a commercial point of
view.
Insurance quotes can vary enormously, so this is one area where it really does pay to shop
around. Its possible to save money by taking out insurance bundles for example a common
bundled package is Professional Indemnity insurance combined with Employers Liability and Public
Liability. Always read the small print as it may contain key exclusions or caveats. Be careful to
check whether any new policy you take out could clash or invalidate any of your other policies
(being double insured can sometimes cause issues).
For a list of insurers see the PCG supplier directory at pcg.org.uk.
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EMPLOYERS LIABILITY INSURANCE

All employers (unless they are exempt) are legally obliged to have at least 5 million of Employers
Liability insurance to protect them against claims from employees for accidents or sickness caused
through work. Some insurers include Employers Liability along with Professional Indemnity and
Public Liability insurance as a single package.
Situations where Employers Liability is compulsory for freelancers
Any freelancer who employs someone must take out this insurance. There are no hard and fast
rules about who counts as an employee for the purposes of Employers Liability insurance.
What matters is the real relationship with the people who work for you and the degree of control
you have over the work they do for you. Even part-time and casual staff may count as your
employees. Remember also that you can have employees irrespective of whether your business is
a limited company or a sole tradership. If in doubt, PCG members can contact the legal helpline
its open 24 hours, 365 days, free of charge.
Exemption from Employers Liability insurance
Very small businesses that employ only their owner are exempt. If they are a limited company,
and employ only the owner, they are still exempt provided that the owner owns more than 50% of
the issued share capital. Family businesses, employing only closely related family members, are
also exempt unless the business has been incorporated as a limited company.
What happens if you contravene
The law is enforced by the Health and Safety Executive (HSE) who can ask to see your certificate
of insurance at any time. You are required to display your Employers Liability Insurance (ELI)
certificate at your work place, so it is visible to all your employees. You are now also allowed to
display your certificate electronically as long as all employees have reasonable access to it. If you
do not display the certificate of insurance or refuse to show it to HSE inspectors when they ask,
you can be fined 1,000. You can be fined up to 2,500 for any day in which you are without
suitable insurance. For more details on employers liability, visit www.hse.gov.uk
MOTOR INSURANCE
Third party liability insurance is compulsory for all motor vehicles used on the road.
Comprehensive insurance includes third party liability but also provides cover for re, theft and
accidental damage.
Personal accident cover for certain bodily injuries sustained by the driver is usually offered as an
extra option and will pay out a weekly or lump sum; an important consideration if you work for
yourself. Ensure that business use is specifically covered by your motor insurance policy.
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INSURANCES SPECIFIED BY CONTRACT

In some instances, even if not legally required, clients will demand that the freelancers/contractors
they work with have additional insurance cover such as Professional Indemnity insurance and/or
Public Liability insurance.
Check your client contracts for any
insurance that may be required if you
dont have the stipulated insurance in place
you are likely to be in breach of contract
and the client may be able to take legal
action against you.
What does the contract say?
If one of your contracts with a client or
agency specifies you have a particular
insurance, you could be liable if you dont
have the relevant policy in place.
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PROFESSIONAL INDEMNITY INSURANCE

Professional Indemnity insurance helps protect you and your business if claims are brought against
you by a client due to a problem with work you have done for them. It covers legal costs and any
compensation paid as well as costs incurred to rectify a problem. These costs can be significant
and could even put you out of business. You may feel confident in the quality of your work, but
any small business, freelancer/contractor is vulnerable to a professional indemnity claim. In some
cases a claim might be brought against you that has no merit, following a disagreement with a
client for example, but you might still face legal costs.
You should consider buying Professional Indemnity cover if you:
Provide clients with professional advice and could be challenged on your work
Handle documents/data belonging to a client
Are responsible for a clients intellectual property.
To work out the level of cover you need, consider the following:
Size of the contract and client
Potential cost of your defence if you were to be sued
The maximum compensation that could be awarded against you.
A good policy, as well as covering you for areas such as negligence, breaches of intellectual
property and loss of documents/data, will also provide protection for areas such as defamation. It
will also provide for loss of client fees in the event of a Professional Indemnity claim. Make sure
any policy you buy, as well as covering you for the following 12 months, also covers you from the
date when you began trading. Should you stop trading, retire, or take a permanent job, it is wise
to purchase Professional Indemnity insurance for at least another 12 months in case a client brings
a claim against you for work done previously. In extreme events, a claim could actually be made
against you up to six years after the claimants first knowledge of a problem, according to the
Limitation Act 1980.
PROFESSIONAL INDEMNITY CASE STUDIES

Case study 1: client withholds payment and threatens legal action
An IT contractor was hired to write a piece of software for a business. Specifications and timings
were agreed up front but, as time went on, the client changed the specifications and the timings
moved. Ultimately, the client was not happy with the work done to the timing the contractor
believed he had agreed. The client withheld payment, formally complaining and making threats
about legal action while commissioning someone else to finish the work. Under the contractors
Professional Indemnity insurance, his insurer negotiated with the client, who agreed to walk
away. The insurance policy also paid the contractor his outstanding fees.
Case study 2: freelancer caught up in copyright dispute
A freelance designer was commissioned to design a website. In good faith he used images he
found on the web that he believed to be copyright free. This transpired not to be the case and the
rights holder issued a demand for payment. He was fortunately covered under his Professional
Indemnity insurance and his insurer negotiated a settlement and paid the fee incurred.
In each of these examples, the freelancer/contractor was able to rely on their
Professional Indemnity insurance to remedy the situation, minimising any financial loss
and, just as importantly, reputational damage.
79
PUBLIC LIABILITY INSURANCE

Public Liability insurance covers you against claims arising from accidents to members of the public
or damage to property that occur as a result of your business activities. Todays growing
compensation culture can make your business more vulnerable to these types of claims and Public
Liability insurance can provide peace of mind by meeting the related legal or compensation costs.
Even if you work from home, you may need Public Liability insurance. If clients or contractors visit
you there, the policy will cover you if they injure themselves while they are on your premises, by
tripping on a computer cable for example, and end up suing you for damages.
If you attend clients premises, Public Liability insurance will also cover you should you accidentally
damage their equipment; you might spill a cup of coffee over a clients computer for example.
PROPERTY AND CONTENTS INSURANCE

For the purposes of business continuity its important to plan for things like fire, theft or flood, so
that you can replace lost or damage equipment if you need to. If you own the building you work in
you will need to insure the actual premises themselves. You should also ensure that anything else
you are responsible for, from the fixtures, fittings, stock, computers and equipment are all insured
appropriately. The ability to get your business up and running again quickly might depend on it.
Even if you work from home, you need to check that equipment used for business
purposes is still covered by your home contents insurance. If not, you should consider
purchasing specific business insurance or extending your home cover.
PROFESSIONAL EXPENSES (TAX INVESTIGATION) INSURANCE

HMRC can conduct random tax investigations on your business or personal affairs, which can be a
bit alarming if youre not completely expert in the complexities of the tax system. Having a
professional adviser to represent you can make an enormous difference to the outcome. Whereas,
your accountant will be an expert in accounting matters, these advisers are specialists in the
specifics of a tax investigation. They are usually ex-tax inspectors themselves and will work
alongside your accountant, dealing with the tax authorities on your behalf so that you dont
unwittingly say something misleading that could escalate the matter unnecessarily. Having an
adviser on board gives you a much better chance of a swift and favourable conclusion.
Needless to say, this representation costs money. An investigation may also incur further
accountancy costs. Some investigations run to the tune of tens of thousands in professional fees
hence why insurance is a good idea. Note that HMRC can conduct enquiries on a company for after
two years after it has closed, so its advisable to keep the insurance in place until the two year
window has passed.
Note: PCG members are automatically covered for as long as they remain members, so if
you join you dont need to take out this insurance - a professional adviser will represent
you if you are investigated and you also get the support of others who have been
through the same experience on the PCG forums. This is included along with all the
resources of PCG membership for 120 + VAT per year.
80
PRE-DISPUTE TAX COVER

HMRC Officers now have the right under Schedule 36, Finance Act 2008, to inspect business
premises, business assets and business documents. They can inspect all of your business records
such as current income, corporation tax, as well as VAT and PAYE. These are not investigations,
although a visit may become an investigation if noncompliance is established. PAYE inspections are
known to be a common route for full blown IR35 investigations. HMRC runs these checks regularly
but does not publish details of how it chooses which company to audit. Again, having a
professional adviser to deal with the case can prevent this turning into a messy dispute with the
taxman. Note: Pre-dispute cover is included in PCG Plus membership.
LIFE INSURANCE
As a freelancer/contractor, you dont receive death in service benefits from an employer, which
pays out a lump sum in the event of your death. This could mean your dependents would be
exposed to potential financial hardship. You can arrange life cover personally or via your company
(which is typically more tax efficient) so that your family is protected and any mortgage or other
debts can be repaid in the event of your death. A lump sum payment or ongoing annual benefits
can be paid and you should always consider the merits of writing policies in trust to ensure a
smooth payout to your beneficiaries while making the most of any tax advantages. In the case of
pension related life insurance, paid for by your company, you can also receive tax relief on the
premiums.
CRITICAL ILLNESS INSURANCE

Critical illness insurance will pay a lump sum on diagnosis of a specific range of illnesses. Any payout can help fund any necessary changes to your home, car or simply provide a financial cushion
to help your recovery free of financial concerns. A suitable alternative to this might be Income
Protection (covered in the next chapter) it is advisable to have some kind of protection in case
you cant work.
PRODUCT LIABILITY INSURANCE

Product liability insurance, which is recommended for product led businesses, covers you against
injury or damage caused by faulty goods. This can be important if you manufacture, repair, install
or even retail goods; a small defect could open you up to large claims. Your policy should protect
you against safety claims, manufacturing quality, spoilage and any compensation costs such as
medical bills.
81
PRIVATE MEDICAL INSURANCE

Private hospital care can make a lot of sense. Quicker treatment times through private care can
help you plan potential treatment more effectively around work, avoid lengthy layoffs and help you
get back to work sooner. In this way the income that would otherwise have been lost means that
these policies can sometimes be self-financing and also helps you to avoid a more serious long
term break in your income.
INCOME PROTECTION
As a freelancer, you do not have the safety net of an employer to pay for sick leave. It is worth
investigating permanent health insurance to cover your personal outgoings should you ever be
unable to work for long periods. Some policies will pay a tax free income on the very first day of
any illness or incapacity, all the way through to retirement if necessary. Its important to ensure
that both salary and dividends are covered by the plan and it is best to be wary of so called
mortgage payment protection plans which offer only short term benefits and often do not
recognise freelance income. Its advisable to apply for all forms of health related insurance before
you experience symptoms of a serious nature.
PROTECTION AGAINST BAD DEBTS

It is possible to take out policies that cover you if your client or agency goes into liquidation owing
you money. If you are a PCG Plus member you are automatically covered for 7,500 in the event
that your agency suffers bankruptcy leaving you with unpaid fees and up to 1,000 where the
agency defaults on its contractual obligations.
TAX LOSS INSURANCE

Some insurers offer policies that will help protect you against any outstanding tax, National
Insurance Contributions, interest and penalties suffered in the event that an IR35 enquiry by
HMRC finds against you. Abbey Tax Protection offers discounted rates to PCG Plus members.
82
BUSINESS INTERRUPTION INSURANCE

Business interruption insurance compensates you for extra costs incurred and trading profits lost if
your business suffers serious disruption after, say, a fire or flood and you are unable to trade as
normal. These costs can often be much greater than losses from property damage for example.
LEGAL EXPENSES INSURANCE

Legal expenses insurance covers legal costs such as solicitors fees and court costs, and is bought
as protection against any future legal action. Many policies offer legal guidance via a telephone
helpline.
KEY MAN INSURANCE

Key man insurance can make your business less vulnerable to the illness or death of key
employees. The insurance will pay out to the business in the event of a serious illness or death of
a key individual. Premiums can often be offset against corporation tax.
JURY SERVICE EXPENSES INSURANCE

Being called for jury service can have a major financial impact on a micro-business, especially if
the person called is the main fee earner for the business, since compensation currently amounts to
little more than expenses for the individual. Note: PCG Plus and PCG Solo members can claim
a jury service allowance of up to 300 per day, less any amount recovered from the
relevant court, for up to ten days.
For a list of insurers see the PCG supplier directory at pcg.org.uk.
83
ACKNOWLEDGEMENTS
PCG, the voice of freelancing would like to thank the following organisations for reviewing this
document and recommending refinements and amendments where appropriate:
Abbey Tax Protection
www.abbeytax.co.uk
Randell Dorling Ltd
www.randelldorling.co.uk
Hiscox
www.hiscox.co.uk
Wealth Matters
www.wealth-matters.co.uk
ContractorFinancials
www.contractorfinancials.com
DISCLAIMER
This document is for general guidance only and is not a substitute for professional advice where
specific circumstances can be considered. Whilst every effort has been made to ensure the
information contained within this publication is correct, PCG does not accept any liability for any
errors or omissions contained herein or any action taken or not taken in reliance upon the
information provided in these articles.
No part of this publication including any article or graphic in whole or part may be reproduced
without PCGs express permission. PCG neither endorses nor provides any indemnity regarding any
product, service or organisation mentioned within this document unless specifically stated.
It is strongly recommended that you consult the appropriate legal and accounting professionals for
advice about your specific circumstances before making important decisions.
UPDATES
This Guide to Freelancing is updated from time to time, and you should visit the PCG website
www.pcg.org.uk regularly to make sure that you have the latest version, or, better still, join PCG
as a member.
Whilst every effort is made to ensure that the information herein is correct at the time of
publication, it is inevitable that certain information may be superseded very quickly.
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3. If you do nothing else, do this... (page 7)

SECTION 2: SETTING UP YOUR FREELANCE

SECTION 3: THE BOOKS

11.Money out (Page 41)

What you can and cant claim as a legitimate business

Copyright PCG September 2011

Guide to Freelancing Version 7.0

SECTION 4: PAYING THE TAXMAN

14.Taxation of sole traders,

partnerships and LLPs (page 53)

SECTION 5: RUNNING THE SHOW

SECTION 6: RISK PREVENTION

22.Worth considering (page 82)

Insurances for those who want comprehensive cover

Copyright PCG September 2011

Guide to Freelancing Version 7.0

Copyright PCG September 2011

Guide to Freelancing Version 7.0

Hello and thank you for choosing the PCG Guide to

TAKING THE PLUNGE

Its easy to delay and

make excuses about

And dont forget, were here if you need us.

Copyright PCG September 2011

Guide to Freelancing Version 7.0

DIFFERENT WAYS OF FREELANCING

BUILDING YOUR OWN CAREER LADDER

Copyright PCG September 2011

Guide to Freelancing Version 7.0

JULIE MEYER, ONE OF BRITAINS MOST SUCCESSFUL

Copyright PCG September 2011

Guide to Freelancing Version 7.0

THE FREELANCE CHECKLIST

THE GRAND STRATEGY

Do a simple business plan. Template available to PCG members

Do a financial forecast. Template available to PCG members

Write down a cash flow strategy to mitigate against late

Decide whether to set up as a sole-trader, limited liability

Source an accountant (unless you went the umbrella route). Ask

If your accountant doesnt provide one, source a record keeping

Get a bank account set up in your company/business name.

Send relevant forms to HMRC (ask accountant for assistance). If

Consider the VAT Flat Rate Scheme discuss merits with

Copyright PCG September 2011

Guide to Freelancing Version 7.0

FREELANCE CHECKLIST CONTINUED...

Can take weeks

Get business phone line, mobile phone and, if necessary, a fax.

Source computer/s, printer, backup system and any other

Set up a professional base to work from.

THE BUSINESS DRIVE

Review business plan and decide which business model, price

Launch a new business drive based on the above

Follow up hot leads

Review results and decide whether to continue or switch tactics.

Copyright PCG September 2011

Guide to Freelancing Version 7.0

FREELANCE CHECKLIST CONTINUED...

GETTING READY TO DELIVER

Understand the project lifecycle from the clients perspective.