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Contractor limited company formation versus set up and preparing for trade

Contractors who wish to trade through a limited company can choose between a basic formation service or appoint an accountant to perform all the necessary registrations required for a new business for trade.

Basic online company formation services can cost as little as £18 if contractors choose to incorporate directly through, for example, Business Link and Companies House. However, although low cost, online services do not include a range of added-value services contractors may require.

Using an accountant to set up a contracting business is more expensive, but can include items such as HMRC registrations, bank accounts, business advice and filing the paperwork to comply with money laundering legislation. Accountants can also provide advice on shares and ownership that can help avoid later legal and tax issues.

Basic formation via Business Link and Companies House

Contractors can incorporate their new limited company via Business Link and Companies House. When using this service, contractors should have the following information to hand:

  1. The company name and address
  2. Details of directors, normally the contractor and possibly a spouse or civil partner, and the company secretary, which is optional
  3. Details of each shareholder and the value of their shares, again usually the contractor and their spouse or civil partner
  4. Credit or debit card details – there is a fee of £18 for this service, payable to Companies House.

This service will register a contractor’s new business with Companies House, usually within a matter of hours, but won’t include any other registrations, such as with HMRC, or a bank account.

Accountant’s formation services

Contractors choosing to incorporate via an accountant will usually benefit from a much broader range of services. Online contractor accountancy services will generally include incorporation as an element of the monthly fee, but some accountants will charge up to several hundred pounds to incorporate a company. That’s because they generally bundle numerous added-value services as part of the incorporation fee. These services can include:

  • Advising on the best trading option for the contractor
  • Incorporating the company with Companies House
  • Registering the business for corporation tax, Pay As You Earn (PAYE) and VAT
  • Providing an introduction to a bank or, on occasion, offering an off-the-shelf company with an existing bank account
  • Performing money laundering legislation compliance checks and registrations
  • Briefing the contractor on remuneration strategies, such as low salary/dividend approaches.

An accountant may also advise a contractor client on whether or not to register for the VAT Flat Rate Scheme (FRS), which allows some contractors to generate a small surplus. In some cases the surplus will more than cover the cost of an accountant’s bills.

Contractors with complex needs or a prior business

Contractors who have a previous trading history, perhaps as a sole trader or having run another limited company business, can benefit from an accountant’s service when incorporating.

This is particularly true of contracting businesses where there might be goodwill or business assets to transfer across to the new contracting business.

The transfer of assets and valuation of goodwill can be a complex process. Contractors can benefit from tax savings if the transfer or valuation process is conducted correctly and with professional assistance.

Using an accountant to incorporate a business generally costs more than basic formation online. However, for some contractors, the additional costs are outweighed by the potential tax savings, time savings and the reduction in the ‘hassle factor’ by involving an accountant from the outset.

Published: 04 May 2012

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