Starting a company prematurely

[Miss Ellie]

you might view it as restrictive, but the courts generally do not. If your contract states that you may not take on other directorships, then the court's view is that you should not do so without asking permission first (the logic being that, as a director you are under certain statutory obligations that might conflict with your responsibilities under the employment contract). Like I said, it dates back to the days when the serfs had contracts of employment and only "gentlemen" were directors. Still the law, though.

This issue is not black and white it depends on the exact wording of the employment contract and that wording must not breach the implied terms in employment contracts and contracts in the different UK laws.

If the wording is clear that it restricts you to not doing anything that is competitive to the your current employer while you are working then it is reasonable. If the wording is very wide and it is not restrictive enough, then you can argue that it breaches contract law in your particular circumstances by being ridiculous unless what you want to do is competitive to your current employer. Setting a non-trading business and having to notify or ask your employer permission is in affect giving your employer notice of your departure months or even years in advance particularly if they question you on what is the purpose of the business and refuse to let you be a director, unless you give them that information. This could lead to unpleasant consequences for you in terms of unfair treatment at work.

The principle that your barrister is (probably) referring to one, refers to restraint of trade clauses. This is where your employment contract states that, when you leave employment, you may not work for a competitor (or solicit work with one of your current employer's clients) for a period of time. These are generally viewed by the courts as being an unfair restraint of trade, and thus not legal (although even here, the law is complex and if the restraint clause is worded sufficiently tightly, it can still be enforced).

No I was asking the barrister about lots of different terms and clauses in contracts trying to find out where someones duties as an employee ended and their rights as a private individual began as lots of employers word contracts in a way that gives employees no rights to be private individuals with outside interests or have information that they can withhold from their employer about their personal circumstances. The courts have always implied you can have a private life even before the Human Rights Act came into force.

This guy was from one of the top chambers (Clositers) and so I was getting as much free infor as possible, because the guy I have normal access to while is an employment barrister doesn't have it has his first speciality.

[XLMonkey]

And I view that notification or asking an employer for permission on directorships is too restrictive.

you might view it as restrictive, but the courts generally do not. If your contract states that you may not take on other directorships, then the court's view is that you should not do so without asking permission first (the logic being that, as a director you are under certain statutory obligations that might conflict with your responsibilities under the employment contract). Like I said, it dates back to the days when the serfs had contracts of employment and only "gentlemen" were directors. Still the law, though.

The principle that your barrister is (probably) referring to one, refers to restraint of trade clauses. This is where your employment contract states that, when you leave employment, you may not work for a competitor (or solicit work with one of your current employer's clients) for a period of time. These are generally viewed by the courts as being an unfair restraint of trade, and thus not legal (although even here, the law is complex and if the restraint clause is worded sufficiently tightly, it can still be enforced).

[philip@wellwoodhoyle]

I don't think you'll be successful in applying for VAT registration until you get a contract. HMRC have recently tightened up the registration process and now do a lot of checks to make sure that applicants are genuine. In recent cases of mine, they've insisted on proof of a company bank account being set up and at least one other "proof" of trading - normally we've had signed contracts from the agency or end-user but otherwise we've had to resort to sending them proof of PI or business combined insurance to prove they're serious!

As to other aspects, the company formation is just a few days at the most, company bank account is a couple of weeks. Assuming you get things moving when you get your contract, everything should be in place for when you want to raise your first invoice a few weeks later.

As for claiming expenses and VAT prior to the company being formed, no problem, this is a common scenario allowed for. As long as the company repays you for the expenses you incurred and you have the invoices etc., you'll be able to claim.

[Miss Ellie]

Most restrictive clauses are badly written. I have been told by an employment barrister that -

If a term in an employment contract is too restrictive it could be deemed unreasonable in a court of law, and the entire unreasonable term would be struck out, and a reasonable interpretation cannot be substitued in it's place.

And I view that notification or asking an employer for permission on directorships is too restrictive. For example my block of flats puts each purchaser of a flat down as a director of the maintenance company for the building (you don't have any choice in the matter you can't be a director you ain't welcome), and asking an employer for permission for a directorship like this is like asking an employer permission to buy your own dwelling.

So it's a case of commonsense. If your company is not trading and therefore not threatening the profitability of your current employer or bringing it into disrepute, and you have a good arguement to prove such a clause in a contract is too restrictive then ignore the clause.

[VectraMan]

And what happens if I start to use my new company (e.g. incurring start-up expenses and touting for work) before resigning my current post, as I'm effectively an employee of two companies at the same time - I guess my tax return could get rather complicated?

Last year I took a sabatical from my permie job to do a contract (through an umbrella). Because I didn't officially leave my permie job I was on both payrolls at the same time, and didn't have a P45. All it meant was that I was then stuck on emergency tax and so overpaid £1500 last year, which in theory you get back after doing your tax return. In theory as I'm *still* waiting to get back from the IR.

[XLMonkey]

A follow-on question...

Is there any legal problem forming a company while I'm still a permanent employee of another company? And what happens if I start to use my new company (e.g. incurring start-up expenses and touting for work) before resigning my current post, as I'm effectively an employee of two companies at the same time - I guess my tax return could get rather complicated?

Yes, there probably are. You need to check your employment contract, but most full time contracts require you not to take on directorships in other companies without first notifying (and confirming acceptance) from your current employer. It's a hangover from the days when "gentlemen" ran companies and "common people" worked for them.

In practice, the odds of your current employer bothering to check with Companies House, or even complaining about it if they found out about it, are minimal. I did it, made not a blind bit of difference.

On the subject of tax returns...you are not an employee of two companies. You are an employee of one and a director of another. You have to put down both on your tax return, but it only gets complicated if you are paying yourself a salary from the new contracting company prior to leaving your current employer. This is unlikely....

[Pondlife]

A follow-on question...

Is there any legal problem forming a company while I'm still a permanent employee of another company? And what happens if I start to use my new company (e.g. incurring start-up expenses and touting for work) before resigning my current post, as I'm effectively an employee of two companies at the same time - I guess my tax return could get rather complicated?

I wouldn't have thought so. There wouldn't be any revenue goinig through the company until you working through it. Once you've resigned from your permie job and had your first invoice paid, put the start up costs through Your Co as expenses. Then the world's your lobster.

[Kess]

A follow-on question...

Is there any legal problem forming a company while I'm still a permanent employee of another company? And what happens if I start to use my new company (e.g. incurring start-up expenses and touting for work) before resigning my current post, as I'm effectively an employee of two companies at the same time - I guess my tax return could get rather complicated?

[TheMonkey]

Yeah definitely. I formed too late and ended up with about £5k's of cheques and no bloody bank account.

[Kess]

Thanks for all the answers and advice. It sounds like it's worth going ahead and setting up the company right now.

Kess

[XLMonkey]

I'm keen to form the company a.s.a.p., but would this be silly if it's not going to see any active use for a couple of months? (presumably even though the company is idle it would still require the services of an accountant etc.).

you don't need an accountant if you aren't trading. The relevant reporting forms get sent to you in the post directly, and if there's no trading, just fill in nil. You can get an accountant and so forth once you have your first contract.

Conversely, if I don't set up the company now but jump the gun and incur some valid expenses in the meantime (e.g. cost of computer equipment, setting up a web site, etc.) could these be claimed back retrospectively once the company is created?

you can claim back retrospective establishment costs for a period of up to 6 months prior to company formation (provided that you have receipts etc).

generally, it's a good idea to establish the company (and register for VAT) in good time, but not essential.

The reason it's a good idea is this:
- takes a long time nowadays is getting a company bank account. New money laundering regulations were introduced a couple of years back that require some fairly lengthy credit checks to be undertaken before you can have a co. bank account. (can take anything from 4-10 weeks to complete the credit checks, which can be a pain in the ass if you want to start invoicing a week after you have established the company)
- often takes a long time to get VAT registered (sometimes as little as two weeks, more often 8-10 weeks), and you definitely want to be VAT registered and on the flat rate scheme if you are a contractor.

but if you can't be bothered, then it's not essential -- both of these things can be sorted out once you've started, although they involve a bit of extra admin

[ladymuck]

premature incorporation!

[bobsmithldn]

In fact, I would set it up now for a number of reasons:

1) When you do find a contract, you can have all the details to hand and you will be able to move quickly w.r.t. signing the contract (Company #, VAT #, etc.). You can also use this time to think about the structure of the company (directors, secretary, shareholdings, etc.). VAT registration takes a couple of weeks, I think.

2) When you start contracting - for example, in three months time, the last three months of your contracting will fall into a subsequent corporation tax year and hence you can delay paying approx. £5K until a subsequent year (every little bit helps), assuming £500 a day and approx. £85K-odd profits.

Hope that helps.

[Kess]

I'm planning to give up permanent work shortly, take a couple of month's well-earned rest after 20 years of continuous employment, then become a freelancer under my own limited company.

I'm keen to form the company a.s.a.p., but would this be silly if it's not going to see any active use for a couple of months? (presumably even though the company is idle it would still require the services of an accountant etc.).

Conversely, if I don't set up the company now but jump the gun and incur some valid expenses in the meantime (e.g. cost of computer equipment, setting up a web site, etc.) could these be claimed back retrospectively once the company is created?

TIA
Kess