The talk may still be of the recession continuing for much of 2013, but Bristol based accountants, C & M Services says it’s still a good time for contractors.
Many large organisations are continuing to put a hold on permanent recruitment, preferring to use contractors which bring with them high levels of skills and experience and the resource flexibility large firms want.
For individuals, whether contracting is a short term or long term career choice, this route can offer the opportunity to develop certain skills, try new industry sectors and take home more pay.
Here, we look at some of the trading options open to contractors.
Once you have decided to contract/freelance, the next step is to decide which is the best route in terms of trading structure.
There are a number of issues to consider and this article highlights some of these.
Essentially, there are four routes to choose from:
Here the contractor is an employee of the agency and so all earnings will be subject to PAYE and NI in the usual way. This route offers no tax advantages but does mean that there is no requirement to complete a self assessment return provided you have no other income.
However, clients and agencies will typically require contractors to provide their services either through a limited or umbrella company. One of the key reasons for this is that both options provide their own legal identity and so offer some protection to the clients and agencies from employment rights and tax liability transfers.
Option 2: Limited Company
This can often be a tax efficient method of trading for individuals provided that they fall outside the IR35 legislation, as earnings can be taken in the form of a salary and dividends. For individuals who offer services and are essentially “disguised employees”, earnings will be subject to a calculation called the “deemed payment” as set out by HMRC. This effectively means that 95% of income will be subject to PAYE and NI. This does often beg the question about the advantages and disadvantages of this route. We look at some of those here:
- As already mentioned, this structure can be a tax efficient one as no NI is payable on dividends paid out. This will be the preferred route if you are genuinely operating outside of IR35.
- As you are trading in your own right, you can register for the flat rate VAT scheme which effectively means that you can add VAT onto your invoices at the prevailing rate of 20.0% but pay over a lower amount to HMRC.
- In addition to travel costs, you will be able to claim use of home as office, computer equipment costs, mobile and internet costs. Company set up costs and accountancy fees will also be tax deductible.
- You can grow the business by allotting more shares or selling some of your existing shares to bring like minded directors in to work alongside you.
- A company is a separate legal entity which protects you and your personal assets from any litigious activity
- The cost of set up and compliance in terms of filing statutory accounts to Companies House and Corporation Tax returns to HMRC can be in the region of £1,200 per year.
- Paperwork involved – raising invoices and debt collection are the key ones to consider here.
- Any profit after your “deemed” wages will be subject to corporation tax of 20% (small companies rate)
- Will require careful consideration and tax planning before closing down
Option 3: Umbrella Company
This will provide you with the flexibility of joining and leaving normally without any charge and with no/minimum notice periods.
- There are no set up costs as the company already exists – this has the added advantage that you can start working as soon as you have completed the joining paperwork.
- Umbrella companies will normally provide you with insurance cover. Make sure you understand exactly what insurance they have and what is covered. This means you do not have the hassle and expense of arranging this for yourself and again, this can facilitate a speedy start to your new assignment.
- If you are new to contracting, you may want to consider this option initially. If you decide that contracting is for you in the longer term, it may be worthwhile incorporating into a limited company.
- As with the limited company, your personal assets are protected from any litigious activity which will be directed at the company and not you personally.
- You have no control over the running of the company as you are not a director or a shareholder.
- You will pay a monthly charge for the services provided by the umbrella.
- You are reliant on the umbrella company to complete the invoicing and payroll in a timely manner to ensure that you get paid.
Option 4: Contractor solution – tax product
Quite simply, designed for contractors who want certainty and protection from IR35 challenges and the individual financial uncertainity associated with this.
- Contractors work as employees – this means any IR35 risk falls on the employer
- Increased certainty for the contractor in managing their financial affairs
- No admin burden in setting up and running a limited company
- No set up fee, no minimum period, no exit charges
- There is a minimum contract value required to be eligible for this product
- This is not for you if you want to set up a limited company to take on staff and diversify your service base
- Your risk profile and attitude to tax planning may mean you do not wish to pursue this route
Which One is For Me?
Here are some considerations before you make this decision:
- IR35 status – if your contracts are such that you will be operating outside of IR35, then the limited company will offer you the most tax effective route. HMRC have signalled that they intend to target those contractors who are caught by IR35 by introducing dedicated support teams and helplines. They have also published the Business Entity Tests – this is a way of proactively reviewing your individual risk to IR35 and should be undertaken on an annual basis or whenever you have a new contract.
- Control – if you want to retain complete control and be seen as the company director, then you will choose the limited company option over the umbrella route.
- Paperwork – if this is not your thing or you don’t have the time, go for an umbrella company that will process everything for you and charge a weekly/monthly fee for doing so.
- Your intentions – a limited company may be more preferable if you intend to stay contracting in the longer term.
- Flexibility – an umbrella company is easy to join and leave. You can always start a limited company later. It is much more complicated and lengthy to shut a limited company down once it is up and running. It will also involve additional filing fees at Companies House and accountancy charges.
- If you are after the maximum tax efficiency and a long term high earner, then you should consider the limited company route.
There is no absolute right answer. However, we will be happy to discuss these options with you further so that you choose the route which suits you.
Please note that the choice of trading route does not influence your IR35 status which is determined by the conditions and practicalities of your contract. Your status in relation to IR35 should be reviewed with each new assignment.
Want to Know More?
For general start up advice or a review of your options, contact C & M Services. We pride ourselves in offering choice so that you can choose the option which suits YOU.