Contractors face a number of issues before they start to work. These include:
Whether to trade as a sole trader, limited company or through an umbrella company. Each one has their own advantages and disadvantages:
Sole Trader: Trading as a sole trader is a very straight forward way to trade. There are few deadlines and much less administration than there is with a limited company. Contractors who trade as a sole trader will have more take home pay compared to operating through an umbrella company but not as much compared to operating a limited company.
Limited company: Contractors that trade through a limited company are generally operating very tax efficiently. This means that contractors receive more take home pay compared with sole traders or those using umbrella companies. Another advantage of a contractors limited company is that if the company was to get into financial difficulty then the contractor would not be personally liable for the debts the company owes (unless a personal guarantee was signed).
Umbrella companies: If a contractor decides to work through an umbrella company then everything would be taken care of by the umbrella company. They would complete the invoicing and make the necessary deductions before giving the contractor their take home pay each month. Umbrella companies are useful for contractors who have very temporary contracts as it saves the hassle of setting up a limited company and closing it down once the contract has finished. However umbrella companies can charge large fees and they are not very tax efficient. Take home pay will be much less through an umbrella company.
VAT registration: If a contractor decides to trade as a sole trader or through a limited company then they can register for VAT and benefit from the flat rate scheme. This is advantageous as an additional 20% can be charged on top of their fee (which the customer will not mind if they are also VAT registered) but a lower percentage paid over to HMRC meaning an increase in take home pay.
IR35: This is a piece of legislation that prevents contractors operating as ‘disguised employees’. If the relationship between the contractor and the end customer is deemed to be that of a similar one to an employer, employee relationship then it is likely that the contractor is obliged to pay the tax and national insurance that would have been due if they were on the payroll.
IR35 only needs to be considered if a contractor is trading through a limited company or as a partnership. If an umbrella company is being used then IR35 is not applicable.
There are many factors that need to be considered before an opinion is given as to whether the legislation applies or not. We can provide help and advice and offer our opinion on IR35 to our potential and existing clients.
We deal with many types of contractors and are happy to help with initial questions new contractors have. We also offer unlimited help and advice included in our fees.
For further information please contact us