Employment Status

Are you a contractor? If you work for someone else, it is important to know whether you are working for that person in an employed capacity or in a self-employed capacity as an independent contractor.

Your employment status will determine the charge to tax on income from your employment or self-employment. It will also determine the class of NICs, which are to be paid.

Umbrella Companies employ you for tax purposes and complete central returns for all their contractors. It's less hassle and more flexible for you but take home pay is typically less than that the limited company option.

The best option for you depends on your plans, 'one off' contract or 'contractor for life'? [Read More...]

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New contractor Limited Company or Umbrella Company

Limited Company or Umbrella Company

New to Contracting? Struggling with the minefield of information?

Setting up your business as a new contractor can be a minefield of uncertainty, especially when registering for Tax, PAYE and VAT.

Contracting - Where to start?

Many new contractors start their contracting education by visiting the HMRC website. Navigating 'Her Majesty's Revenue and Customs' (HMRC) website can be time consuming and very confusing. It's not unusual for new contractors (and veteran accountants!) to spend hours going round in circles trying to find a simple piece of information. This can be frustrating, especially if you only have a short timeframe to decide whether to form your own limited company or use the services of an umbrella company. (NB: Although Technically you could be a 'sole trader', most agencies and clients will not work with a sole trader due to the differences in liability and conformance).

Limited Company or Umbrella Company - it's the first choice a new contractor has to make.

Most end clients prefer to work with limited companies or contractors using an umbrella company. As a limited company director you will have had to register your company and commit to HMRC legally binding obligations. This provides a more robust and credible option to the end client (because if something goes wrong, it's easier for them to do something about it!). An umbrella company is basically a quick fix means of giving you limited company status.

Identifying and Choosing what's right for you

As a contractor, you have two options: Limited Company or Umbrella Company.

This article provides an introduction to ltd and umbrella company solutions. The aim of this article is to provide you the right information to set up as a Contractor, either by forming your own Limited Company or utilising an Umbrella Company, without the frustration of the HMRC information overload.

The Limited Company Option:

Setting up and financially managing a Limited Company:

  1. You must appoint director(s)
    Directors run the company. Directors responsibilities include ensuring that the financial accounts of the company are accurate. Both the company's financial accounts and Company Tax Returns must be signed by a Director to confirm their accuracy. The Director must also complete an annual Self Assessment income tax return
  2. You must register with Companies House
    Companies House registration can be completed online, by visiting the HM Revenue & Customs (HMRC) website. You will then receive a 'certificate of incorporation' Companies House which shows the company number and date of formation. Once the certificate is received, you must use the word 'Limited' or 'LTD' as part of your business name. Your responsibilities to Companies House include; providing full statutory annual accounts to Companies House, Filing a Company Tax Return with HMRC, paying Corporation Tax (or advising HMRC that your Limited company doesn't owe any).
  3. Notify HMRC
    The following information must be provided to HMRC; the company name and registered number along with your business address and type of business. The date the company started must be provided and if it is a 'group' or if you've taken over an existing business. The start up date is any activity has taken place, such as buying, selling, employing someone, advertising or renting a property. You must advise HMRC of the date that you will make your annual accounts up to. HMRC will send you a Unique Taxpayer Reference. You must let HMRC know within three months that your company has started any business activity. HMRC will advise you how to set up your company's HMRC 'online account' for Company Tax Returns and Corporation Tax.
  4. Financial Accounts
    You must send statutory accounts to both HMRC and Companies House annually. Unless you have prepared financial accounts before you may need a professional advisor to help as accounts must follow certain 'Generally Accepted Accounting Principles' (GAAP). Amongst the information you have to provide is a 'balance sheet', which is a snapshot of what your company owns and owes to others, a Directors report and an Auditors report. Note: Accounts must be audited unless your company qualifies for the small companies exemption. Companies House has special rules relating to the period of time covered by the first set of accounts. Please visit http://www.companieshouse.gov.uk/webfiling/julyImprovements.shtml
  5. Record keeping
    In order to draw up 'true and fair' annual accounts you need to keep a full record of all business income and expenditure. For Corporation Tax you must keep business records for six years from the end of an accounting period. It is your responsibility to ensure that the records you keep are sufficient to make a correct Company Tax Return and calculate how much Corporation Tax you need to pay. If you fail to keep the right records for the required length of time then your company may be liable to a penalty.
  6. Company Tax Return
    Shortly after your company’s accounting period ends you will receive a notice CT603 to 'file a return'. You must file the company tax return before the statutory filing date, which is usually 12 months after the end of the accounting period. (NB If you do not receive a notice CT603 to file until more than 12 months after the end of the accounting period, then you have three months to file the return. If you are late filing the return then the company will be liable to a penalty).At the end of every accounting period, you must 'file a return'. You must provide a copy of your company accounts and tax computations and a fully completed CT600 form to HMRC. Each company tax return can cover a maximum of 12 months.
  7. Paying Corporation Tax
    All Corporation Tax payments now need to be made electronically and you can register on the HMRC website. Corporation Tax is only payable when the company makes a profit. The amount of tax charged depends on the amount of profit made and when the profits were made. You can find the current Corporation Tax rate that applies to your business on the HMRC website.

If your company has an annualised profit of less than £1.5million, the deadline for paying Corporation Tax is nine months and one day after the end of the accounting period, which is normally three months before the deadline for filing a return.

The Umbrella Company Option:

Utilising the services of an Umbrella Company:

  1. What is an Umbrella Company?
    It is a company that provides a service to contractors with regards to managing some financial aspects of running a business. It negates the need for a contractor to set up their own Limited Company and assumes the role of your 'Employer' in legal terms. The Umbrella Company will not be involved in running any other part of the business, but will manage the wages, Tax, PAYE and VAT on behalf of the business. You can use the service for as long or short-term as you like.
  2. Identify the Umbrella Company
    You can browse the internet to compare companies or you can choose a vetted HMRC compliant umbrella company right here. You should enquire about the exact service that will be provided to you and what you will be charged for that service.
  3. Once you have selected the Umbrella Company
    , you must provide them with your original P45 immediately. This ensures that the chance of paying 'emergency tax' is reduced. NB If you do not have a P45, the Umbrella Company will provide you with a P46 form to complete and return to them. HMRC will then notify the Umbrella Company of your Tax Code.
  4. Provide the Umbrella Company with your timesheets and expenses
    (certain expenditure may be tax-deductable) for them to calculate pay and taxes etc.
  5. The Umbrella Company now acts on your behalf
    to pay your Income Tax, VAT, PAYE and National Insurance contributions.
  6. You should expect the Umbrella Company
    to maintain a professional service for the duration of your time with them.

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HMRC Compliance

It's the basics... Compliance with Tax, VAT, PAYE and fiscal arrangements is mandatory for contractors regardless of whether you use an umbrella company or your own limited company.

Incredible then that there are still rogue umbrella companies and limited company accountants who expose their contractors to fraud. Umbrella Compare provides THE solution, we thoroughly vet all umbrella companies and limited company accountants that we list [Read more...].

Umbrella Compare provides a holistic overview of contracting with the aim of helping new and old contractors find the right payroll solutions. Contracting should be about focusing on the contract, not payroll, accounting, HMRC and bureaucracy.