LIMITED COMPANY CONTRACTORS
Many temps and freelancers are keen to work as Limited Company Contractors however this is not as straight forward as it may appear and you should carefully consider the following factors and thoroughly research the options before making your decision.
Being your own boss – this can be extremely enjoyable and satisfying however this can also mean you are your own HR, accounts and workforce.
Earn more money – Contractors rates can be more than employees working alongside them on a project. The rate you are paid needs to include all statutory obligations NI, pension, taxes, sick pay, maternity/paternity pay. You will also need to keep a fund to pay insurers, accountants and lawyers if needed.
Freedom and Flexibility – Contractors can choose when and where to work and when to take time off. If you accept a contract you are obliged to complete it though as the company that has engaged you has paid for delivery of a service and not for your work by the hour.
Variety – by moving from contract to contract and company to company, there is an opportunity to develop very varied experience and an impressive CV. In some industries this is extremely advantageous. In other sectors, it may have negative connotations.
How is your role defined? – You are a corporate entity and therefore you will be treated in a different manner by the client and your recruiter. You will not entitled to the same treatment as PAYE staff
Admin, admin, admin – Running your own business necessitates this. There will be forms to fill in, rules to obey and accounts to keep
This is about you – You are likely to alone. As well as sometimes being lonely, being your own boss means, that nobody will pay you when you take a holiday or are ill and you may need to think about how to negotiate this with your client if they are expecting a service.
Limits to some client sites – Some companies will not allow recruiters to submit LCCs for assignments. If you wish to work as a LCC or sole trader you should explain this to your recruiter as early as possible to avoid disappointment.
Are you genuinely self-employed?
You should also have a clear grip on whether you meet the criteria to be judged as genuinely self-employed. You will need to consider the following;
Agency workers Regulations 2010
The Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the Conduct Regulations) dictate how a recruitment company supplies work-seekers to an end client.
The definition of “work seeker” in the Regulations includes individuals who supply their services through limited companies, umbrella companies as well as personal service companies.
Limited company contractors (LCCs) and umbrella workers need to understand their ability to opt out of the Conduct Regulations and be prepared to communicate their decision to their agency or umbrella so the right contracts can be issued.
What are the Conduct Regulations?
The Conduct Regulations and the Employment AgenciesAct 1973 are the main statutory rules
governing the conduct of employment agencies and employment businesses operating in England, Scotland and Wales. For those who operate in Northern Ireland, the Conduct of Employment
Agencies and Employment Businesses (Northern Ireland) Regulations 2005 apply.
Opting-out of the Conduct Regulations:
Under Regulation 32, LCCs are entitled to opt out of the Conduct Regulations provided they are not working with anyone under the age of 18 or with vulnerable adults. Where there has been a valid opt-out, the provisions of the Conduct Regulations will not apply.
Furthermore, under Regulation 32(13), an employment business cannot make the provision of work finding services conditional upon an LCC opting out of the Conduct Regulations.
If you require further information please request a fact sheet or seek advice from your lawyer or accountant, recruiter or umbrella.
The IR35 legislation was primarily designed to tax ‘disguised employment’ . This is where the relationship between worker and client is such that had the worker been paid directly rather than through a personal service company or other intermediary, they would be deemed employees of the client. There is clear guidance of how to comply with IR35 and judge if you hit the criteria. Please refer to HMRC website or speak to your professional advisors.
Contractors operating a limited company will pay themselves a mixture of a salary and dividends and claim expenses, as this can allow them to make considerable tax savings. Dividends are payments made to the shareholders of a company – which, in the case of your limited company, generally means you alone. In reality, contractors should be generating significant or multiple income streams to make the tax savings be advantageous.
Dividends themselves are not tax-free; they qualify as income and must be declared on your self-assessment. However, they are taxed at a lower rate than standard income, and are free of National Insurance. In addition, because dividends are paid out of income that has already been taxed, they include a tax credit component which ensures that the same income is not taxed twice. Current tax rates for dividend income can be found on the HMRC site.
Dividends are paid out of your company’s post-tax profits – that is to say, the money left over once you have paid your Corporation Tax. You pay dividends by declaring them, by documenting the declaration in the form of company board meeting minutes, and by issuing a dividend voucher to each shareholder.
Once declared, the dividend itself can be paid whenever you want. It is crucial, however, that you do NOT pay out more in dividends than you can afford after allowing for tax, even if you expect to make up the additional funds before your Corporation Tax falls due, as to do so would break company law
PAYE and National Insurance
Income tax and National Insurance contributions, or NICs, are payable on the salary that you pay yourself out of your limited company’s turnover. It is common for contractors who are not caught by IR35 to pay themselves a very low salary (e.g. minimum wage) to keep income tax and NICs to a minimum, taking the remainder of their income as dividends. Because you are automatically your company’s director, you will need to contact HMRC to set up a PAYE scheme to pay yourself.
Income tax is calculated on your gross salary, taking into account the various thresholds and allowances in force. NICs come in several flavours: Class 1, or Employer’s Contributions, calculated from gross salary; Class 2, which are a flat weekly rate; and Class 4 which are also calculated on your gross salary. Latest information on income tax and National Insurance rates and allowances can be found on the HMRC website. Dedicated accounting software can be used to work out the tax and NICs due based on your salary. Tax and NICs due must be paid either monthly or, if the amounts are low, quarterly.
VAT is administered by HMRC. It is not necessary to register a Company for VAT until its turnover hits a certain level. VAT is a tax charged on sales made. A VAT registered business therefore has to charge VAT on sales, but can reclaim VAT on purchases made from other VAT registered businesses.
If you think you are going to exceed more than £81,000 in company revenue you will be required to register for VAT. You can benefit by registering regardless of this level, as it enables you to recover any VAT that you incur on things that you buy for the business (e.g. computer equipment/accountancy fees).
You will need to complete a quarterly VAT return if you don’t have an accountant that does this for you. VAT registration usually takes about 8 weeks, but this will not prevent you from invoicing your agency/client or reclaiming VAT on expenses. Until the Company is registered you simply raise sales invoices without adding on VAT. Once the Company is VAT registered you must show the registration number on your invoice and add VAT at the appropriate rate. You will receive a green VAT100 form on a quarterly basis which should be forwarded to your accountant for completion as soon as you receive it. VAT payable must be paid by the last day of the month following the VAT quarter. There are penalties for late payment. In order to recover VAT on things that you buy for the business you must obtain a “VAT Invoice” showing the supplier’s VAT No. Always ask for a VAT invoice as they will not automatically be provided every time.
Taxed Management Act Section 29 – are you the target?
HMRC may use this section in relation to contractors and freelancers, however. They are more often used if an individual or business has complex tax affairs or has implemented a tax avoidance scheme where there is significant tax at stake. HMRC has targeted doctors, dentists, plumbers and those with overseas income (potentially including contractors), by giving them the opportunity to come forward and settle up at the lower end of the penalty regime. The next steps could be for HMRC to approach those who they are aware have undisclosed income to make their “discovery”.
Please ensure you understand the consequences of the decision to become a LCC or a sole trader. It can be extremely beneficial and enjoyable but it may not suit all and the costs of running a business mean that you can make a loss as well as a profit.
Are you equipped to be an L.C.C.? That is the question.
Further information available from :
HMRC, VAT, Recruitment Employment Confederation (REC), APSCO