PREVIEW

Select a topic using the links below

      How to break rank with permyism

                Educating yourself on IT contracting

                Preparing for the move to IT contracting

                The successful contractor

                What to do next

                Setting up your corporate foundation

                Structure choices

Structure choices

• umbrella

• composite

• limited liability

• other structures

These structures are all offered by Managed Services Companies (MSC’s). An MSC is any company that offers to manage the running of your contracting affairs for you. They can be difficult to identify but cost you dearly if you are caught using one by the HMRC. To find out if an MSC is involved with your company or contracting business, look out for the following signs:

1. They benefit financially on an ongoing basis from the provision of services to you. Often they will receive a percentage of your contracting income as their fee for providing services. This fee will be linked to your contracts, therefore you pay only whilst you earn. They will also handle invoicing of the organization you are contracting at and pay you, less their admin fee (in essence this is what all agencies do).
2. They will influence or control how you get or secure your contracts. An MSC will normally arrange contracts, negotiate changes to your contracts, negotiate rates, arrange when you go on site, and handle disputes between you and organizations.
3. MSC’s may also influence how and when your time sheet and their invoices are paid by the organization. They will normally have access to your company bank account or control it and make payments on your behalf.
4. They often offer payroll services and calculate dividends, expenses, tax and VAT due, and also instruct you on how much to pay yourself from the company bank account.
5. MSC’s may also promote insurance schemes promising protection against tax loss due to tax investigations, or successful HMRC legal cases brought against you. These insurances are normally related to IR53, PAYE, or VAT.

A word of warning about MSC’s, stay away from them. Since 2006, the Chancellor has targeted them exclusively and removed all their benefits, therefore using one will actually cost you dearly when you eventually are caught by the HMRC. Once caught, you will have to pay all benefits gained from using one by having all your income treated as PAYE.

Umbrella Companies

Umbrella companies promise to remove the hassle of managing your contracting business. In return they offer you a means of contracting. Their downside is that they treat your contracting income as PAYE[2]. This means you lose the 17.5% VAT, plus your income receives the permie tax treatment on the rest (10%, 22% and/or 40% deductions) after allowed deductions for expenses – less the Umbrella Companies admin fees.

A few things to beware of in Umbrella companies; make sure they do not use the services of an MSC. Similarly, you may be at risk if any of the other contractors operating under the umbrella become involved in trouble with the HMRC.

• It has never been an MSC or Composite Company.

• It doesn’t use the services of an MSC or Composite Company.

• It’s not a subsidiary of an MSC or Composite Company.

• It’s not a subsidiary of a company that once was an MSC or a Composite Company.

• It operates a salary only scheme and does not attempt to operate outside IR35.

• Allows you to claim the following:

1. VAT on expenses if your company is VAT registered.

2. Limited Company accountancy costs.

3. Business insurances – professional indemnity, business contents and other business related insurances.

4. Company bank account charges and interest.

5. HMRC approved Pension scheme payments.

6. Your gross salary – usually kept to a minimum, in order to maximise shareholder dividend disbursements and avoid paying employees and employers national insurance contributions.

7. Spouses’ salary – must be a realistic actual amount related to duties performed.

8. Travel expenses.

9. Motor expenses – mileage claims if the vehicle is personally owned, and all other payments, if the vehicle is company owned.

10. Computer costs.

11. Accommodation and subsistence.

12. Telecommunications – business calls only.

13. Business related books, magazines, subscriptions and courses.

• They submit invoices to agencies or organizations (if you are working direct) promptly and pay your invoices immediately on receipt of funds.

• They pay via fast electronic transfer methods and not by cheques through the post.

• They offer legally binding guarantees for their services – especially relating to late payment of submitted timesheets and invoices.

• They do not withhold any of your wages for the purpose of paying you sickness pay, holiday pay or any other payment at a later date – they give you the full amount to manage yourself.

• They pay dividends weekly or worst monthly.

• They do not charge you a percentage of your earnings for their services.

• They charge a fixed weekly or monthly fee for their service.

• They are run by a credible, qualified and experienced team.

• They are suitably insured to offer their services.

• They come highly recommended by many contractors.

Because you will be employed by the Umbrella Company, you need to present them with a Form P45 from your previous employer and inform the organization you are going to contract directly, or – if working through an agency – inform the agency of the Umbrella Company’s details. They will send the contract to the Umbrella Company for their Director(s) signature and your countersignature.

From then on you simply go to work, do your job well, get your time sheet signed and present the signed timesheet to the Umbrella Company to invoice the organization or agency. Once the paid invoice arrives in the Umbrella companies’ account – all going well – they will pay you your salary, withholding all related taxes on behalf of the HMRC. Alongside this; the Umbrella Company will also bill you periodically for their service fees (normally weekly).

There you go – congratulations, you are now a permie contractor!!

Composite Companies

The Composite Company is an artificial entity that enables individuals to achieve tax benefits through reductions in tax liabilities. They achieve this by paying dividends through multi-tiered share ownership structures. According to the HMRC, 200,000 individuals in the UK – across numerous industries – use the services of Composite Companies. Composite Companies allow individuals to subcontract through them, by issuing shares of a unique class. These shares allow dividends to be paid to the subcontractor based on their earnings.

Normally, the subcontractor is left to source his/her own contracts and inform the Composite Company of the terms of the contract, working hours, and rate of pay. The Composite Company handles all invoicing and VAT collection. In this way, the Composite Company handles all accounting and company administration, charging a fee for this service to its subcontractors.

In this setup, the subcontractor does not even need to be a director of a company. Composite Companies normally only accept individuals whose annual taxable profits do not exceed £300,000. This is to avoid paying the higher rate of corporation tax applied to taxable profits after £300,000.

The subcontractor is paid a wage, which is equal to a personal allowance., The Composite Companies admin fees and any related corporation tax on the profits are deducted from these earnings. The balance is normally distributed as a dividend on the subcontractor’s shares – monthly. This setup benefits the subcontractor greatly as it alleviates the burden of running a company whilst endowing him/her with all the benefits of limited liability company ownership.

There are huge risks for Composite Companies that take on non-limited company subcontractors. If the HMRC questions the subcontractor’s status, the Composite Company could face a huge – backdated – financial burden.

To reduce this risk, most Composite Companies insist on limited companies only as subcontractors and could even facilitate the setting up of a limited liabilities company for their subcontractors. This way, when trouble comes in the form of an HMRC investigation, the subcontractor will shoulder most of it. The subcontractor will have to settle tax, National Insurance Contributions, and even some VAT payments. These payments could also be backdated by many years.

Composite Companies are virtually useless for IT contractors now, and should be steered clear of. The treasury made this clear in the budget of 2007. The treasury wrote:

“5.85 Since the Pre-Budget Report, further evidence has emerged that employment income is being disguised as dividends in order to take advantage of the small companies’ tax rate, often encouraged by promoters of mass-marketed managed service company schemes. There is also evidence of some agencies, contractors and employers requiring workers to use corporate structures, thereby denying them employment rights as well as avoiding paying their fair share of tax and NICs.

Private company limited by shares

Individuals as well as other companies can be shareholders in Ltd. companies. As a shareholder, you are not liable for the company’s debts; however, if the company fails, you may lose funds you personally invested in it. Shareholders need not be UK citizens or companies only; they can be from anywhere in the world.

• Determine a unique name for your company.

• Check the uniqueness of your company name by calling the Contact Centre on (0044) (0) 870 3333636 or online at www.companieshouse.gov.uk/Webcheck. The Registrar gives the following guidelines to choosing a company name:

• it is 'the same as'[4] a name already on the index;

• it includes the words 'limited', 'unlimited', 'public limited company' or ‘community interest company’ anywhere except at the end of the name. This applies equally to abbreviations or the Welsh equivalent of the words;

• it ends with ‘commonhold association limited’ or the Welsh equivalent (unless the company is a commonhold association);

• it ends with ‘community interest public limited company’, ‘community interest company’ (or abbreviations or Welsh equivalents) unless the company is a community interest company;

• it includes anywhere in the company name any of the following:

• ‘investment company with variable capital’ (or its Welsh equivalent);

• ‘open-ended investment company’ (or its Welsh equivalent);

• ‘limited liability partnership’ (or its Welsh equivalent);

• ‘SE’ (or the abbreviation SE bracketed or with other punctuation marks before or after the abbreviation). For more information, see our booklet The European Company: Societas Europaea (SE);

  • it is offensive;

  • its use would be a criminal offence.

• Next you have to determine your company directors and your company secretary.

• Fill in the following forms:

   

  • Form 10[5]

  • Form 12[6]

  • Memorandum of Association[7]

  • Articles of Association[8]

You can find form 10 and 12 on the Companies House Website – www.companieshouse.gov.uk/forms/ formsOnline.shtml. Unfortunately, the Memorandum of Association and Articles of Association can be collected from any of the addresses below: