The good, the bad and the ugly: how to set up your contracting business
Before taking the plunge into contracting you’ll need to dot some i’s and cross a few t’s, picking your legal structure is one of the key jobs that you’ll need to take care of. Everything from your profitability to your potential paperwork will depend upon what method you choose, so it’s important you learn the ins and outs of each – more importantly, whether they’re good, bad or ugly.
Form a limited company
One option is to form your own limited company.
Many contractors go down this route as it can enhance their profitability, PAYE and National Insurance contributions not quite as high if they manage their finances cleverly.
This is they can pay themselves via a combination of dividends and a low wage, the biggest tax bill imposed by the current 20% Corporation Tax rate. An attractive prospect, it’s one that draws many to form their own limited company. But it’s not without its drawbacks – life as a limited company bringing certain responsibilities. These come in the form of what’s called the Director’s Fiduciary Responsibilities, which basically outline what you, as limited company director must do legally. You’ll need file a yearly annual return for one, as well annual accounts. However, a reliable accountant can take care of these things for you.
Operate through an umbrella company.
Another option is to contract through an umbrella company. They’ll act as an intermediary between you and your clients and pick up a lot of admin – specifically things to with payroll and tax. Your umbrella company will be the one your clients will pay, and they’ll then pass that pay onto you, minus deductions for income tax, National Insurance contributions and their own fee. All you need to do is file a timesheet to them. The trouble is this isn’t very tax efficient process, and it’s likely to get even less so soon – umbrella contractors ability to claim travel and subsistence expenses soon to be taken away. According to the Chancellor no less, this current tax relief is ‘unfair’, umbrella companies a constant annoyance that the Treasury seems keen to address…
Take a risk with tax schemes.
Now, we’re not advising you to explore these at all – we don’t want you breaking the law – but we thought we’d highlight them nonetheless, just to show how shady they can be.
Typically, these schemes route employment income through offshore trusts, your pay arriving in the forms of loans designed to be non-taxable. As a result, you can end up taking home around 95% of your contract value – an arrangement that puts these schemes firmly on the radar of HMRC. They’ve got an 85% success rate in overturning these schemes, and the consequences can be dire when they do. Under new legislation they can backdate missing tax as far as they see fit, leaving perpetrators with a hefty bill they’ll probably struggle to repay.
These are the options available when it comes setting up your contracting business, as setting up as sole trader means that you’ll struggle to find work through recruitment agencies. Wary of IR35, they’ll prefer to work with an intermediary company. Anyhow, that’s our two cents – the ultimate decision is up to you.