A question about : Considering moving from umbrella to Ltd Co contracting
I posted this under the 'boost your income' sub forum but have been redirected to here, so my apologies. Below is the original message.
Quote:
Originally Posted by jimmythegent Hi All, Apologies if this is in the wrong forum, I wasn't sure between this and the Cutting Tax but figure as the primary reason for considering this is to boost my income that this was the best place for it I'm currently working as an Umbrella contractor. I am conracted to a client by my (Engineering) Recruitment Agency and I log my hours and expenses with, and am paid by an Umbrealla company. For tax calculations I am considered a PAYE employee of the umbrella company. I have considered going Ltd Co for a while given the financial benefits, however the extra effort of doing my own tax returns etc haven't been worth the benefits in my opinion so I've been happy staying as Umbrella. However, my Umbrella company recently informed me that they offer a fully inclusive service for Ltd Co contractors. They kindly did a projection for me based on my currently hourly rate and hours worked and in that example, my take home was 20% more than it is currently so it;s gotten me very tempted. I'm aware that month to month the actual amount may change but before I take the plunge I want to understand things more. The umbrella company have offered this service for a Ј100+VAT setup fee, and then a Ј100+VAT a month fee (this increases to Ј125+VAT a month if you want to include Public Liability and Employers Ins). My understanding is this covers everything so there would be no extra hassle for me (I value my time and being stress free more than saving say Ј50 a month on fees) but there are a few questions I have: I log my hours and expenses onto an online portal, which would continue if I used this same company. Therefore I presume those are the records needed for them to do tax returns? I've been told by a fellow Ltd Co contractor that there are 4 things involved with Ltd Co tax: 1. Corporate Tax Returns Finally, is there anyone on here who is Ltd Co with an Umbrella company who can give the good and the bad points? Many thanks, Tax just confuses me which is why I leave it to the experts! |
Best answers:
- First thing is for you to decide whether or not you'd be caught by the IR35 legislation. That depends on the contract wording AND the exact nature of the actual working relationship. The promised 20%+ savings will only happen if you are certain that you are not caught by IR35.
- Moving away from an umbrella to Ltd company setup can certainly have a lot of tax advantages - even if you're caught by IR35. Have you considered IR35? As you're currently with an umbrella its not something you need to be concerned with but if you go the Ltd route you will have to be.
However I'm a bit confused by why this umbrella company is offering. It *sounds* like some kind of managed service company to me, although I could be wrong. I don't understand why your umbrella would be involved in you going down the Ltd route.
If you want to go the Ltd route, find a good contractor accountant, speak to them about your circumstances and see if the Ltd route is right for you. An accountant can help you set up the company, an appropriate share structure (if you have a spouse or partner with low income there could be an opportunity to save some more tax) and help you with things like tax returns and VAT.
It might also be worth registering under the VAT flat-rate scheme too as it usually results in a reasonable profit for businesses with low overheads.
If you don't already do a tax return, you'll only need to do one if you earn over the higher rate tax threshold - you *don't* need to do one just because you're a company director, despite what HMRC guidance says and what some accountants think.
So in short, yes the Ltd route could be worth it but you haven't really given enough information for anyone on here to give you definitive advice.
Finally, be suspicious of anybody claiming they can increase your take-home percentage to in excess of 80% as this is unlikely IMO without something dodgy going on. Assuming you're a sole shareholder, a good take home would be 75-80% versus 65-70% with an umbrella (they are very rough estimates). - Thank you both, so I expect my first question to the umbrella company is "Is this an IR35 friendly contract?"
Quote: - I would ask them if they can refer you to any of their clients who have already made the switch so that you can ask them if they experienced any difficulties or have any regrets. I'd have thought that Ј1200 a year is at the top end of charges for doing the accounting for a simple limited company but as it's over 10 years since I stopped running one I may be out of touch.
- Some good posts here. IR35 check is crucial, as per Pennywise. That is potentially big bucks - in my case, the client with the highest IR35 risk would face a tax demand of over Ј80k if it went wrong.
Registering for VAT is a no-brainer in most cases as you will make a profit on the deal of around 6% of sales in most cases.
The last point on fees is a good one. I am not the cheapest contractor accountant in my area - Lake District - but charge Ј850 plus VAT which includes VAT, PAYE and one self-assessment tax return. So Ј1,200 is way too high, if you just Googled "limited company contractor accountancy fees" I'm sure you'd at least get some infomration to bargain with. - Thanks guys, great! I've compiled a list of information together to ask the guy this evening so hopefully that makes me understand things better. As I've said before, what matters to me more is sleeping well at night and not having to worry about the tax man.
- You can do everything right and still be the subject of a random investigation by HMRC. You may want to consider insurance to cover you in the event of such an investigation.
- In my view for "IR35 risk" people, two expenses of around Ј100 with Qdos or similar providers are no-brainers:
1. Contract legal review - this will highlight any contract areas perceived to be at risk. As the contract progresses, be sure to keep a record of events which in practice mean these weak terms are not such a big deal. An interesting aspect of current HMRC IR35 enquiries is they don't even bother to look at the contracts, but focus on actual operational practice.
2. Tax investigation insurance. IR35 enquiries can be lengthy and expensive, often it is uninsured contractors who throw in the towel and pay up because the bills keep mounting and they can see no light at the end of the tunnel. In one IR35 case which HMRC took all the way, in order to get Ј70k or so of tax it is estimated HMRC spent nearly Ј1m just in external lawyer bills. The victim won that case because he was insured and could match the silly money HMRC were throwing at him. - Thanks all,
Pennywise, again thank you for your time.What is the best way to find an IR35 specialist who I could trust in my area? Also, are you saying it would be better for me to seek advice from a separate accountant than to 'trust' the details and figures my Umbrella company are currently showing to me?
I definitely don't want to learn this all myself for my head would implode! - I think we've covered most of the right questions to ask of a contractor accountant. Here is my summary, Pennywise and others can add anything I have missed:
1. What will you do each year to record and demonstrate that I have operated outside IR35?
2. What will my VAT flat rate be and how much profit should I make each year?
3. How often will my company declare dividends and what records will you give me for these?
4. How will I know what I can draw out of my company without any tax pitfalls?
5. How will I send you my source records to produce the accounts?
6. Do you offer contract review for IR35 and at what cost?
7. Do you offer comprehensive tax investigation insurance and at what annual cost?
8. Do you have a standard fixed annual price for limited company contractors? What services are covered and at what price?
Any competent accountant used to dealing with limited company contractors will be able to answer these accurately without hesitation. I would be wary of anyone unable to do so.
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