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Choosing the right structure for you
Freelance contracting used to be easy - sign a contract, do your work, send in a timesheet, get paid, pay your taxes. Simplicity itself! But the environment has changed as the Government has increased the burden of legislation and regulation, often not recognising the impact on contractors.
There are a number of options available and making the right choice is important. We will provide you with unbiased advice to ensure the most suitable choice is made. In providing you with advice we will take a number of factors into account, including:
- Rate of pay
- Length of contract
- Working practices
- Long term ambitions
Here are your choices:
There are a number of self employed offerings to contractors; these are particularly prevalent in the construction sector.
In the 80's this was the most common way of operating as a freelance contractor. This changed in the late 80's when HMRC introduced a rule making the Recruitment Company liable for any unpaid tax and NI by the contractor. The same rules apply to the end client. Most recruitment companies now refuse to deal with self employed contractors - and hence the growth of the other structures listed below.
Many Recruiters offer the option for contractors to work through the Recruiters own PAYE service.
If you select this route you will be offered a lower rate than through an external provider. This is because the Recruiter has to provide for Employers NI, Holiday Pay and statutory benefits.
This structure is ideal for lower paid contractors and is intended for very short term assignments.
Umbrella companies are limited companies that employ contractors. They provide a simple cost effective operating structure. There are no costs to join or to leave and umbrella companies only make their margin when you are working. The contractor is employed on a contract of employment and is covered by the companies insurances, they will also be responsible for health and safety.
The contractor will be able to claim business expenses against tax for the cost of travel and subsistence incurred travelling to temporary workplaces to undertake assignments.
Where a contractor operates through an umbrella company the agency rate will be uplifted to account for Employers NI, Holiday Pay and statutory benefits. All income paid out through the PAYE tax system, making IR35 rulles irrelevant.
This solution is ideal for 1st time contractors, those who are on shorter term contracts, and those caught by IR35 rules.
Own Limited Company
Setting up and operating through your own limited company can appear on the surface to provide the best returns and often seem to be the most attractive option. However you should base your decisions based solely on the expected returns.
A limited company is a legal entity and where you set up your own you, as the director of the company, become responsible for meeting all the legal requirements and obligations associated with the company.
Orange Genie will provide you with expert advice to help you make you decision, we will guide you through the following issues:
Your intentions - how long do you intend to operate as a freelance contractor; IR35 status; financial awareness; personal organisation; your risk profile, and your responsibilities as a company director.
In 2007 HMRC introduced a new piece of legislation, MSC Legislation. This legislation is complex and is intended to limit the level of service, support and advice that can be supplied to contractors. Non-compliance will lead to additional tax liabilites. Orange Genie complies with this legislation and we will be able to guide you through your decision making process.
A number of providers are either based offshore or provide offshore solutions to contractors. These arrangements are often seen by HMRC to be 'manufactured' and they have taken the stance that where income is generated from work carried out in the UK then that income must be paid in line with rules applicable in the UK.
MSC legislation can be applied to offshore offerings and many recruitment companies are waking up to the risks of debt transfer and will not deal with offshore providers.
This is a high risk solution and one that HMRC may regard as tax evasion.
Employee Benefit Trust
This structure is based on the payment of loans which do not need to be declared as income and are effectively tax free at the time of payment. Whilst it is entirely possible for EBTs to operate compliantly where the arrangement is considered 'manufactured' there is a significant chance of the scheme being challenged by HMRC.
HMRC have announced that they are targeting this type of arrangement for investigation and a number have collasped leaving the contrator with a demand for tax payment, a significant tax fine and a demand from the administrator of the trust for loan repayment.