Archive for September 2011
Umbrella Company Vs Limited Company – Contractor Trading Structures Explained
September 26, 2011 | 
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Following the introduction of the IR35 legislation, there are now only three real options open to contractors, so let’s have a look at each option in more detail.
The options available to contractors are as follows:
Option 1 – Umbrella Company (Payroll service)
An umbrella company is essentially an invoicing vehicle for contractors who want to avoid the administration duties normally associated with contracting, namely issuing invoices, chasing payments from clients / agencies, calculating tax and national insurance (NI) contributions and making payments to their bank account. It’s worth noting that because you are employed by the umbrella company, IR35 legislation does not apply.
Contractors who work through an umbrella service will submit timesheets and expenses (normally online) and then leave the rest up to the umbrella company. They will generate and send an invoice to the agency or client, chase payment when it’s due and then upon receipt of payment will calculate your tax and N.I and transfer your net pay direct to your bank account.
Umbrella Company Providers
Naturally, there is a fee for providing an umbrella service which can vary hugely between different companies.
For new contractors the umbrella company is often an appealing option, as it provides an easy and cheap way to decide if contracting is for you.
Many contractors, especially those who are contracting long term or want the best possible return normally decide to start their own limited company, which we will move onto now.
Option 2 – Limited Company (or Personal Service Company)
The vast majority of contractors work through their own limited company, as this is the most tax efficient method, enabling them to keep more of their income. However, these tax advantages are wholly dependent on whether they fall inside or outside IR35 “rules”.
Contractors who fall outside the IR35 rules will often be better off operating through a limited company, whereas those inside IR35 will often be better with an Umbrella company.
By setting up a limited company you have complete control of the running of your company and its bank account. Provided your contract falls outside IR35 (i.e. you’re not deemed to be an employee of the client using a limited company as a disguise) you may draw dividends from the company that are not subject to National Insurance (NI) contributions.
Many contractors decide against starting a limited company because of the day to day administration and the legal requirements all limited companies have to comply with. Whilst many accountancy practices offer services to remove many of these headaches (i.e. VAT returns, monthly payroll, annual company accounts, company formation and corporation tax returns), until now a truly comprehensive accountancy package has not existed.
Option 3 – PAYE through an agency
The last and generally the least favourable option for contractors is the agency PAYE route. In short, you are employed by the agency so you pay full tax and national insurance contributions and you are either tied to working through that agency indefinitely or having to resign and join a new payroll scheme each time you change agency.
Posted in limited company | 
Tags: Administration Duties, Invoicing, Worth Noting That | 
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UK Limited Company – Accounts Filing Penalties
Having your own UK Limited company can provide one with many benefits as compared with being a sole trader.
For one thing it does give many potential consumers the feeling that a Limited company is a more substantial undertaking than just a one man band.
How ever having a limited company does bring with it certain responsibilities and requirements that cannot be ignored.
One of the main reasons why business people trade through a limited company is simply because it has “Limited Liability”.
The liability of Directors and Shareholders liability is Limited to the amount unpaid on any shares that he has subscribed for. For example you can issue say 1000 one pound shares and if a shareholder pays 500 pounds then these shares would be 50p part paid. So if the company ceased to trade the most the share holder would need to pay is the amount unpaid on their shares and in this case that would be 500 pounds.
If all the shares that he owns are paid up for in full then he will have no additional liability for the company’s debts should these exceed the assets of the company.
All the assets and liabilities of the company belong to the company so that the personal assets of shareholders nor that of the directors’ assets can be used on behalf of the company’s liabilities.
Of course this does not mean that the Directors can act in a reckless way in their trading activities and they have very considerable responsibilities.
Directors have to act at arms length with the company.
These are some of the other advantages in having a UK Limited liability company.
A Limited company is a separate legal entity and it is one that will survive despite the death of its shareholders whose heirs will inherit the shares.
If the directors cease for what ever reason the share holders can appoint new directors.
A Limited company will have an issued share capital and this can be divided between people working together or to provide an incentive for key employees. Shares can be issued which have different classes and rights. This can give considerable planning opportunities in providing income and capital for family members.
Whilst a Ltd company has many advantages there are also many responsibilities to do with filing accounts and returns at the Registrar of Companies.
For example you will need to file accounts every year at the Registrar of Companies and also submit an Annual Return. The Annual return will show an up to date list of current directors, secretary and share holders.
There are many generous exemptions for small companies as regards the accounting details required so an audit is not required and most companies will only need to file a balance sheet not a detailed profit & loss account. Some notes to the published Accounts will be required but usually these will fit on to one page so all that is required is two or three pages.
To claim these exceptions both from an Audit and as a small company it does require the director to sign a certificate on the accounts themselves.
If accounts are not filed in time which is 9 months (previously 10 months) after the year end for financial years beginning on or after 06 April 2008.
The company will incur an automatic penalty of 150 which increases progressively geared to how late the accounts are. The penalties are -
one month late or less then the penalty for a private company would be GBP 150 and GBP 750 for a public company.
more than one month late and less than three months the penalty is GBP 375 and for a public company some GBP 1,500.00.
more than three months late but less than six months then the penalty is GBP 750 and GBP 3,000.00 for a public company.
more than six months late the penalty is GBP 1,500 and GBP 7,500 for a public company.
There is a mighty sting in the tail in that if you are unlucky enough to file accounts’ late twice on the trot the fines are doubled.
This only applies when accounts’ are filed late under the Companies Act 2006; and the accounts for the previous year were late and that they were for accounting year beginning on or after 6 April 2008. This date is important as it is from that date that this applies as those accounts will be under the Companies Act 2006.
A private company files accounts which are less than one month late then under the Companies Act 2006 they will incur a penalty of GBP 150.00.
In the next year, the same private company files accounts that are 2 months late then under the Companies Act 2006 the normal penalty would be GBP 375 but as this is the second successive time for that private company being late if filing this set of accounts and the company will then incur a penalty of GBP 750.
If the accounts are not filed after some time the company may be struck off the register by the registry of companies how ever before taking such drastic action they will write to you and give notice of their intention.
When they do it you have to move quickly to bring the public file up to date. Also companies like Experian a credit reference agency will be informed and they will advise their clients as appropriate. For example they may have a client with whom you trade on a regular basis and they may ask a credit agency to advise them of such things. Your client may no longer wish to trade with you in these circumstances.
The other problem can be the banks as they too will ask to be notified if notices to strike off are filed in the Official Gazette. If this happens you must bring the public file up to date very quickly as if the company is struck off then its assets will belong to the crown and the bank account will be frozen.
Umbrella Company Versus Limited Company
It can be a tough decision to make, and one which will impact strongly on the next period of one’s life. The choice between umbrella companies and limited companies for contractors should be approached with an open mind, and a keen eye for detail. To make the process that little bit simpler, let’s take a look at some of the aspects of each option available to contractors.
Umbrella Company
An umbrella company performs a specific service for contractors. Essentially, they act as an employer to contractors who are engaged in a contracted assignment. The umbrella company processes a PAYE payroll for contractors, and offsets business expenses (travel expenses, accommodation expenses etc) against the contractor’s tax.
Employment through an umbrella company is subject to the same employment rights as any other permanent, direct employment relationship. Entitlement to sickness pay, maternity and paternity leave, and minimum wage all full under the auspices of the benefits of working through an umbrella company.
Other advantages of undertaking employment through the umbrella company includes:
- A reduction in the amount of paperwork involved in running one’s own limited company
- No need to worry about taxation or expenses; this is covered by the umbrella company
- The opportunity to invest in pension schemes, training courses etc
- Elimination of any IR35 legislative concerns
Limited Company
A limited company is an entity completely separate from those who own it and run it. At the most basic level, it is a legally recognized entity in itself. As such, the element of limited liability is the main attraction of this option. Operating in this way reduces the risk faced by shareholders or directors.
Opting for the creation of a limited company, while it does involve more legwork on the contractor’s part, will be the most suitable option for many people for the reasons mentioned above. From basic elements like the legitimate registration of the company name, to the more in-depth aspects such as the completion of VAT and tax returns, and expense reconciliation’s, the workload involved is considerably higher when operating as a limited company.
If you are a contractor in need of some advice on the options available, hopefully the information provided here will go some way to assisting your decision. Whether you opt for employment through an umbrella company or the creation of a limited company, be sure to research both options thoroughly.
It is important to make the decision based on your requirements; always think about the service you are providing, and how that service will be best served and applied. Do you have the time to be your own accountant, or is the sense of credibility associated with the limited company the most important aspect?