There are three main routes available to a professional looking to enter into the contracting market.
Many clients in the financial and energy sectors are insisting on the flexibility of using contractors and will not use permanent staff where this is possible. Therefore the professional finds himself in the position of having to choose one of these options.
This guide is designed for independent contractors who plan on using their own limited company but it is worthwhile exploring the other options available:
An umbrella company is a halfway point between the agency employee and Limited Company routes. The Umbrella company is set up and run by a third party (often a firm of accountants). The contractor becomes an employee of the Umbrella company and all invoicing, VAT returns, tax administration, bookkeeping etc are handled outside the control of the contractor. The contractor is then paid a salary in line with their earnings – the tax treatment is exactly the same as a permanent staff member.
While not particularly financially attractive, contracting through an umbrella company does provide the flexibility craved by many contractors and can be particularly good for short term contracts.
Offshore Solutions / EBTs
Many independent contractors are tempted by the high financial return promised by promoters of Offshore Solutions, who claim that you can retain around 85% to 90% of your earnings. The schemes vary in complexity and are often shrouded in secrecy but most work in a very similar fashion: A small salary is paid to the contractor, typically £10,000 per annum, and the contractor will pay a small amount of tax on this. The balance of the income which YOU HAVE EARNED is then loaned back to you on a non-repaying basis. Unsurprisingly, HMRC are not too keen on these arrangements and are actively taking steps to close down these schemes. The basis of their argument being that a loan that is not repayable is not a loan. A sentiment we find quite difficult to argue with.
Trading through a limited company is an extremely popular contracting method due to its flexibility and tax efficiency.
There are of course disadvantages associated with running your own limited company such as the increased administration and responsibility but with the right adviser behind you, this shouldn’t present too much of a problem.