IT Contracting - Ltd company or Umbrella

[newbieITContractor2015]

Hi,
I'm about to go contracting and told my employer I want to leave to do contracting, my employer has asked me to contract for them directly (my employer is an IT consultancy so I'd be visiting clients\working from home). I'm planning as working as a contractor for my current employer for an initial 6 months.

Long term I see my future as:
- Working for a single customer at a time on contracts of between 3 and 12 months
- Using my own IT equipment with a combination of onsite and offsite work
- I may grow the business with additional employees, but it's unlikely, I'm quite happy to work as a single person at the moment
- At most I'm likely to have 1 or 2 customers that I'm work for simultaneously

Most of my contracts will come from cwjobs, monster, totaljobs and recruitment consultants - in essence a typical IT contractor. What I'm struggling with is umbrella company vs Ltd company, so far I have:

Limited Company
+ More control
+ Cheaper administration fees (even using an accountant)
- IR35 risks
- Very limited expenses

Umbrella Company
- More expensive
+ IR35 compliant

What I'm not sure about is if I will fall under IR35 or not (probably guessing by the sound of IR35 rules). If I am under IR35, am I right in thinking I can only claim expenses up to 5% of total contract for:
- administration expenses (i.e. accountant & a company website)
- pension contributions
- profressional subscriptions (MSDN)

Presumably with the umbrella I can claim for travel, meals, replacement laptop, etc? If so, given the UK's hotel and train costs this is a massive bonus.

Some advice on which way to go would be greatly appreciated.

Thanks

[mudskipper]

Hi,
I'm about to go contracting and told my employer I want to leave to do contracting, my employer has asked me to contract for them directly (my employer is an IT consultancy so I'd be visiting clients\working from home). I'm planning as working as a contractor for my current employer for an initial 6 months.

Long term I see my future as:
- Working for a single customer at a time on contracts of between 3 and 12 months
- Using my own IT equipment with a combination of onsite and offsite work
- I may grow the business with additional employees, but it's unlikely, I'm quite happy to work as a single person at the moment
- At most I'm likely to have 1 or 2 customers that I'm work for simultaneously

Most of my contracts will come from cwjobs, monster, totaljobs and recruitment consultants - in essence a typical IT contractor. What I'm struggling with is umbrella company vs Ltd company, so far I have:

Limited Company
+ More control
+ Cheaper administration fees (even using an accountant)
- IR35 risks
- Very limited expenses

Umbrella Company
- More expensive
+ IR35 compliant

What I'm not sure about is if I will fall under IR35 or not (probably guessing by the sound of IR35 rules). If I am under IR35, am I right in thinking I can only claim expenses up to 5% of total contract for:
- administration expenses (i.e. accountant & a company website)
- pension contributions
- profressional subscriptions (MSDN)

Presumably with the umbrella I can claim for travel, meals, replacement laptop, etc? If so, given the UK's hotel and train costs this is a massive bonus.

Some advice on which way to go would be greatly appreciated.

Thanks

You will almost certainly be IR35 caught if you are doing the same job for the same employer, therefore, financially, it makes little difference if you go Ltd or Brolly. Brolly is a lot less hassle in terms of admin. The 5% covers administration expenses - you can contribute to your pension on top of that, so, if you can afford to, you can mitigate your tax liability by maxing out your company pension contributions.

The 5% will apply if IR35 caught for both brolly and Ltd - you cannot claim for travel and subsistence to a regular place of work if IR35 caught, or if operating via a brolly. You can still claim for travel to other sites (as you would as a permie) but the rules round how to claim this have changed - probably best to talk to a brolly who can explain it.

ContractorUmbrella oft gets recommended around these parts so try them for starters.

[eek]

You will almost certainly be IR35 caught if you are doing the same job for the same employer, therefore, financially, it makes little difference if you go Ltd or Brolly. Brolly is a lot less hassle in terms of admin. The 5% covers administration expenses - you can contribute to your pension on top of that, so, if you can afford to, you can mitigate your tax liability by maxing out your company pension contributions.

The 5% will apply if IR35 caught for both brolly and Ltd - you cannot claim for travel and subsistence to a regular place of work if IR35 caught, or if operating via a brolly. You can still claim for travel to other sites (as you would as a permie) but the rules round how to claim this have changed - probably best to talk to a brolly who can explain it.

ContractorUmbrella oft gets recommended around these parts so try them for starters.

While I would agree with the above - you will not be able to expand if you use an umbrella.

An umbrella means you are not so much working for yourself but working on a freelance basis for others...

If you want to expand you really need a proper company structure that will allow you to expand the business how you describe above you really need a limited company.

My big question if you want to be a contractor or create a proper company why do you want to contract with the company you currently work for.. Apart from some immediate income that isn't going to help you do anything that you want to do and as shown by MS above its actually going to hinder you not help...

[northernladuk]

While I would agree with the above - you will not be able to expand if you use an umbrella.

An umbrella means you are not so much working for yourself but working on a freelance basis for others...

If you want to expand you really need a proper company structure that will allow you to expand the business how you describe above you really need a limited company.

My big question if you want to be a contractor or create a proper company why do you want to contract with the company you currently work for.. Apart from some immediate income that isn't going to help you do anything that you want to do and as shown by MS above its actually going to hinder you not help...

Absolutely but I can't help reading the OP's plans that they are probably much the same every newbie has with the rose tinted specs. I've a feeling the OP is going to be very surprised and disappointed when he finds he's just going to get stuck in the churn with a majority of us dealing with agents, how few clients take on direct and so on.

To that end I think the OP needs to read the guides in the Umbrella section about LTD vs Umbrella.

Umbrella Companies

I also think he needs to go brolly for maybe his first 3-6 months or his first gig until he finds his feet and understands the reality of the situation and then switches to LTD when he's ready. If he's going to contract with his current employer then it's Umbrella anyway.
Umbrella might not be that efficient but if he's going to nail his contracting career a couple of months brolly will be peanuts. We've had more than enough people come on and mess it up from the start and arguable cost them more over the short term than brolly.

Only the OP knows how (over)confident he is but I don't see a problem with Brolly to start if there is any doubt whatsoever.

[newbieITContractor2015]

Thanks for the feedback guys,

I've spoken to some friends (fellow IT employees) and there's potential for additional clients, as well as having people available to do the work. Therefore I'm going to use a limited company.

At first, I'm probably caught by IR35, therefore am I right in thinking if I limit my expenses to the following and ensuring they're under 5% I'm OK?
- administration expenses (i.e. accountant & a company website)
- pension contributions
- profressional subscriptions (MSDN)

In addition, I've spoken to my accountant and he said he'd prefer me to process my own PAYE every month (he's happy to do the annual return), as I've never done this before, could someone point me in the right direction\provide some tips for this?

Thanks

[fidot]

If I read this correctly
His client will be his current employer, so travel to the client site (current employer) won't be allowed. However, travel from that site to their clients' sites may be.

[Jeremiah@RHJAccountants]

Thanks for the feedback guys,

I've spoken to some friends (fellow IT employees) and there's potential for additional clients, as well as having people available to do the work. Therefore I'm going to use a limited company.

At first, I'm probably caught by IR35, therefore am I right in thinking if I limit my expenses to the following and ensuring they're under 5% I'm OK?
- administration expenses (i.e. accountant & a company website)
- pension contributions
- profressional subscriptions (MSDN)

In addition, I've spoken to my accountant and he said he'd prefer me to process my own PAYE every month (he's happy to do the annual return), as I've never done this before, could someone point me in the right direction\provide some tips for this?

Thanks

If your inside IR35 you may want to ask you accountant to process the payroll especially since you have never done this. Can he not advise you on this?

Has you contract been reviewed for IR35 ?

Have you thought about the tax currently paid via PAYE this tax year and the affects of this when it comes to drawing funds from the company?

Your accountant who knows all your personal circumstances will be best placed to advise you and this is what you pay him for!

[NotAllThere]

The one reason I would say go ltd is that then you are in charge of the relationship with the agency. There was a post here recently, where a contractor was in dispute with a client over payment. As a brolly user, he doesn't personally have any debt. The debt is the brolly's. But since the brolly's exposure is only the admin fee, it's not worth their chasing.

[northernladuk]

In addition, I've spoken to my accountant and he said he'd prefer me to process my own PAYE every month (he's happy to do the annual return), as I've never done this before, could someone point me in the right direction\provide some tips for this?

Thanks

Get a better accountant, preferably a freeagent one. What's the point of having an accountant that leaves you in limbo try doing to do stuff you don't k ow how to? Sounds a bit ridiculous to me.

If you are going to get multiple clients and have people working for you it's going to get pretty complicated pretty quick. The last thing you need is an accountant who's palming his duties off on you.

[NotAllThere]

Payroll is simple to do yourself, should you choose to. I've always done it myself - at first using the tables and procedures provided by the Inland Revenue (as it was!), but then by software. At first, you'll only have your own to run, so it won't be onerous. My accountant will do payroll and bookkeeping. But we prefer to do it ourselves, as we keep closer track of our money, it costs less, there's no real pitfalls and doesn't need accountant expertise to do. He does year end and is available for questions and dealing with the authorities on our behalf. Now, I don't live or work in the UK anymore, but the principles are the same. Even though we have to do it in German, it isn't difficult.

While the standard contracting model is for your accountant to provide a full service, if your accountant doesn't want to do these basic tasks, then you could probably hire a bookkeeper for a couple of hours a month to do it for you for less money. Many small businesses operate this way in the UK.