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gafias
9th July 2012, 08:11
This is my first post and this sounds like a stupid question to me but it's one I need answering!

My first contract was through an umbrella company. I never got less than 63% of the day rate with nothing else then to pay out.
I looked at the limited company or umbrella comparisons and decided to go with the limited company and register for the flat rate scheme in the belief I would be better off.
It appears I'm paying 20% of my sales invoices to VAT for HMRC before I pay corporation tax at 20%, employers NI/Paye, accountants fees, insurance.

On the Contractor UK website it says:

In terms of your ability to maximise your income, forming a limited company is the most attractive option, allowing you typically to take home over 80% of what you earn; this compares favourably with umbrella services where you will expect to take home approximately 65% of your earnings.

Am I missing something really obvious here that I should/should not be doing?

cojak
9th July 2012, 08:14
Yes, the VAT is not your money - you neither gain or lose that amount, it merely flows through your company.

Clare@InTouch
9th July 2012, 08:18
You charge an extra 20% VAT, then pass on less than that to HMRC via the flat rate VAT scheme. So you have more income in the first place compared to being brolly :)

cojak
9th July 2012, 08:22
You charge an extra 20% VAT, then pass on less than that to HMRC via the flat rate VAT scheme. So you have more income in the first place compared to being brolly :)

Yep - your rate plus VAT, NOT including VAT.

Nixon Williams
9th July 2012, 10:31
It is always more tax efficient to operate through a limited company, rather than an umbrella company, the reasons for this include:

1. Ability to save from the VAT Flat Rate Scheme, typical annual saving are £1,800
2. Lower administration fees, typical annual savings are £360 but can be over £1,000
3. Expenses prohibited by umbrella’s such as mobile phone and internet can be claimed.
4. Agencies using Preferred Supplier Lists (PSL) can restrict your ability to claim travel expenses, if the agency effectively forces you to change umbrella each time you start a new contract. (the role is permanent and as such temporary travel costs cannot be claimed!).

The savings are reduced if the contract is caught by IR35 but the savings are still there.

BolshieBastard
9th July 2012, 11:26
Yes, the VAT is not your money - you neither gain or lose that amount, it merely flows through your company.

If you are on the VAT Flat Rate Scheme, your co does get to keep a small amount of the VAT amount each quarter.

IR35 Avoider
9th July 2012, 14:24
Back in 2010 I compared working via Parasol with my own company via Crunch. I needed to work only 63 days for running the company to be entirely free due to profit from flat rate VAT scheme.

The breakeven between using Parasol and having my own company was about 45 working days, assuming a 5-day week. (Parasol charge per period that you invoice, so for example a 3 day week that accumulated to 45 days would be more.) i.e. Parasol was cheaper if you were going work less than about nine weeks, own company if you were going to work for longer.

cojak
9th July 2012, 14:27
If you are on the VAT Flat Rate Scheme, your co does get to keep a small amount of the VAT amount each quarter.

Ah yes, quite right. I forgot about FRS.

LisaContractorUmbrella
10th July 2012, 08:28
Doesn't the benefit of the FRS disappear after the first 12 months?

Sally@InTouch
10th July 2012, 08:50
Doesn't the benefit of the FRS disappear after the first 12 months?

The 1% discount for the first year on flat rate stops but there will still be a profit made each year.

Waldorf
10th July 2012, 08:55
Doesn't the benefit of the FRS disappear after the first 12 months?

As an IT contractor, I still gain 2.6% on my net invoice value, so it is well worth having.

northernladuk
10th July 2012, 09:08
Doesn't the benefit of the FRS disappear after the first 12 months?

Ask your accountant :facepalm:

rd409
10th July 2012, 09:49
This is my first post and this sounds like a stupid question to me but it's one I need answering!

My first contract was through an umbrella company. I never got less than 63% of the day rate with nothing else then to pay out.
I looked at the limited company or umbrella comparisons and decided to go with the limited company and register for the flat rate scheme in the belief I would be better off.
It appears I'm paying 20% of my sales invoices to VAT for HMRC before I pay corporation tax at 20%, employers NI/Paye, accountants fees, insurance.

On the Contractor UK website it says:

In terms of your ability to maximise your income, forming a limited company is the most attractive option, allowing you typically to take home over 80% of what you earn; this compares favourably with umbrella services where you will expect to take home approximately 65% of your earnings.

Am I missing something really obvious here that I should/should not be doing?

Yes, your calculations have a flaw.

You put in the employer's NI and Paye, in the limited calculation, but forgot to mention, that they are also paid by you through umbrella route. Do you think the umbrella pays these expenses from their pocket?

A typical umbrella charges £25 pw, which is almost equivalent to the accountant's fees. If you are registered for FRS, then you gain roughly about 5% of the invoice amount, which is more than enough for all the insurance cost. So cost wise both the sides are almost equal.

Now with limited company if your contract is IR35 friendly (along with other caveats), then you can have tax efficient way of drawing income, as compared to PAYE only with umbrella. If you are married, then you may also be able to use your partner's tax allowance to certain extent, which is not possible through umbrella.

On a like to like basis, there was a difference of about 10% between Umbrella and Limited route when I checked. The only reason you may be better choosing an umbrella is because of your personal preferences, and not financial gains/loss.