Moving from an umbrella company to a limited company
In light of the T&S legislation which will remove Travel and Subsistence tax relief between home and work for ‘SDC’ umbrella workers from April 2016, many contractors are looking at potentially moving from an umbrella company to a limited company.
The removal of Travel and Subsistence tax relief will apply to temporary workers supplied through intermediaries (such as an umbrella company) who are subject to the Supervision, Direction or Control (or the right of SDC) of any person.
So although the removal will apply to PSCs who are caught by IR35, those who are not caught by IR35 can continue to claim.
What are the benefits of moving to a limited company?
Other than being able to continue to claim for T&S tax relief if you are not caught by IR35; setting up a limited company, where you become a director and shareholder, is the most tax-efficient way of contracting.
Running your own limited company means that you will benefit from being able to claim back a wider range of expenses, and will have access to the flat rate VAT scheme which allows you to keep some of the VAT you receive. Perhaps most importantly you will have complete control over your financial affairs.
You must also keep in mind though that there are legal obligations and paperwork to be kept on top of when running a limited company, however a good contractor accountant will be able to assist you with this and minimise the amount of time you need to spend on it.
When’s the best time to switch?
The best time to switch is in between contract renewals as any current contracts are signed between your umbrella company and the client, whereas when you move to a limited company contracts will need to be between your limited company and the client or recruitment agent. Therefore any mid-contract moves would require your contract to be reviewed and altered, and both your umbrella company and client or agent would need to agree to this.
You may also be tied in by terms and conditions with your current umbrella company service such as penalties for leaving early, so you should also check your contractual agreement with them before you decide to make the move.
How do I make the switch from umbrella to limited?
There are several steps you will need to take in order to move from an umbrella company to a limited company, the first of which is forming your own company. This process is very simple, and once approved your company can be formed within a matter of working hours.
Unlike with an umbrella company, you will also need a business bank account in order to get paid. As your limited company is a separate legal entity, the money your company makes needs to be kept completely separate from your personal funds.
The next likely step will be to appoint a contractor accountant as they can help manage the administration duties required in running your company. Services performed by an accountant typically include completion of VAT returns, tax planning advice, preparation of company year-end accounts and completion of P11D, P35, P60 and other forms on your behalf. However as with any service they may differ so when looking for an accountant you should check which services are included in their monthly fee.
Lastly you should ensure that you have the correct contractor insurance in place before you start working through your limited company. As well as protecting you from claims brought against you by a client because of problems with the work you have done for them, in many contracts it is now often specified as a requirement to have professional indemnity insurance. Almost every contractor also sees having IR35 insurance as a necessity in order to provide assistance with any potential IR35 investigations into your company by HMRC.
Adjust yourself mentally and practically to running a business compared to what you used to be – an employee in someone else’s business. If you can’t make this not insignificant leap, you run a greater risk of falling foul of the IR35 legislation. And if you’re caught by IR35, then relief on T&S expenses isn't going to be allowable.