So based on my IR35 Business Entity Test results which option is the best for me? Going with an Umbrella Company or going with my own limited company?
Inside IR35? Go Umbrella with payment via PAYE.
If you are new to contracting, have a short term contract or intend to return to permanent employment within a year we would suggest that you use an Umbrella Company for the sake of simplicity. An Umbrella Company removes the burden of IR35 completely. As you will be an employee of an Umbrella Company and will be paid via PAYE, the IR35 rules do not apply to you. This means you can work without the worry of any additional tax bills and penalties.
Your Umbrella Company is responsible for sending your contributions for tax and national insurance to HMRC and also for providing them with details of your earnings and tax paid at the end of the financial year. Your Umbrella Company should provide you with a payslip each time that you are paid and also a P60 at the end of the year. If you have no other source of income there will be no need for you to complete a self-assessment form.
As detailed in the HMRC IR35 Forum Minutes (23rd July 2012), the following was detailed in relation to Real Time Information (RTI):
Page 1. Point 2.
In relation to IR35, it was noted the 2 part question 6 currentl asked on the P35 will be merged into one;
"Are you a service company who has operated Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies Legislation?". The question will be embeded into the PAYE regulations for 2013/14 and it will become a legal requirement to answer it on the last return for the tax year.
From 2013, if you go Limited you'll have to declare your IR35 Status!
Outside IR35? Go Limited.
If you are a career contractor or your contract falls outside of IR35, you could set up your own Limited Company. Your net earnings will be higher than if you worked through an Umbrella Company as you would be entitled to draw dividends from your company, which do not attract national insurance contributions. However, with the revisions to the way that IR35 is administered by HMRC, it is worth noting that if you choose to go down the limited company route, then you will have to keep the following evidence indefinitely in case you come under investigation:
- Address of business premises
- Lease or contract for business premises
- Utility bills for business premises
- Home address
- Client’s address
- PII policy document
- PII premium note
- Explanation of why you need PII
- Clauses in contracts with costings for proposals, tenders submitted and letters from clients accepting offers
- Accounting records
- Details of tasks carried out
- Names and payment details of workers who carried them out
- Copies of any advertisement(s) placed
- Copies of invoice(s)
- Copy of business plan
- Copies of updates to the business plan
- Statements of business bank account
- Repair at own expense clause in contract, details of what could go wrong, details of how you would put it right and details of the cost to your business of putting mistakes right
- Accounting records showing write-offs
- Copies of letters and emails between intermediary and end client
- Copies of letters and emails about legal action for recovery
- Copies of letters and emails about billing
- Details of who would supply the substitute
- Details of who would be responsible for the substitute’s performance
- Details of who would pay the substitute
- Details of what level of veto the end client has
- Details of end client
- Details of who was hired
- Details of why the substitute was hired
- Details of who was responsible for finding the substitute
- Details of who was responsible for paying the substitute
- Payment terms
- Audit trail of payment from end client to intermediary and from intermediary to substitute
You would also need to retain a proportion of your income to pay corporation tax as well as for your personal tax obligations. Depending on the level of your earnings you may also need to register for VAT and make provision for payments accordingly.