LTD Company Contractors

We use the term Limited company contractor to refer to consultancy and contracting service providers who provide their services through a Limited company.

Ltd Company Contractors Image

We use the term Limited company contractor to refer to consultancy and contracting service providers who provide their services through a Limited company.

A Limited company is usually the preferred route for providing the services by each of the parties involved. The parties that are usually involved in these arrangements would include the following:

The Contractor/consultant

Obviously the contractor will need to either be self employed, an employee of an agency/end client/umbrella company or in business on own account through a Ltd company. It is usually preferable to contract as a Ltd company for both taxation reasons and also commercially this is a safer structure for the end client and agency. In certain cases it will be a condition of the contract that the supplier of services operates through either their own Ltd company or under some type of arrangement where they are an employee of the agency or some other third party who is not associated with the client.

The Client

There will need to be a client who is engaging the services of the contractor. The client will usually only need someone for the purposes of a specific project and therefore would prefer to provide the contract to a third party rather than face employment risk by employing a temporary worker. The client will often insist that the "worker" provides their services through a Ltd company as this protects the client from incorrectly determining the "status" of the worker. The risk is pushed back onto the contractor under this situation.

The Agency

In most contracting arrangements there will be an agency present. The purpose of the agency would be to put the two parties into contact with each other. the agency is there are "middle man" in the chain, and they will have a contract with both the client (the upper contract) and a contract with the contractor (the lower contract). In terms of status and determining whether IR35 is relevant, it is the lower contract that is of greater importance. We can provide advice to agencies on the terms of their standard contracts to ensure that they remain outside of IR35. However, it must be remembered that the actual working relationship between the parties needs to mirror the contract or else the contract is simply a sham and would not hold up to an IR35 challenge.

IR35 refers to the Inland Revenue bulletin that first mentioned about proposed legislation to catch situations in which HMRC believed that the worker had a "hypothetical employment contract" with the client.

The legislation has been with us since 2000, but it is only in the last couple of years that we have seen HMRC putting a much greater emphasis into investigating these cases and in raising enquiries and investigations into this area.

We are specialists in identifying situations which are likely to be caught by IR35 and can advise on the arrangement of contracts so that IR35 risks can be mitigated. In order to be outside IR35 it is important that the contractual relationship between the parties is set out in such a manner that the worker cannot be deemed to be an employee of the end client. It is important that the contract sets out the terms of the contract clearly, but it is of equal importance that the actual contracting relationship of the parties falls outside of IR35.

HMRC have their own interpretation of the types of arrangement that will fall outside of IR35, but it is important to remember that it is the courts that will ultimately decide whether a situation is within or outside IR35.

There are many important decided cases which will influence whether a particular situation is within or outside IR35. We have experience in dealing in this area, and can advise on particular situations, and provide you with an IR35 contract review.

The key areas to look out for in a contract review would include:

  • whether there is a valid and enforceable substitution or sub-contracting clause in the contract
  • whether there is "control" over the worker in the contract
  • if there is mutuality of obligation between the parties
  • the level of financial risk that the worker is bearing through the contract

The above are a few of the key areas, but it is important to review the contract as a whole and to ensure that the whole contract falls outside of IR35.

Refers to cases where income is diverted to another party - either due to a dividend wavier or by allotment or transfer of shares in a company. There has been much in the press about the apparent abuse of income splitting, especially between spouses, which means that a married couple can split dividend income between themselves such that they can both benefit from no income tax on dividends within the basic rate band of income.

The most famous English case regarding income splitting is the "Arctic Systems" case in which HMRC lost in the House of Lords.

HMRC stated after losing the case that they would look to bring in legislation to prevent this in the future. So far nothing has come out on this, but it is an area in which further developments are likely.

However, care needs to be taken when considering income splitting arrangements and you should always consult with a specialist.

HMRC were considering bringing in legislation to prevent controlling persons in an organisation from being paid "off payroll". However, after a detailed review of how this would work, the legislation was pulled. It was noted that the IR35 rules should be able to provide the tools needed to combat any abuse.

There might be situations in which a particular individual has been brought into an organisation as a short term measure and which may genuinely be a project based role, with a planned end date, and this may well be a situation in which it is perfectly acceptable in terms of being outside of IR35.

Again, it is important to note that not all situations will be alike and it is therefore pleasing to see that HMRC will use the existing IR35 legislation to regulate this area.

HMRC have introduced their own business entity tests which allow a contractor to "self assess" whether they are inside or outside of IR35.

HMRC even provide a helpline to assist those not sure if they are inside or outside.

It is important to note that the results of taking the test need to be considered within the wider picture of IR35, as IR35 will be determined based upon the facts of the case and how this compares to previous status cases.

We believe that the business entity tests are a useful starting point, but one should not get too carried away with the results as they need to be put into the wider IR35 context.

We have reviewed a number of contracts to determine the IR35 status of the contracts, and can also provide advice on how a particular contract would do under the Business entity tests.

MG Group works with Pacificb2e, a company that specialises in Umbrella company solutions. It should be noted that we have never been involved in any offshore umbrella structures as we do not believe that they can be defended in terms of being within the spirit of the tax law in the UK.

Umbrella company solutions that we advise on would involve being employed within the UK, and being subject to UK PAYE & NI on earnings from employment. We believe that an Umbrella company solution works for individuals who only plan on contracting for a very short time, or those who do not wish to take on the burdens or compliance costs associated with being a director/shareholder in a Ltd company.

VAT (value added tax) is a tax on consumption charged by the government. Businesses with a turnover of more than a certain level in a 12 month period need to register for VAT. The threshold for 2012/13 was £77,000. Typically an accountant would not recommend becoming VAT registered until this turnover threshold was breached.

However, with the introduction of the VAT Flat rate scheme (FRS) in 2002, it has meant that most contractor businesses would make an additional "margin" by becoming registered for VAT even if their taxable turnover is less than the minimum registration threshold.

As well as the Practice tax return, each dentist will need to submit their own personal tax return to HMRC.

Depending upon your contracting sector, there will be a different VAT FRS applicable to your business.

We can advise you on the benefits of VAT and FRS registration, and are happy to discuss this with you.

Online calculators

Calculators available for mortgages, loans, APR, payslips, VAT, stamp duty, company car and fuel benefits.

View our calculators

Have we convinced you yet?

Please feel free to get in touch via phone email or our quick contact form.

We offer initial free consultations simply contact us to find out more.

Harrow logoXero logoICAEW logoIPSE logo