Omnium IT Recruitment : Contractors -> Guide to Contracting

Guide to Contracting

Use of an Umbrella limited company
Limited Status Company
Step by Step
Legislation IR35 / S660 / IR591
Opting In / Opting Out (Legislation)

Omnium IT is an associate member of the Professional Contractors Group (www.pcg.org.uk) and as such endeavours to keep up to date with legislations that can potentially affect the framework by which you work.

Once you've decided to work as a freelance contactor you may operate in one of two ways.

Use of an Umbrella limited company (see our links page for such companies) - When you have registered with an umbrella company for a piece of contract work, they invoice the agency on your behalf and will pay you after making the necessary deductions. e.g. tax and national insurance. However, you must ensure that you submit your timesheets on a regular basis. Umbrella companies vary in terms of the services they offer and the fees they charge. It is advised that you contact at least two umbrella companies before making a decision. Also speak with the agencies accounts department for a feel for how efficient and compatible the umbrella company is.
Limited company status Your solicitor or accountant may assist you in establishing your limited company. However there are organisations which specialise in this field and often at much lower cost.Your company is then responsible for invoicing the agency / client for your time, and ensuring that the necessary corporation tax, income tax and NI contributions are made and any legal requirements are met.

Step by Step

You may already work alongside a contractor in your current role and a seasoned professional should be happy to offer sound advice. Additionally, please don't hesitate to contact Omnium for an informal and confidential chat.
We advise that you secure your first contract before you spend any money on the operational necessities. Once the contract has been verbally agreed, you will need to:

Decide if you wish to set up your own Ltd Company or engage the services of an Umbrella Company.
If you have chosen to establish your Limited company. The easiest way is by buying an off the shelf company and changing its name if preferred. Omnium is able to advise of companies that will do this for you. See our links page.
Select an accountant. There are some accountants that specialise in this field
Open a company bank account with a bank of your choice.
Secure the relevant insurance - Your broker will advise you regarding employers liability, public liability and personal/professional indemnity insurance. Additionally, ensure your car insurance is covered for business use if relevant.

Revenue & Legislation areas that may affect contractors.

IR35 / S660 / IR591

IR35 is HMRC legislation which applies to some limited companies and can potentially impact upon P.A.Y.E. and N.I.C. status/payments.

S660 is revenue legislation that prevents you passing income to someone else in the family, or giving income or assets to someone else on the basis that you will have it back later, all in an effort to reduce your overall income tax bill.

The following example is taken from www.contractoruk.com

"A husband and wife set up a company together and decide to split the shares equally, so they own 1 share each. If, for example, the husband does the work and earns the income, and the wife takes care of the administration, bookkeeping and so on. The result is that they share the income of the Company, meaning that they have two lots of personal allowance and basic rate tax band to use up."

"The Revenue's argument is that if the wife's income stems mostly from the husbands work, then he has given her a right to his income ie the dividends that she gets on her shares in the Company, and therefore this should fall under S660 as a settlement."

IR591

"In his Pre-Budget Report on Wednesday 10 December 2003, the Chancellor of the Exchequer announced "specific proposals ... to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company".
The proposed measures were outlined in paragraph 5.91 of the Pre-Budget Report 2003, in a chapter entitled "Building a Fairer Society", hence the coining of the term "IR591".

This information was taken from www.ir591.org.uk

www.pcg.org.uk and www.contractoruk.com both give a guide to IR35 / IR591 and S660.

Opting In / Opting Out

Background (Changes to the Conduct of Employment Business Regulations)

All UK employment businesses are required by law to comply with the Conduct of Employment Agency and Employment Business Regulations.

Recent changes have been introduced by the Department of Trade and Industry (DTI) with the objective of protecting both 'temporary' and vulnerable workers (e.g. under18s). Unfortunately personal service limited company contractors and umbrella limited company contractors were defined in this legislation as temporary.

After considerable lobbying, campaigning and pressure from a number of organisations, the DTI introduced an additional clause in order that "limited company contractors" may opt-out of the "protection" of the new legislation.

Why Opt-Out?

Many of the lobbying groups are of the view that 'opting-in' may inadvertently damage their relationship with their employment business by intimating an employment business to temporary worker arrangement as opposed to a business-to-business relationship - possibly affecting IR 35 status.
One of the measures of tax status with respect to IR35 is that of financial risk. Again 'opting-in' may be viewed as having an impact on employment status.
'Opting-out' legislation allows the "limited company contractor" the option of paying the employment business for work finding services and therefore the relationship may be viewed as a true business-to-business relationship.
Although opt out status cannot influence an agencies selection procedure, a client is not bound by the same restrictions and may require a contractor to opt out. Opting out allows the client more flexibility in terms of contractual clauses e.g. restriction on working for any competition whilst contracted to them.
As more detailed checks are required if a contractor does not opt out, the process may become more lengthy and therefore submission may be delayed. This may reduce opportunities if time is of the essence to the client.

Policy guidelines

Both a director of the limited company and the individual supplied must give freely their opt-out notice.
Both a director of the umbrella limited company and the individual supplied must give freely their opt-out notice.
Opt-out status must be in place on or before 5th July 2004 in order for the employment business to comply with the new legislation.
An opt-out is not permitted if the individual supplied is to be working with vulnerable groups e.g. under 18's.
Opt-in/out status may be changed at the end of each assignment.
Omnium is unable to award opt-out status on the basis of a conversation. Written documentation is required in order to comply with legislation.
Opting-in requires more work of the supplying employment business and the Client. Therefore, in some circumstances it may be permissible for the employment business or client to offer a higher rate to opt-out status contractors to reflect the reduced administration costs.

*Please note that Omnium has also taken the opportunity to improve contractual documentation in line with the tests for IR35 status.

Useful website addresses

www.DTI.gov.uk Tele:0845 955 5105
www.pcg.org.uk Tele:0845 125 9899
www.legislation.hmso.gov.uk - for the full regulations
www.jsagroup.co.uk