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Setting up a limited company? What is an umbrella company? The facts.

Setting up a limited company? What is an umbrella company? The facts.

Choosing the most appropriate corporate entity is an important decision.

Should you set up a

  • Limited company
    or
  • A partnership? (technically known as an LLP - a limited liability partnership)

Or is it worth operating merely as a sole trader?

Limited companies can be one of two types, based on ownership:

Privately-help companies

  • Can be owned by only one director
  • Its shares are not publicly traded
  • Company's name is follwed by 'Limited' or 'Ltd'

Publicly-owned companies

  • Governed by at least two directors
  • Known as 'PLCs'
  • Companies' names are followed by 'plc'
  • Their shares are traded publicly

Limited companies vs sole traders

A key difference between operating as a sole trader and working as an employee of your own limited company is that as a sole trader, you can be held personally liable for debts incurred by the business and legal actions brought against it.

In simple terms, that means that if a sole trader gets things badly wrong, their personal assets are at stake.

Limited companies, however, are so named because liabilities are only ever limited to the business and do not extend to individual directors’ personal assets.

A limited company is a legal entity in its own right, with its own profits and losses, and must be treated as such (hence the requirement, by law, to have its own bank account).

It can own property, assets (such as vehicles, machinery and IT equipment), accrue debts as well as bring – or be subject to – legal action.

A sole trader business does, however, require much less administration than limited companies.

Why set up a limited company for contracting?

Having your own limited company might make it easier for you to obtain work.

Many self-employed freelancers set up a company because they have to, since an EU directive – introduced in 2011 and designed to protect the working and employment conditions of contractors, freelancers and temporary workers – means that temporary workers are entitled to some of the same conditions that their counterparts in permanent positions enjoy, after twelve weeks’ employment in the same role.

Owning and operating a limited company can give contractors control of your career and offers the most tax-efficient method of managing income. It also enables you to claim business expenses.

Are you a ‘career contractor’?

Setting up a limited company could well suit you.

IR35

Historically, many IT contractors have benefitted financially from working via their own limited companies. Tax breaks made it worthwhile.

Then came the introduction of IR35, legislation designed to eliminate tax avoidance through workers’ use of intermediaries or agents.

If you fall outside the IR35 rules, you’ll probably be better working through your own limited company – and that’s what the bulk of this post helps you with.

But what if you’re among those who now fall within IR35 rules, and may have seen your tax advantages removed?

You can use an umbrella company.

What is an umbrella company?

Providing a ready-made alternative, umbrella companies make invoicing and payment simple, quick and easy.

Especially if your work is overseas.

We know all the local nuances, rules and regulations, so you don’t have to.

Umbrella companies...

  • Issue invoices on behalf of you, the contractor
  • Collect payments from clients/agencies
  • Calculate tax and National Insurance contributions
  • Pay you (the contractor) your net pay directly

In the 'old days'

Using an umbrella company used to be expensive and not as financially beneficial as working as an employee of your own limited company.

There were few tax breaks to enjoy.

The 'good new days'

Now, though, thanks to the introduction of IR35 legislation (see above), umbrella companies can offer attractive tax incentives.

Plus, they (we) make your life easier by removing administrative duties you have as a director of a limited company.

What’s more, you could use an umbrella company as you start your journey as a contractor, rather than a ‘staffer’. 

Contracting for short periods? Give us a call. We can help. 0121 663 1163.

Contracting for longer periods? Consider setting up a limited company.

Read on. This is for you.

Registering your business at Companies House

Registering a new company is a relatively straightforward process, but you’ll need to have specific information to hand when you do so:

Information you'll need

  • Proposed company name (that you've checked to make sure is available - see below)
  • Your business address (again, more info on this below)
  • Name, address and date of birth for the business's owner(s), director(s) and secretary (if applicable - it's no longer a legal requirement for businesses to appoint a Company Secretary)
  • Shareholders' details

Costs involved in setting up a limited company

If you don’t fancy the idea of setting up your limited company yourself, you have two options:

  1. Use an agent, such as an accountant or a solicitor
  2. Use an online formation service

Using an agent usually costs between £50 and £100, while a formation service might charge just a few pounds, including VAT and the £15 Companies House registration fee.

As with most things, there are pros and cons associated with both.

An agent, for example, can provide you (included in their fee or priced additionally) with an address to use as your company’s registered office (see below for more on this), as well as a more personalised service.

The cheapest – although not necessarily the simplest – way to set up your company is to do it yourself.

Ways to register / How long does it take?

Applying online usually takes 24 hours to process and the fee is just £15 (at the time of writing), which you can pay via a debit or credit card or PayPal.

You can also apply by post, which – as you’d expect – takes a little longer: 8-10 days. The fee for this is £40, payable by cheque.

If you’re in a hurry, you can pay £100 and get your company registered on the day you decide to do it.

Your same-day application has to reach Companies House by 3pm (and you envelope – or that of your courier –must be marked ‘same day service’ in the top left-hand corner).

However you choose to register your business, you must do so within three months of trading for the first time.

Same-day service

Our partners at SJD Accountancy, who look after the accounts for more than 15,000 clients, offer a same-day company formation service, which also gets you a business bank account and advice on optimum share structure, for £125 plus VAT, which is one of the lowest fully inclusive prices available. Cheaper alternatives rarely include everything you need, such as VAT and PAYE registration. (That link takes you to a page where you can also search company names and check availability).

Free company formation

Four words:

What might seem great when first viewed will undoubtedly prove less so when you’ve studied the small print.

A ‘free’ formation might tie you contractually to the formation agent for a minimum term, meaning you have to remain a client of theirs for a year or perhaps longer.

And who knows what rates they’ll charge for their services down the line.

They probably won’t be free. 

You could end up losing thousands of pounds as a result.

Off-the-shelf companies

These are pre-registered and you can start trading as soon as you’ve paid for it. However, the choice of names available may be limited.

Essential forms

Whichever method you choose, there are certain forms that’ll need completing.

But the good news is that if you decide to form your company online, you don’t even need to know specifically which forms, as they’ll all be part of the process (such as Form IN01).

Other documents, such as ‘memorandum of association’ (a legal statement signed by all initial shareholders agreeing to form the company) and ‘articles of association’ – a set of written rules about running the company agreed by the shareholder(s) and director(s).

You can download templates via links on this page.

Shares - different types

There are different types of shares, with varying conditions attached. Generally, though, they’re one of two categories:

  • Ordinary shares
  • Preference shares (dividends will be paid first to holders of these shares)

Shares - allocation

One of the many benefits that might’ve attracted you to the idea of setting up a limited company in the first place is the tax savings to be had.

So, at the outset, research or ask your accountant:

Identify who’ll receive after-tax profits. Dividends are paid in direct proportion to the number of shares held, so be aware of implications of this.

Your company's name

Choose a company name that identifies and/or clarifies the services you offer.

Your company’s name cannot...

  • Be exactly the same as another registered company’s name
  • Be similar to (‘too like’ or ‘same as’) another registered name
  • Include sensitive words like ‘international’ and ‘federation’
  • Include the word ‘limited’ except at the end of the full, official title
  • Imply criminal activity

How do I check if a company name is already registered?

Check on the Companies House website to see if your chosen name is available. You can search by name or company number.

If you really want to be sure that your chosen name is unique and doesn’t infringe on an existing trademark, you can go the extra mile to check these things, too...

How to check trademark availability?

Answer:

Really easily, using the government’s Intellectual Property Office (IPO) website.

Despite what some people will tell you, a registered trademark is not essential for your business, especially if you’re a contractor.

But if you decide to go down that route, you’d be advised to protect that trademark by registering at the IPO, which will give you exclusive rights to use your brand name (as well as the services or products it covers) across the UK.

When registered, there are rules about how and where you must display your company name.

The following two screenshots are taken from the government website on the subject:

When you invoice on behalf of your company, you must include:

You must clearly display the word ‘invoice’ on the document. You must include:

  • a unique identification number
  • your company name, address and contact information
  • the company name and address of the customer you’re invoicing
  • a clear description of what you’re charging for
  • the date the goods or service were provided (supply date)
  • the date of the invoice
  • the amount(s) being charged
  • VAT amount if applicable
  • the total amount owed

Limited company invoices must also include the full company name as it appears on the certificate of incorporation.

If you decide to put names of your directors on your invoices, you must include the names of all directors.

Your registered office and service address

Your registered office is the company’s official address, where letters and legal documents from Companies House and HMRC can be sent.

Things to note:

  1. It doesn’t have to be your trading address
  2. It can be your home address, your accountant’s office or any address that suits you
  3. It must be a UK address

Whichever you go with, it just needs to be able to reliably receive incoming post.

Administrative costs of running a limited company

Costs of running a limited company are higher than if you operate as a sole trader. The preparation of annual accounts, for example, is one cost that is normally higher.

The use of a professional accountant is always a good idea when it comes to managing your company’s finances.

While it’s not a legal requirement for companies, it is advisable to use one as they’ll help you avoid costly errors, prepare your year-end statutory accounts and almost certainly reduce your tax liabilities. They can also manage your payroll.

It costs £13 to send your company's annual return online (you can send a paper version if you prefer, using form AR01, which costs £40).

Corporation tax

The rate of corporation tax your business must pay depends on how much profit it has generated.

The main Corporation Tax rate is currently 20% (correct in March 2016 – check the most up-to-date rate here) and the government announced, in the spring budget, that it intends to cut the rate to 17% in 2020.

Corporation must be paid within nine months of the company’s year-end – as explained in this short video produced by HMRC:

National Insurance

You’ll be employed by your company, even if you’re the only shareholder, and will have to account for PAYE (pay as you earn).

VAT - do you need to register?

You must register for VAT if your VAT taxable turnover is more than the £82,000* threshold in a 12-month period (or you know that you will be). (*Correct at the time of writing – March 2016).

You can register voluntarily if your business turnover is below the current threshold, and you must pay HMRC any VAT you owe from the date they register you.

If you take over a business that’s already registered, you may have to register for VAT, in which case you must use VAT invoices.

For more information on VAT, here are three links to help:

VAT exceptions

You can write to HMRC to apply for a registration ‘exception’ if your taxable turnover goes over the threshold temporarily. They’ll then consider your application and write to confirm if it’s been granted or not (in which case they’ll register you for VAT).

To apply for an exception, you have to supply evidence showing why you believe your VAT taxable turnover won’t go over the de-registration threshold of £80,000 in the next 12 months.

Your obligations as a company director

Firstly, know that revenues earned by the company must be paid to the company account, never a personal bank account.

  • Filing annual returns
  • Filing annual accounts
  • Filing company tax returns
  • Paying corporation tax

...but they can be done by your accountant.

Debts

You’re not liable for your company’s debts unless you sign a personal guarantee or trade fraudulently.

As mentioned above, the word ‘limited’ in limited company names refers to the fact that liability is limited to the company – not you, personally.

But, if things go wrong and the company fails for any reason – and you haven’t executed your duties as a company director – you could be liable for debts.

You could also be disqualified from acting as a director in another company.

Penalties for filing late

There are penalties for the late delivery of certain documents at Companies House.

Filing certain documents at Companies House late will result in a fine, the size of which depends on exactly when your documents are filed:

Source:
https://www.gov.uk/.../GP5_Late_filing_penalties_v2_9.pdf

Late-filing penalties only apply to company accounts – not any other company documents.

If you generate an income from your business, you may need to register for self assessment with HMRC, complete a self assessment tax return and pay tax on your earnings. Your accountant can handle those things for you.

Are you a contractor looking to set up a limited company? Do you work abroad? Would you like to? Talk to us at International Umbrella and we’ll help you get started.

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Taking the decision to work abroad can be a difficult one. Often it involves working away from family and friends in an environment that presents new challenges. Having the support of a respected umbrella company to take care of all your in-country tax and social premium deductions will ease these additional demands.

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