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Umbrella or limited?
Overview

Choosing the correct operating structure for you is crucial.

If you select the wrong route you can find yourself out-of-pocket, potentially at risk from HMRC enquiries and locked into a vehicle that just does not suit.

This area of the site tries to help guide you through your choices and narrow these down based on your personal circumstance.

Professional Passport's guidance is completely independent. We do not believe that any one structure is better than another; the most important aspect is helping you establish which one is likely to be best suited to your personal circumstances.

You can also download our guide below.

PLEASE NOT OUR GUIDES ARE CURRENTLY BEING UPDATED TO REFLECT ALL THE RECENT CHANGES

Guidance

One of the issues that has driven HMRC’s focus towards the contracting marketplace, is a belief that choosing your preferred operating structure has always been primarily based on tax as opposed to a consideration of all the factors.

With the introduction of the MSC legislation; it was clear that HMRC will make an assessment based on whether they believe that the chosen operating structure is one that would have been 'professionally advised' or just chosen as a way of reducing tax liabilities.

HMRC has introduced a further test for contractors known as Supervision, Direction and Control [SDC]. Where you are subject to the right of SDC in the manner in the way you carry out your work you are seen as a temporary employee and, when operating through an umbrella or your own limited company inside IR35, you will no longer be able to claim tax relief on the travel and subsistence expenses you incur.

It is perfectly acceptable business practice to reduce your tax burden, and in fact, a number of registered professional bodies state this as an aim to their members. The difference in the contracting market is the raft of legislation that HMRC can use if they disagree with the advice.

Some of the key drivers, we call them 'hard facts', HMRC consider appropriate are:

Rates

Your role

Whether you are subject to the right of SDC

IR35 status

Experience

Future aspirations

As a result it is now not only essential to identify the correct way for you to operate, based on your current personal circumstances and aspirations, but also to be able to demonstrate the process you went through. The irony is, your personal situation and aspirations can and probably will change in the future.

You should also consider the fact that if you choose an inappropriate route, this can prove costly and time consuming for you personally to resolve in the future.

In the simplest of terms, as this is all we are trying to establish at this stage, there are three possible routes available:

Agency payroll

Umbrella

Limited company

There are also a number of, what we call 'soft facts', that need to be considered in making your decision such as:

Do you want to avoid administration?

Is there something that would prohibit you from becoming a company director?

Does IR35 make you nervous and you want to be completely safe?

If you answer 'yes' to any of these questions then the limited company route is unlikely to suit you.

In summary, HMRC has no issues with contractors who look to operate via an umbrella provider or through agency payroll, as they pay full PAYE tax; they do, however, want to look closely at those operating through their own limited company. This is purely because of the potential tax benefits available by operating through your own limited company.

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