Contracting Options
Shaun McGrail, FCCA
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Content
• Main operating models available to temporary
contractors/freelancers in the UK
• Comparison of PSC vs. Umbrella
• Can I use my UK Limited company when working abroad?
• Models under attack
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Operating models available to temporary
contractors/freelancers in the UK
• Agency payroll
• Umbrella worker
• ‘Going’ Limited
- Inside of IR35 = Personal Employment Company (‘PEC’)
- Outside of IR35 = Personal Service Company (‘PSC’)
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Operating models available to temporary
contractors/freelancers in the UK
Agency payroll – key features
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Employed by the agency
Agencies generally do not favour this route
Lower rate of pay quoted than Umbrella or Limited
Full PAYE applied with no ability to offset travel and subsistence expenses
in most cases
• Least amount of input required by contractor
• Least flexible from a taxation planning point of view
• Generally viewed as least attractive by most contractors
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Operating models available to temporary
contractors/freelancers in the UK
Umbrella worker – key features
• Employed by the Umbrella company – like I-PAYE
• Agencies generally favour this route or Limited
• Higher rates of pay quoted than Agency payroll (due to inclusion of holiday
pay and ERS NI)
• Full PAYE applied with the ability to offset travel and subsistence expenses
• Some input required by contractor (e.g. expense submission)
• More attractive from a taxation point of view
• A margin is deducted by the Umbrella provider
• Generally viewed as more attractive than Agency payroll by contractors
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Operating models available to temporary
contractors/freelancers in the UK
‘Going’ Limited
Inside IR35 = Personal Employment Company (‘PEC’) – key features
• Employee, director and shareholder of your own Limited company
• An option preferred by agencies
• Higher rates of pay quoted than Agency payroll (due to inclusion of holiday
pay and ERS NI)
• Full PAYE applied, therefore IR35 risk falls away
• Ability to offset travel and subsistence expenses
• Ability to carry out VAT planning
• Greater level of input required by contractor than Umbrella (e.g. operation
of the bank account)
• Accountant required to deal with accounts production, tax compliance
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Operating models available to temporary
contractors/freelancers in the UK
‘Going’ Limited
Outside IR35 = Personal Service Company (‘PSC’) – additional
features/benefits over the PEC option
• Need to take advice regarding IR35
• The most flexible model available from a tax planning perspective with a
mixture of expenses, salary and dividends
• Possible to split income with a spouse and plan a profit extraction strategy
(e.g. entrepreneurs relief)
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Operating models available to temporary
contractors/freelancers in the UK
SUMMARY AND CONCLUSIONS
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Time Investment/Risk
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Tax Planning
Opporutunities
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PAYE
Umbrella
PEC
PSC
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Comparison of PSC vs. Umbrella
PSC Advantages
• You take control of your financial affairs
• Most tax efficient way of working
• Allows use of the VAT Flat Rate Scheme
• The start of something big?
• Greater opportunity for tax planning than under Umbrella (e.g. dividend
strategies, capital extraction on closedown)
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Comparison of PSC vs. Umbrella
Umbrella Advantages
• Easy to use – submit a timesheet and expense claim form
• All taxes are deducted before you are paid, so no tax returns to submit or
liabilities to plan for (unless you have other reasons to submit selfassessment e.g. untaxed income)
• Quick sign up and well suited to contract rates below £20/hour (circa £38k
p.a.)
• Good first step into contracting as very little paperwork or time
investment
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Comparison of PSC vs. Umbrella
PSC further considerations
• Ultimate responsibility for the company is with the director (e.g. must
maintain proper records etc.)
• The contractor must operate the bank account and take responsibility for
settling tax liabilities
• How long do you expect to contract? At least 12 months is advisable
• Rates of over £20 per hour (circa £38k per annum) make it worthwhile
• What is your IR35 risk? Take specialist advice
• You will need an accountant
• Financial risk is not for everyone (e.g. the agency defaults)
Umbrella further considerations
• Little opportunity for tax planning, apart from expenses
• Income is subject to full PAYE and NIC
• If you are outside of IR35 you could be missing an opportunity
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Can I use my UK Limited company when working abroad ?
Typical scenario
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UK national running through a UK Limited company
Agency offers new short term assignment overseas
Easiest route seems to be to continue using UK Limited company
Things to think about
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If you are (or expect to be) on assignment abroad for more than 3 months you
need to think about the requirements in the country you are working
If you are working overseas through your own limited company you could end
up being liable for tax in the UK and the country in which you are working
Tax is generally due where the income is earned
Essential to take professional advice – e.g. I-PAYE has Umbrella option for
working in Europe
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Case Study :
Double Dutch
• UK contractor operating through a UK PSC goes to work for a UK agency in
Holland for 5 months and the end client is Dutch
• The agency is multinational and their Dutch accountant advises the
contractor that he is liable to Dutch tax of €33,200 and Dutch national
insurance of €10,300
• Contractor now faces possible double taxation in the UK and Holland
(although he should be able to claim foreign tax credit relief in the UK)
• Contractor unlikely to gain a retrospective A1 and therefore he faces an
unnecessary national insurance liability of €10,300 in Holland
• Could have been avoided with the correct advice/payment model
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Case Study :
Norwegian Woe
• IT contractor who had been working through his UK Limited company in
Norway for 5 months. On submission of his last invoice the client
requested sight of an A1 certificate and confirmation of Norwegian Tax
paid.
• When this could not be evidenced the client retained the whole of the last
invoice of £11,000 and paid it to the Norwegian authorities
• Contractor has since received a Norwegian Tax bill of £13,000
• A retrospective application for an A1 was denied by HMRC
• The contractor has had to employ both a Norwegian accountant and pay
his UK accountant additional fees to limit the damage and bring his affairs
into line
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Models under attack
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Self-employed models – new legislation coming in April 2014 (Onshore
Intermediaries legislation) aiming to prevent employment intermediaries
being used to disguise employment as self-employment
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Loan schemes – where income is disguised as a loan to workers (e.g. utilising
weak foreign currencies that devalue against the pound going forward) to be
repaid at a long off future date
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Offshore schemes/Employee Benefit Trusts (EBT’s) – where some income is
deferred into a discretionary trust with ‘offshore’ trustees to be distributed at
a later date. The basic idea is to distribute the funds held in trust at a later
date when it is advantageous to do so (e.g. following retirement or when nonresident)
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Anything else offering ‘to good to be true’ take home pay – GAAR (General
Anti-Abuse Rules – introduced July 2013)
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