Which trading format should I use?
This is the recommended trading format for an interim manager and represents the industry standard.
A limited company is a companyin which the liability of the shareholders is limited to what they have invested in, or guaranteed to, the company.
A limited company has a separate legal entity from that of the shareholders, and small companies owned by one or two individuals who offer professional services through their own company are often referred to as personal service companies.
Read more about the advantages of operating through a limited company here.
In theory, it should be perfectly feasible to operate as a sole trader, producing your own accounts and completing a self-assessment income tax return at the end of each year.
In practice, however, this is not always a suitable way of proceeding because interim providers, and the majority of clients, insist that candidates operate under the banner of a limited company.
PAYE umbrella companies
PAYE umbrella companies have long been a thorn in the side of HMRC which sees these companies help thousands of people reduce the amount of tax they should be paying. Legislation is frequently being introduced to try to regulate the umbrellas, the latest of which is the Agency Workers Regulations (2010), which has made it very difficult for PAYE umbrella companies to operate as widely as they once did.
Umbrella companies came into being to help a flexible workforce, where individuals were required to work through limited companies but did not want the burden of having to set up and run a company.
Initially, the umbrella clients were in the main low paid contract workers and they became shareholders in the umbrella company. As a result they were encouraged to take all of their income as dividends, thus avoiding paying national insurance contributions.
Recent legislation stopped that practice and PAYE umbrellas came into being with the workers becoming employees.
Why you should avoid working with umbrella companies
Below are some of the reasons why you should avoid trading through umbrella companies:
- Interim service providers frequently complain that they are pressured to use contracts provided by the PAYE umbrella companies, reducing the effectiveness of their usual back to back contracts;
- In the UK, all employees have rights to such things as holiday pay, sick pay, maternity pay, redundancy etc and these cannot be signed away. Typically, PAYE umbrellas account for very little of this beyond administering the statutory sick /maternity pay;
- The PAYE umbrella does not pay the employer’s National Insurance, but deducts it from the employee’s pay;
- Most PAYE umbrella companies claim that they have special dispensations on employee expenses and HMRC is very unhappy about such schemes. You can read more at: www.hmrc.gov.uk/briefs/income-tax/brief5009.htm;
- Many interim providers are no longer prepared to work with PAYE umbrella companies, particularly after the collapse of the Albany Group which left hundreds of individuals losing a great deal of money.
In addition, the government is implementing the Agency Workers Directive in such a way that PAYE umbrella companies will fall within the rules and clients and service providers will no longer be prepared to work with them.