Which trading format should I use?
Working in the private sector
If you are an interim manager, consultant, contractor or other independent professional working in the private sector, the recommended way of working is via a limited company or as a sole trader.
A limited company is a company in 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.
Limited companies are also called personal service companies (PSCs).
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.
However, HMRC will not let your client take you on on this basis, as they would expect you to be on the payroll doing the sort of work that you do. Because of this, interim providers, and most clients, insist that candidates operate under the banner of a limited company.
Working in the public sector
If you are an interim manager, consultant, contractor or other independent professional working in the public sector, it is no longer viable to work through a limited company due to recent HMRC legislation entitled ‘Off-Payroll Working’. The recommended way of working is via an umbrella company.
An umbrella company is a company that employs freelance workers who may work on numerous different assignments, at various locations, either through agencies or directly for end-clients. The umbrella company enters into an employment contact with the worker and a service contract with the agency or end-client.
An umbrella company differs from a limited company in that the freelance worker does not own shares in the umbrella company and is one of many such workers employed by the company.
We recently published a free guide in association with Competex Ltd for interim managers, consultants, contractors and other independent professionals working in the public sector. If you are working, or considering working in the public sector, this is essential reading to understand the pitfalls of contracting in the public sector and how to avoid them. Download the guide here.
Working in the charity/not-for-profit sector
The ‘Off-Payroll Working’ rules also apply to certain organisations in the charity/not-for-profit sector, as well as to the public sector. If your end-client is subject to the Freedom of Information Act (2000), these rules will apply and we recommend you download the guide.
Next resource: What is a limited company and why might I need one?