Post April 2016: Birth of a new Umbrella generation. Better or worse?
Since April 2016 new tax rules restrict the expenses that can be claimed by Umbrella workers, with the consequential loss of tax relief reducing take home pay. These new rules changed the landscape. Many Umbrella workers wanted to protect their earnings and Umbrella providers wanted to retain their employees (and margins).
New models were born as the Umbrella workers and Umbrella providers sought the best solutions. So if you were an Umbrella worker in April 2016, where did you end up?
- Still in Umbrella – no Travel & Subsistence (T&S) relief or IN Umbrella – claiming T&S
- Returned to permanent employment – had enough of the hassle • You selected agency payroll – simple but flexible life
- New Personal Service Company – made the change to Limited
- Exploring something new – a “hybrid”
Since April hybrid arrangements have emerged that claim to offer Limited Company advantages, but without requiring the worker to run the company themself. These models are typically termed Managed Service Companies (MSC) and are not to be confused with running your own Personal Service Company (PSC). If you have been encouraged into any new model without fully having the consequences explained, then this ebrief is for you.
In this ebrief we consider the issues Umbrella workers experience when they switch or are switched into a model they may not understand. We compare hybrid models and MSCs with familiar PSCs. Specifically:
- Defining a Managed Service Company (MSC)
- How can you tell if you are using a MSC?
- Risks and consequences of being involved in a MSC
- Differences when running a PSC (Limited Company)
- Does leaving an Umbrella make HMRC suspicious?
- Tax avoidance schemes – the facts
Who are Intouch Accounting?
Already decided you want to run your PSC with support from an expert contractor accountant?
Limited Company contractor accounts is our specialist subject – from good tax advice for both you personally and your company, to expert IR35 contract risk assessments and easy online accounts management. You can relax and spend more time doing the stuff you love.
Why not speak to one of our expert advisers about what we can do for you?
Call 01202 901 385
Models – demystified and explained
Using a model you don’t understand?
Some Umbrella service providers (not all) have actively encouraged their workers a switch in large numbers, either to use a Limited Company or into a new model (a “hybrid” or a MSC) that has not yet been subjected to scrutiny by HMRC.
The reasons are simple. If you are a modestly paid Umbrella worker under the supervision, direction or control (“SDC”) of the client, then the loss of T&S hurts you in the pocket. If the Umbrella has fewer advantages, it has less value to you. You may decide agency payroll or PAYE is the most elegant solution and least fuss. But the Umbrella provider does not want to see its business affected either.
Do they move you to keep you? If you were an Umbrella worker and that was best advice, what changed to make PSC or MSC a better solution?
Do not use a model you do not understand. Your Umbrella provider or accounting adviser will be able to explain the rationale to you, so ask until you are happy. If they fail to explain how their offering is right for you and your needs, then ask someone else.
Step back to reconsider the characteristics of the new model and make sure the benefits suit you.
What is the difference between MSC and PSC ?
Below we will examine the main differences in these two models. It has long been the case that if contracting was to be your career or long term (more than 9 months) option, and you sought flexibility at work, credibility in the marketplace and the ability to plan long term, plus your annual earnings were likely to be greater than £30,000, then by every measure PSC, (your own Limited Company) contracting was the most beneficial.
As a PSC contractor you are required and should take full notice of your obligations as a director and assess correctly your IR35 status on a regular basis, often with the support and guidance of a qualified accountant to guide you through the red tape. This burden whilst real is often delegated to an accountant, who is chosen by you, guides and explains your options.
What is a Managed Service Company (MSC)?
An MSC is typically a Limited Company through which you provide your services, but the crucial differences is that it is run on your behalf entirely by a service provider. You will typically be a shareholder in the company, you may also appear to be a director, but in practice all the decisions about your company are taken for you. You also have little or restricted choices of how much or when money is made available to you.
In short, if you are a shareholder and director of a company but have no day to day obligations to run the company, make no financial decisions for yourself or allow the company money to be centrally administered, you will most likely be involved in a MSC.
How do you tell if you are using an MSC?
Consider these simple questions to see if you’re in a managed service company. If you agree to the answers, then you may be at risk of working through an MSC:
MSC Are you (or your family) the only shareholders? No
Are you (or your family) the only directors? No
Is the money paid into a dedicated bank account? No
Does your service provider have access to make payments from that account? Yes
Do you alone decide when and how much you pay yourself? No
Are you making all of the operational and administrative decisions for the company? No
Does the amount you pay your service provider vary with the money you earn? Yes
Are the fees you pay a % of the value of your work? Yes
Does the amount you pay vary with the amount of invoices or timesheets raised? Yes
Do you only pay the MSC provider when working? Yes
What are the risks of using an MSC?
Did you know?
If as a director of a company you don’t think you need to take responsibility, because your provider does everything for you, be aware you are still legally responsible for their actions!
- As a director of a company you are still legally responsible for the actions the MSC provider may take.
- Even if you are not formally appointed a director, you may be deemed a “shadow director”, and that carries the same responsibilities as any other director.
- Your MSC provider may not be running the company properly and could leave you with an administrative mess that you will eventually have to pay to resolve.
- A MSC has very strict rules affecting how tax liabilities are calculated, and how unpaid liabilities can be transferred as a personal debt. You won’t be able to take dividends if you are a MSC, even if your contract is outside IR35.
- If taxes are not correctly calculated, you could personally face unforeseen liabilities that become payable further down the line.
- If you don’t have control over the company bank account, taxes may never be paid despite being deducted from your pay, leaving you personally responsible.
- You are legally responsible for everything the company does
- IR35 doesn’t matter, you must pay PAYE and NI on all money taken from the company
- The company debts can be transferred to you personally
What are the other risks of using an MSC?
By using an MSC you accept transfer of debt liability for unpaid taxes. You are fully are exposed to the dangers that tax is not paid on time, or not paid at all, and that the calculations of your tax liabilities include dubious expense claims that could become personally taxable as benefits.
If HMRC require answers to questions and need to approach the company, as a director, you are responsible for that enquiry and may be held personally accountable for unpaid taxes and consequential penalties and interest.
Does a PSC have the same risks as an MSC?
The simple answer is a clear NO it does not. A PSC is not under the control of another party “involved in the process” of management. The critical difference is that a PSC may be advised by an accountant engaged as agent for the PSC to explain tax rules and prepare and file returns and in every respect act in accordance with the instructions given by the owner/ director who remains the principal. Decisions in a PSC are always taken by the principal having taken advice from the agent if necessary.
Is a Limited Company the right thing for you in the first place?
A Limited Company can be a suitable vehicle for any individual irrespective of their IR35 status, as it’s always a matter of personal choice. If you are genuinely in business on your own account, truly independent and not a “disguised employee”, and can demonstrate that you are unlikely to be within IR35 you are most likely to benefit from financial reasons as well as commercial reasons when trading via a Limited Company
HMRC enquiries are stressful, costly and take a considerable time to resolve, especially if you are dealing with actions taken by others than have quietly disappeared.
There are many commercial reasons for choosing a Limited Company solution, including:
- Credibility and limited liability protection
- Requirements of the engager or sector specific rules
- Privacy and to split out other business interests
- Longer term planning and wealth protection, including succession planning
- Pensions provision and working flexibility
- Just a plain lifestyle choice….
….but the rule of thumb financially is earning over £30,000 a year, and expect to contract for more than 9 months to make the efforts of setting up and closure worthwhile.
If working through a Limited Company is right for you, then you should make sure that you avoid any likelihood of being within a MSC. If you use agencies, they avoid MSC’s because they expose the agency to a transfer of debt liability in the event of taxes remaining unpaid.
What does it take to run a Limited Company?
Having your own Limited Company does come with some added responsibilities however, the large majority of these should already have been advised upon or prepared by your agent (the accountant or lawyer). But in deciding to run your Limited Company, it’s important that you know where your key responsibilities lie.
You’re a director, a shareholder and an employee
Personal Service Companies typically have one shareholder and one director who is the only employee.
However, company structures can be very flexible and it’s not uncommon for a spouse or partner to also be a shareholder and employee as this provides opportunities to beneficially manage tax liabilities.
Decisions on who should be directors, employees and shareholders are very individual and based on your personal circumstances. Don’t be fooled by standard answers, ensure you speak to an expert adviser to be sure you’re getting the right advice.
Your Limited Company is a separate legal entity
This means your company makes its own profit and has liability for taxes in its own right. Your business cash and assets are treated as separate from your personal cash and assets. So if your company gets into financial difficulty, your personal money and assets are protected, provided you have not avoided taxes or liabilities.
You need to set up a separate business bank account
As your company is a separate legal entity you should always set up a separate business bank account. Intouch clients enjoy free business banking as part of their monthly service. Speak to an expert adviser today about how our services can compliment your career in contracting.
You’re responsible for your own contracts – including reviewing for IR35
To avoid unplanned time between contracts you need to be proactive in finding and negotiating your next project. It’s up to you how you go about this – networking, signing up with some reputable agencies who specialise in your line of work, or even contacting past clients or employers to see if they have any opportunities. But you are also responsible for the contracts themselves and ensuring you correctly understand your IR35 status.
You’re responsible for overseeing or delegating company administration
Part of being the director of your own Limited Company means it’s your responsibility to keep your accounts up to date and meet certain deadlines throughout the year, such as VAT returns; management and yearend accounts; calculating your company’s tax liability; filing your personal tax return and all other HMRC and Companies House returns; setting salary and dividends; and claiming expenses.
We strongly advise you have your contract reviewed soon after you begin working (so that you can compare actual working practices with what’s outlined in the contract) and throughout the year to be sure nothing has changed.
This is important and should never be neglected, no matter how seasoned a contractor you may be. As part of your monthly service, unlimited IR35 contract risk assessments come as standard.
You don’t have to go it alone!
Working with a specialist contractor accountant such as Intouch Accounting means you’ll keep on track with what you need to do throughout the year. Be sure you know what you’re getting for your fee and that you won’t be hit with hidden charges for things that need doing to keep you compliant.
At Intouch we offer a monthly service which covers everything you need to contract with confidence. Call us 01202 901 385 or Email firstname.lastname@example.org
Will changing adviser make HMRC suspicious?
Is it risky to leave my Umbrella’s new solution or change accountants?
Not at all. PSC and Umbrella workers appoint new advisers or employers all the time and there is a clear and simple process to replace your current adviser (accountant or MSC) and notify HMRC. HMRC are aware of advisers that are providing solutions that are not considered compliant, or perhaps are not seen as “best practise”. Arrangements that transfer whole groups of workers from one solution to another without considering the individual needs of the worker can seem aggressive and may not be in the best interests of the workers. Remember not all engagers or Umbrella providers operate without a conflict of interest.
Losing Umbrella workers means losing margins and that affects the provider’s motives. Therefore for Umbrella, PSC and MSC advice make sure you appoint a reputable firm. Badges such as ICAEW, FCSA, IPSE, all denote quality and compliance.
Will I incur fees if I move my Limited Company away from my agent?
In part that depends upon the integrity of your existing provider. Reputable professional firms, regulated by professional bodies do not normally charge to handover details to your new adviser, but it can happen.
The best way to check is to read the terms of business provided by your current adviser, looking out for notice periods, minimum contract periods and charges additional to your monthly fee.
But if you can’t move your company then you would have to consider moving on and forming a new company.
Intouch Accounting are regulated by ICAEW, a full member of FCSA and a partner of IPSE
Is it better for me to wind up my Limited Company set up under an agent and set up a new one?
Not necessarily, but this may be the right thing. Your new adviser should look over what has happened and advise when you have a problem and the best solution in your circumstances. Trying to hide from a problem by winding up your company may not the best solution. HMRC have the power to step in and take action where problems are not being resolved properly.
I’m a contractor and I don’t have a Limited Company – but I think it’s time I did!
Forming your own company is very easy, especially if you do it with the assistance of a professional expert adviser. The costs are nominal and it takes very little time to get matters set up and ready to contract.
Understanding what Limited Company contracting means is as important as your options on taking money for yourself. All of this can be explained when talking to the experts. Alternatively, why not download our free ebrief: Choose the best for you – go Limited to understand what being Limited really means for you and your contractor take home pay.
Tax avoidance schemes – the facts
How can you extract yourself from a tax avoidance scheme?
Tax avoidance schemes cross boundaries; some ethical, some legal and some morale. Beware of anything that seems too good to be true and schemes or arrangements which are marketed as a one size fits all. Be very cautious of believing claims that a scheme is HMRC approved as there is no such thing; and claims that legal opinions are held are generally meaningless unless you are able to read the full advice given.
If you are already involved in a tax avoidance scheme, then you must set aside the tax saving and be prepared to pay it if HMRC successfully challenge the scheme. And don’t forget you will have to pay penalties and interest, making the final bill much more than your tax savings.
You will carry the weight of the period you used the scheme until HMRC accepts its validity and this is unavoidable, unless you want to approach HMRC to reach a settlement.
Extracting yourself from an avoidance scheme is not always easy, but avoiding avoidance in the first place is our advice
Tax benefits of using a PSC without undue risk
A properly established and well administered Limited Company, making use of the widely accepted and totally legal tax legislation can enjoy significant benefits over a similar worker under PAYE or as an Umbrella worker. The reason is that although they are similar they are not the same. Employment rights are different , financial risk profiles are different and this reflects not only in rates of pay but also the application of taxation. Professional accountants demonstrate what is available under the law and highlight the benefits you are entitled to. Assuming these benefits comes without risk.
If you’re with an Umbrella, can you change?
The decision to move from an Umbrella needs to be carefully considered. The first decision is whether or not it is right for you and whether the commercial and financial benefits will outweigh the extra inconvenience.
Normally a move away from an Umbrella is quick and can be simply achieved. If you are within a contract term then you would have to agree changes with your agency, and often it’s better or easier to wait until the end of the current contract. But, as you are only an employee of the Umbrella leaving one is as simple as resigning any other job. As we have previously referred to, forming a new Limited Company with the help of an expert contractor accountancy is easy and that just leaves the contract to be agreed.
Use Intouch to help you pay the taxman what is his and keep what is yours
Choose what’s right for you
It’s not just what we can do for you, as a contractor or freelancer, it’s also how we do it that makes the difference. Enjoy the benefits of being PSC without the risks of MSC.
- As a client of Intouch Accounting you can relax in the knowledge that we’ll make sure your contractor business gets off to the right start and stays on the straight and narrow.
- At every step of the way you’ll receive expert accountancy advice from your dedicated, specialist Personal Accountant, combined with our own contractor specific online accountancy software designed to make your life easier.
- We’ll remind you when you need to send us information. We’ll then process this on your behalf and, once you’ve confirmed it, send it to the taxman and Companies House on your behalf.
Speak to us today about how we can help you be a contracting success
Our experts are here to discuss any questions or concerns you may have about moving to Intouch, or whether contracting is for you in the first place!
Call 01202 901 385