The demand for limited companies by contractors has stabilised in recent weeks, but the contractors who start limited companies now seem to have a much clearer idea of how to run them, according to Rebecca Dawes, director of the Bristol-based company-formation specialist Duport.
Demand Slows As Contractors Adapt
Demand for limited companies start ups had increased dramatically last December when the Treasury began its attack on managed service companies. The attack which effectively removes the tax advantages from working with a managed service company, and which places liability for their tax debts on those who work with them, was clearly driving contractors to open limited companies of their own.
Demand has fallen from the high of 15,000 company starts at that time to the more typical 7-8000 which Duport is now seeing, according to its research.
''At that time we found many contractors simply eager to start a limited company, often without perhaps having weighed the full consequences of the decision,'' says Dawes. ''Now we are talking to contractors who seem much better educated, more confident about what they are doing when they make the move to start their own companies.''
Contractors are now more confident and knowledgeable about the choices they make
Rebecca Dawes-Duport
Unintended Consequence
Clearly, contractors are adapting to life after the legislation on managed service companies. One unintended fortunate effect the legislation has had is to make contractors think hard about how they are to administer their affairs, rather than simply signing up with a provider who handles everything for them. Those who make the choice to start a limited company realise that this involves considerable effort and input on their part---they must be prepared to actively manage and administer the company themselves. Contractors are entitled to get help from accountants and lawyers, but they must make the decisions themselves based on advice. The additional advantage of limited companies is that they limit the risk for those who own the business.
Know Your Choices
Dawes points out that it is good to see that contractors display increased knowledge about starting up companies. ''Starting a company or not is one of the most important decisions a contractor will make, because it will radically effect how the contractor does business in the future,'' Dawes says.
IR35 And Other Factors
By running your own business, and by taking great care to see that your contracts are based on projects, the owner of a limited company still has the best chance to stay outside of IR35. ''Contractors genuinely in business on their own account and operating through a limited company have nothing to fear. But if contractors make a conscious decision to run their businesses in this way, the workload of administration and bookkeeping increases, '' Dawes adds.
The option of acting as a sole trader (meaning being self-employed) is a difficult one for most contractors, as agencies will not work with you on that basis. There is one other choice, that of working as self-employed through the vehicle of a limited liability partnership which is just beginning to become popular among contractors.
Making a considered choice about limited company startup or other format is one of the most important decisions a contractor will make
Rebecca Dawes-Duport
''There is, however, more to making this decision than just considering IR35 and tax,'' Dawes reminds us. ''There are also lots of factors like insurance, business planning, number of family members or partners involved in the business, etc. All of this needs to be taken into account.'' So it is good to see that contractors seem to be choosing more wisely than in the past about how they run their businesses, but we hope that the effort to learn more will continue.