Contractors should choose limited companies if the fit is right

Since the managed service legislation was enacted, there is particular pressure on contractors to keep it simple. Choose a PAYE umbrella for your business, and you won't have to worry about whether or not you are a managed service company, or even whether or not you are within IR35.

Make the Right Choice

Many agencies, which are now deeply concerned about being tainted encouraging contractors to use managed service companies, are now great advocates of PAYE umbrellas.

Yet it is now particularly important that contractors make the right choice between operating their own limited company or going into an umbrella company. Your income is at stake.

But choosing to run your own limited company means actually running it yourself. Since the legislation governing managed service companies was enacted, it is particularly important that contractors do not choose any kind of standardised service where their companies are run for them. That will put them right in the managed service company basket.

Is It Right For You?

''The question is,'' says Barry Roback, chief executive officer of the Watford-based JSA, a chartered accountancy firm that specialises in contractor affairs, ''are you certain that running a limited company is right for your lifestyle? Not everyone is really prepared to run their own company, with all the decision-making and work that it entails. Choosing a limited company is not only a tax question, but it is a question about who you are, how you work, and what you do.''

Roback points out that, since the managed service company legislation, there is a lot of pressure on new contractors to join PAYE umbrellas. Several major firms have simply moved large numbers of their clients into them. Roback points out that this isn't necessarily the best way to choose the best option for them and in some cases, may even be considered negligent advice.

''Certainly you have to be entirely outside of IR35 for a limited company to make sense for you. And unquestionably, you won't want to be in one at the low end of the pay scale--the economies and potential benefits are just not big enough. But if you earn enough, and you are in a position to administer and control a limited company, and, most importantly, your income is not caught by IR35, then it would be wrong to advise you to choose a PAYE umbrella.''

Are You Committed?

Further, a limited company is not a good choice for someone who isn't committed to contracting.

''If you are just going to give it a try for the short term, don't get involved with running a limited company at the same time,'' Roback warns. ''Make that choice when you are certain that you can accept a reasonable amount of risk, and that you aren't going to pop back into full-time employment a few months later.''

One important aspect of running your own company is understanding how to run it. It is fine to take advice from accountants and lawyers, but you can't leave the control of the company to them any longer. The Revenue has made understanding how to run a company one of the tests for IR35 and managed service company status. If you don't want to know how to fill out a VAT declaration, or to understand what the tax difference is between taking salary or taking dividend income, don't opt for a limited company. ''Getting an accountant to do the donkey work such as filling in VAT forms etc is OK, but the important decisions must be yours,'' Roback adds.

''On the other hand, if you're a dedicated contractor with a good income and the determination to chart your own course, you should not be afraid to go for it. Take advice from a qualifed accountant or lawyer and see what the best choice is for you,'' Roback suggests.