Contracting Options

All businesses are faced with making many important decisions and a range of options concerning how their operations are conducted and, as a consequence, accounted for and taxed.

Freelance workers are no different in this respect. However they are faced with very specific and highly focused legislation that will affect those options and decisions in the practical world.

To start with, freelance workers must decide upon the manner in which they will provide their services and among the options available are:

• Sole Trader
• Partnerships
• Limited Liability Partnership
• Limited Company
• PAYE via an Agency or End Client
• PAYE via an Umbrella arrangement

In making a decision we recommend that the freelance worker gains a thorough understanding of IR35 and the MSC legislation. Quay are available to assist in this respect and guidance notes are available from us upon request.

It is a fair summary to say that the most popular options adopted historically are the Limited Company and an Umbrella arrangement.

Click on the links above for more information on the various different options available to you.

Quay Accounting provide fixed price services to freelance workers, with a range of monthly, annual and ad hoc services available to select.

Sole Trader

An individual can provide their services in their own name; accounting for their income and tax as a self employed person, however, if those services are supplied regularly to the same client (which is often an Agency in the case of freelance workers) then it is likely that the current PAYE regulations would dictate that the person be treated as an employee.

Indeed many Agency workers are regarded as employees whenever their services are provided in their own name and most agencies would refuse to contract with a freelance worker who traded "in their own name".

To explain this, there is no legal tax distinction between a sole trader and the individual conducting the trade, as such the individual is the person with whom the contract for the provision of service relates it being little different to a contract of employment.

Due to the practicalities of the legislation very few freelance operators conduct themselves as a self employed individual.

These restrictions do not always apply and where a person provides services to a range of different customers, usually concurrently, and for short durations or specific projects, then this option is a possible consideration.

Where self employment is determined correctly and fully compliant with the legislation, the individual accounts for their profit and losses on the basis of the fiscal year. The individual reports their results through the Self Assessment Tax Return regime and accounts for Income Tax and Class 4 NIC accordingly. They will also be responsible for paying fixed rate Class 2 NIC on a weekly or monthly basis.

Partnership

A partnership is the joining together of more than one party (companies can be partners although individuals are more typical) to create a partnership to provides services together.

A partnership is often governed by a legal agreement between parties known as a Partnership Agreement.

Profit and loss is accounted for as a partnership and then allocated between the partners.

The partners then disclose their partnership share via the Self Assessment Tax regime and account for Income Tax and Class 4 NIC accordingly. They will also be responsible for paying fixed rate Class 2 NIC on a weekly or monthly basis.

In many respects a partnership is taxed as a sole trader and there is little distinction between the partnership and the partners.

Where a number of individuals can bring different skills to the partnership which they can sell or provide a combined product, then a partnership may be the right solution. More commonly, partnerships are created by individuals simply wishing to share the burden, and hopefully the benefits of being in business.

It is very rare for freelance contractors to operate through partnerships due to the nature of the services they provide and due to the manner in which the market place demands those services. They are more commonly seen where a larger number of clients exist, demanding a range of services provided by more than one person often at the same time with differing skill sets. Another common example is a software house where freelance workers come together to create a single software product which is then sold as a single unit.

Agencies workers rarely operate in this way simply because the provision of services is almost entirely individually based.

Limited Liability Partnership (LLP)

A normal partnership has no distinction between the partnership and the partners, which can expose individual partners to liabilities that may not be their own.

The concept of a LLP was introduced to meet the demands, often from professional firms, for a legal entity that was distinct from its individual members.

A LLP is a legal entity in its own right. It is incorporated and registered at Companies House and is subject to statutory regulations on the publicity of its financial affairs, its constitution and its members.

A LLP is taxed in a very similar way to a normal partnership. Each of the Members is allocated a profit share which is accounted for individually by them.

The debts of an LLP are its own and only Members who are knowingly aware of the debts can in limited circumstances be held liable personally for them.

The most common use of a LLP is by Accountants and Solicitors although its popularity is increasing in a broader range of business activities.

It is rare to see LLP's used by freelance workers and especially agency workers because rarely do such individuals come together in a practical business manner.

Limited Company

A limited company is a separate legal entity which exists in its own right. It is incorporated and registered with Companies House and subject to specific company law and regulations.

It is the more onerous and most highly regulated of the various trading styles available.

A company accounts for its profits and losses as its own on the basis of a selected accounting period. Those profits are subject to Corporation Tax.

A company can possess its own property and incur and be liable for its own debts.

There is a clear legal distinction between the owners, the managers of and the company itself.

A company is managed by its directors, who are often also its employees.

A company is owned by its shareholders.

Shareholders need not be directors, and vice versa although in most small companies the owners are often also the directors.

Where a limited company provides the services of an individual worker, such as a freelance worker, and those services are the greater part of the activity of the company, the company is termed a Personal Service Company (PSC). A more recent mutation of the PSC was the Managed Service Company (MSC) which gained some considerable notoriety because such companies were often provided, managed and controlled by business service providers and not the actual freelance worker themselves, often to hide the true nature of the services provided by the worker.

Since the very late 1990's there has been a large increase in legislation directed specifically at PSC's, most notably IR35 introduced in 2000 and more recently the Managed Service Companies and Transfer of PAYE Liabilities legislation introduced in the Finance Bill 2007.

For this reason a limited company option is only suitable for those freelance workers truly providing their services on a professional and businesslike basis.

A thorough understanding of IR35 and the MSC legislation is required before considering a limited company as an appropriate option. You can call us for an informative discussion on IR35, MSC legislation or any aspects of operating a limited company.

PAYE via an Agency or End Client

Where a freelance worker is linked to an individual agency the scope and frequency of contracts available to that worker is often restricted to the clients linked to that agency; and so it is often necessary for a freelance worker to move between specialist agencies.

In doing so, the worker moves from employment to employment, often holding several contracts during a single fiscal year.

The benefits are that all income is taxed as earned and other than completing personal self assessment tax returns, working in this way is very easy to administer and manage by the worker.

However, where the worker is truly in business and provides services that are provided on terms that comply with and meet the standards of self employment, such arrangements can be considered restricted and unrealistic reflections of the effort by the worker.

PAYE via an Umbrella arrangement

Whenever we consider that an umbrella service would be appropriate we will recommend an appropriate and professional provider.

The benefits are that all income is taxed as earned and is very easy to administer and manage by the worker. Our Personal Tax Service can help you with your personal self assessment tax return if you need to complete one.

However where the worker is truly in business and provides services that are provided on terms that comply with and meet the standards of self employment, such arrangements can be considered restricted and unrealistic reflections of the effort by the worker.

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