Setting Up Your Company 

Historically, the majority of IT contractors worked through their own Limited Companies. The tax advantages of working this way far outweighed any other method. With the introduction of IR35 these tax advantages may have been removed depending on whether you fall within the new IR35 "rules" or not. As a general rule, if you fall outside the IR35 rules then you will be most likely better off using a Limited Company, whereas an Umbrella Company would probably be more beneficial otherwise.

The options available to you are:

1. Your own Limited Company

The vast majority of IT contractors work through their own Limited Company. Company Set-Up can cost under £100 and many Company suppliers advertise in the trade press. Alternatively, you can apply for a limited company direct from Companies House (but this will take longer).

Many contractor accountants will set up your company for free on condition that you sign up as a client. The process is fast and not as complicated as it may initially seem. If you've found an accountant you're happy with, this is probably the best option.

Once you have formed your limited company, you will need to appoint a company secretary, which fulfils a legal requirement to record company meetings and perform administrative duties. In practice, this role is minimal and should not take up much time during the company year. Many contractors appoint their partner, or a parent.

Here are some recommended books - these are handy guides and well written. Although they may be aimed at larger companies, there contain lot of useful info for the one man band. These books cost around £12 - £15 from Amazon. 

You can check to see if your prefered Company Name is available at Companies House.

2. Umbrella Company

An Umbrella Company provides a ready made invoicing vehicle for contractors whilst also removing the administrative duties normally associated with contracting in the form of a Personal Service Company. The Umbrella Company normally issues invoices on the contractors behalf, collects payments from clients/agencies, calculates tax and N.I contributions and pays the contractor their net pay direct to their personal bank account.

Traditionally, Umbrella Companies were more expensive than running your own Limited Company, mainly because their charges included all the administration overheads, and they tended not to offer the same tax advantages. With the introduction of IR35 the tax disadvantages of Umbrella Companies have been reduced and a new breed of internet based umbrella companies have emerged.

Variations on umbrella company schemes include Managed Companies and Composite Companies.

Managed Companies normally offer similar facilities to a normal "umbrella" with additional benefits such as holiday pay and sick pay. This kind of service attracts premium charges, normally based as a percentage of gross invoiced income, to reflect the level of benefits provided.

Composite Companies also offer "umbrella" type facilities with the contractor also being a part-shareholder of the "composite" company. The contractor is normally paid a base salary with the balance of their income going into a shareholding "pot". The contractors share of this "pot" is then normally retrieved at the most tax advantageous time (normally years later). A plethora of companies offering variations of this theme have sprung up in an attempt to reduce the effect of the IR35 legislation.


3. PAYE through the Agency

Some agencies allow you to become "PAYE" through their own payroll service.

This is the least tax beneficial option available to a contractor as you pay full tax and national insurance (NI) contributions on all your earnings. In addition this option does not allow you to claim valid business expenses which would help to reduce your tax and NI liabilities.

Timesheets and Invoices

As a contractor, you will be required to fill in timesheets detailing the work you have done for the Client, and the number of hours or days you have worked in a given time period. Your manager or team leader will typically authorise your timesheet.

Currently timesheets are paper based, but some internet based companies will be offering online versions in the near future. These will allow online timesheet creation and verification followed by the automatic creation of an invoice.

Most agencies and clients will require an invoice to accompany each timesheet, detailing the total amount owed for services performed, plus V.A.T (if your Invoicing Company is registered). Some of the larger agencies also offer a self-billing option where they create an invoice on your behalf when they receive your authorised timesheet. Payment times can vary from agency to agency, although most of the larger ones tend to pay promptly (some within 7 days). Fingers crossed, you shouldn't experience any payment delays, but if you do - chase up the agency/client.

It is important to keep your timesheets and invoices up to date, ensuring they are sent in at regular intervals. If you run your own limited company then you are your own 'finance director' as a contractor, and in charge of your Company affairs. The responsibility for these matters resides with you. This may seem to be a 'downside' of contracting, but things tend just to slot into place and these tasks will become second nature after a while. Umbrella Companies generally perform these administrative tasks on your behalf.

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