Advantages for the Contractor
There are tax advantages to trading through a limited company, rather than being PAYE employees (mainly in the area of the tax-deductible expenses that can be claimed by the contractor).
However, running a limited company is onerous in terms of additional regulation, responsibility and statutory accounts, returns and corporation tax.
Using an Umbrella Company means that the individual contractor would NOT have their own limited company, the need for limited company accounts, corporation tax and VAT returns and other administrative responsibilities connected to running a company would all be avoided.
It also means the the contractor has a continuous employment with the Umbrella company that can continue through contracts with different clients.
Advantages for the contractor’s client
Some contractors are forced by their clients to operate through a limited company, as opposed to being a sole-trader. The main reason for this it shifts the responsibility for correctly ascertaining employment status from the client company to the contractor. (When a contractor is a “sole-trader” it remains the responsibility of the client company to ensure that the contractor isn’t really an employee. In this instance, it’s the client company that would be penalised if HMRC deemed that the “sole trader” was actually an employee. Where the contractor works through a limited company, the client has no such responsibility (or potential liability for penalties from HMRC)
It also lowers the employee numbers.
