The legal company structure under which you operate as a Contractor will depend on your IR35 position. Broadly speaking, you have five main options:
1. Be genuinely self-employed as a Sole Trader as long as your contracts fall out of IR35 (you provide a personal service directly to the Client, not through any other party). A Sole Trader is a business that is owned and controlled by one person who takes all the decisions, responsibilities and profit from the business they run. You do not have the administrative or legal responsibilities of a limited company, however you must register as self-employed with the HMRC. You are personally liable for any debts incurred in running the business. You can offset business expenses and losses against tax and need to do a yearly tax self-assessment.
This is a good option if you work for a number of clients simultaneously and want to be your own boss. It is not such a tax efficient option as a Limited Company.
You cannot work through an Agency* who will find work for you.
2. You can form your own Limited Company which is a legal entity in its own right. You and the company are not the same – the company has rights and responsibilities and can own its own property and equipment. The company is liable for any debts it incurs, not you personally. You have legal obligations to publish accounts and there is more administration involved.
You should not consider this option if you are only intending to freelance/contract for a short time.
3. You can use a PAYE Umbrella Company who essentially do your payroll and tax for you. You are regarded as an Employee of the Umbrella Company. You will be within IR35 if you do this so there are no issues – the Umbrella supplies you to an Agency, who in turn place you with clients. The Umbrella will charge you a fee for the provision of its services.
If you are freelancing on a ‘casual’ or short-term basis you may be better falling off within IR35 (if the circumstances apply), rather than trying to avoid it.
4. Work through an Agency on a PAYE basis. This offers the lowest financial returns of the above options (as you cannot offset some expenses as you can when working through an Umbrella Company or Limited Company) and the Agency will probably offer you a lower rate to take into account their costs (Employers NI, holiday and sick pay etc.). This can be advantageous if you only intend to contract for a short period or you are a lower paid contractor.
5. Get a permanent contract with the Client. This offers the lowest financial return of all the options but gives you stability and benefits.
* Agencies can only supply Contractors directly and pay them through PAYE (as Workers/Employees) or engage with Limited Companies – they cannot pay the genuine self-employed ‘gross’. Therefore if you are a Sole Trader this could limit your chances of getting work, as you cannot obtain it through an Agency.