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Umbrella contractors already being encouraged to incorporate because of AWR

Umbrella company contractors are being encouraged to incorporate by recruiters and clients, as a result of the Agency Workers Regulations (AWR). This is according to ContractorCalculator CEO Dave Chaplin, who says the website’s popular Contractor Doctor has started to receive questions from numerous concerned umbrella contractors.

“The Agency Workers Regulations came into force on Saturday 1 October and the Contractor Doctor received its first question from an umbrella company contractor on the Monday,” says Chaplin. “We’re being told that a small number of recruiters and clients are putting pressure on contractors to incorporate as limited companies to take them out of the scope of AWR.”

Despite the unwelcome pressure, Chaplin highlights that some contractors have been pleasantly surprised by the outcome, particularly those who followed the Contractor Doctor’s advice and used ContractorCalculator’s online interactive calculators to work out what they would earn after incorporation.

“Higher earning, more experienced contractors who remained with their umbrella through inertia have discovered that their current contract is actually outside IR35, their take-home pay has increased sharply and the burden of running a limited company is much less than they had been led to believe.”

Limited companies are financially not worth it for some contractors

Despite the pressure from recruiters and clients to incorporate as a ‘get out’ of AWR, Chaplin warns contractors that a limited company is simply not the right solution for some: “Contractors should think through the implications of incorporation and work out whether the increased tax efficiencies outweigh the increased professional fees.”

The administration burden of running a contractor limited company is not much greater than a contractor uploading timesheets and expenses to their umbrella company portal, he says, particularly with the advent of online contractor accountancy. However, some contractors prefer not to have the responsibility.

And for contractors on low rates of pay with annual fees under around £26,000, it’s just not worth incorporating, as the tax savings are outweighed by the accountancy and administration costs. “For most low earning contractors inside IR35, incorporation is not the right solution, as our target income calculator shows,” adds Chaplin.

IR35 and short-term contracts

Some contractors have chosen an umbrella company as their trading vehicle because they know from the outset that their assignment will be inside IR35. This is particularly true of many lower paid assignments when the contractor’s day to day activities are tightly controlled by the client.

For most low earning contractors inside IR35, incorporation is not the right solution, as our target income calculator shows

Dave Chaplin, ContractorCalculator

“Umbrella company contractors considering incorporating should first commission an IR35 contract review, which should include checking both the contract and working conditions,” continues Chaplin. “That way contractors understand from the outset what benefits they can expect from incorporation versus the costs of complying with IR35. As is the case with lower paid contractors, some contractors with a contract inside IR35 may be better off staying with an umbrella.”

Chaplin also urges short-term contractors to try and avoid incorporating: “If a contractor is only contracting as a stop-gap between permanent roles for a couple of months, then umbrella companies offer the best solution. This only changes if the contractor is on an exceptionally high day rate, when even three months of trading via a limited company could result in many thousands of pounds of additional take-home pay.”

Incorporation is not a ‘get out of jail free’ card for AWR

“Not only is a contractor limited company not the right trading solution for many contractors, but the official guidance from the Department for Business, Innovation and Skills (BIS) also confirms that a contractor trading via a limited company can still be in the scope of AWR.”

Chaplin says recruiters and clients pressuring their contractors to incorporate should be mindful of the following excerpt from BIS’s guidance:

“Simply putting earnings through a limited company would not in itself put individuals beyond possible scope of the legislation.”

“Contractors whose personal circumstances don’t suit incorporation should ask their umbrella company about AWR-friendly solutions,” says Chaplin. “And there will be some contractors who are ready to incorporate who will have a pleasant surprise when they find out how much more of their fee income they take home at month end.”

Published: 31 October 2011

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