Moving from limited company to umbrella, agency or client payroll

For all the uncertainties of 2020, one thing that’s indisputable is the increasing number of limited company contractors considering moving from running their own limited company to an employed role directly with an end-client, or via a recruitment agency or through an umbrella company.

Whatever the reason behind the transition (and very often it is IR35 reform-related), there are plenty of factors to consider when making the switch and it’s a switch likely to be considered both in the new year and the rest of 2021, writes Helen Christopher, operations director at Orange Genie.

Mindset

The DNA of an experienced contractor tends to be very different from that of an employee. Switching from running your own company to being employed requires a shift in mindset.

Chiefly, as an employee you will not have the same autonomy you enjoyed as a company director and even if the novelty of being your own boss had worn off, you may find you miss the freedoms and lack of independence you once enjoyed.

That said, there are some positives to being employed. You won’t have to worry about making sure your taxes are paid on time, your expenses will be checked as they are claimed (so less fear of future HMRC investigations), and you will benefit from statutory payments like sick pay and potentially additional employee perks, such as employer pension contributions, life cover and shopping discounts.

Take-home

Whatever the driving force for the move to conventional employment – ‘the dark side’ in contractor parlance -- you will need to consider the financial implications. As an employee you will be taxed on all your earnings through the PAYE system and you will also need to pay Class 1 National Insurance. Inevitably, unless you have negotiated an uplift in your rate, you will see your take-home pay reduce. Personal cashflow planning and forecasting will be vital to ensure you are financially comfortable.

Practicalities

There are two sets of practicalities to consider when moving to employment. Firstly, there will be administration involved in setting you up as an employee including making sure you get paid on time. Secondly there is the question of what happens to your company.

It should be relatively straightforward for an employer to set you up as an employee. You will need to provide your personal details including National Insurance number and evidence of your Right to Work (if necessary), along with your P45 from your limited company plus details of a personal bank account for salary payment.

If your limited company accountant also supports the umbrella company model, you should find switching over very straightforward as they will already have much of the detail required. They may even offer a model that means you can switch between umbrella employment and your PSC depending on your particular contract, hopefully allowing you the best of both worlds if IR35 does crop up.

There are contractual considerations too. Your new employer will issue an employment contract for you to sign, which will set out your rights and obligations. If you are retaining your company, watch out for a clause in your new contract that asks you to declare your interest in your limited company. The clause will likely extend to asking you to confirm that you will not be using your limited company to directly complete with an end-client’s business.

Making the company dormant

If you plan on using your company again in the future, making it dormant may be sensible. To maintain your company, you will need to prepare trading accounts for the active period of trading up to the regular accounting date and then from the start of the dormant period you will be required to file dormant accounts and Confirmation Statements with Companies House. 

There is no formal notification process to let Companies House know your company is dormant but HMRC do need to be told. Your accountant can help you inform HMRC so that requests for Corporation Tax Returns are stopped. You shouldn’t run into any problems maintaining a dormant company as long as no trading transactions are incurred during the dormant period.

Closing the company

Now may be the right time to permanently close your company. This will require a little more paperwork and effort, but your accountant should be able to assist. Depending on the level of reserves in your company, there are one of two ways of closing which will minimise your tax liabilities. Where your reserves are less than £25,000, your accountant can guide you through a simple ‘striking off’ of the company and any funds transferred to you will be reported on your self-assessment as a ‘capital gain.’

If your reserves are over £25,000, a formal Members Voluntary Liquidation may be necessary and a liquidator will need to be appointed. This process may take a little longer (than if your reserves are under £25k), and will cost more but the benefits should outweigh these factors when Entrepreneurs’ Relief is applied and the funds withdrawn are taxed at just 10%.

Under either route, final accounts will need to be filed with Companies House and a formal request to strike the company from the register will need to be made. The dissolution process at Companies House can take between three and six months to complete. HMRC also needs to be informed so that any PAYE or VAT registrations can be formally closed.

An honest assessment

As a contractor accountancy firm, we tend to do everything we can to advise contractors to think about a long term contracting career, but for many right now there is a perceived security in a permanent position. It is difficult for us to argue against this when many end-clients are determining not to use PSCs in the short term because they don’t have the capacity to focus on IR35 reform and navigate through the issues they face with Covid-19.

In these circumstances, we are recommending contractors to place their company into a dormant position for at least three to six months while probation periods are completed and the contractor has the opportunity to really see if a move to permanent work is for them. We genuinely believe that contractors will play a key role in the UK’s economic recovery. We think that in time, end-clients will need and want to engage with temporary expertise and those contractors that have retained their companies and kept their contacts will be first in line to pick up the contracts.