Should a contractor go for an offshore umbrella company or an onshore PAYE one? That is the million dollar question. Whereas one is the riskiest of the three options when you include operating through a Limited Company, the other is the least risky of the three options.
If you go for the onshore PAYE version you can sleep safely in your bed at night knowing that there will be no knock on he door. There will be no IR35 investigation. There will be no paying tens of thousands of pounds in back taxes and fines as would happen if one was operating through a Limited Company but deemed to be caught by IR35.
Another bonus is that all the admin is done for the contractor. There are no VAT returns and there are no end of year accounts. The contractor doesn’t even have to invoice the client. All he or she has to do is to type in the weekly timesheet and expenses and the Umbrella Company will do the rest. They pay you after subtracting the taxes and NICs.
The offshore umbrella company is often considered the most risky. However, smart operators are usually able to keep one step ahead of HMRC and come up with completely legal schemes that usually return the contractor around 85% of his or her money. Of course the contractor is taking the risk that the scheme that he is in is not legal – and then the contractor is liable for the tax. For instance the Government is going to outlaw Employee Benefit Trusts as from April next year. They deem them to be employment income. However, most of the smart operators have already got out of those into new schemes which are still legal.
Operating through a Limited Company when one is obviously caught by IR35 is probably really the most risky option. The contractor is a sitting duck if every HMRC investigate him or her. The trouble is that, according to a poll by www.ITContractor.com the vast majority of contractors are caught by IR35 according to HMRC’s view – if their IR35 test is anything to go by.