I wondered if anyone could kindly assist please and provide some clarity please or point me in the direction of someone who can?
I have a friend who works through an AGENCY on a 10 month contract............signs off a weekly timesheet and am sure he is paid by them direct but the PAYSLIP is issued by an umbrella Company
He was told he had to start his own Ltd Company and be VAT Registered which was set up by this umbrella Company (why VAT Registered I have no idea is there any benefit?) to be employed by this agency - I understand that Ltd Companies mostly have to be opened to be employed via an agency hence IR35 rules as they are trying to stop Sole Traders
How are the accounting entries made through his Ltd Company for Income and Expenses? There was hardly any explanation as to why he had to register Ltd & VAT - I would expect a new Bank Account to be opened in the Ltd.'s name and prime entries recorded from transactions?
This will now drive Returns to be made for both Ltd Accounts and Annual Return plus VAT and even CT
Regarding the VAT there is an advantage if you can charge VAT on top of an invoice, because you register flat rate, charge the client VAT at 20%, and only hand over c 12-15%* in VAT . Its common for IT Contractors to do this.
* On flat rate the VAT is calculated on the sales including VAT Percentage quoted is a broad average, there's a few that are lower.
Thanks for the reply - but I'm none the wiser nor is my friend..............he seems to be have been kept totally in the dark over everything and has had no proper guidance from either the AGENCY or this Umbrella Company re LTD etc
Who should be raising VAT Invoices my friend through his LTD Company as this is not happening since company Registration
I'm not au faire with umbrella companies I'm afraid but this does seem very much as if the arrangement is more for the financial benefit of the umbrella company than your friend.
However, as your friend is a Director of his own Ltd Company he does have legal responsibility for it and that could have implications further down the line, submission of annual accounts, filing of corporation tax etc. If this has all been set up via the umbrella company and he hasn't been given any advice about what is happening and why, then frankly it stinks.
I would strongly suggest that he engages an accountant to have a look over the arrangement and give him proper advice regarding the situation.
usually the limited company is set up to get away from paying the fees that umbrella companies charge.
I have a few clients that have done this- registered as limited because they only contract to one supplier - even with the accountancy fees increased it still works out cheaper than the umbrella scheme fees
Vat is optional - if he doesnt want to be registered he can just as easily de register
The situation you describe I see as becoming more and more common.
Umbrella company is a company that the agency opens and runs for the individual. The individual are the director/shareholder but the agency take a large % of their income to administer the company eg do the accounts, VAT returns, payroll, tax return etc.
What more and more people are doing is setting up their own ltd company and engaging an accountant to do everything. This usually works out a lot less than that the fee they are charged by the agency.
Benefit of registering for VAT is as said above you charge 20% on your invoices but pay a lesser % to the VATman under the flat rate scheme. eg say your turnover is £40k. Then would charge £8k VAT at 20%. Say your flat rate % is 14% then you pay £6720 (14% x £48000) to the VATman. So purely by registering for VAT you are £1280 (£8k - £6720) better off. Even if you get the accountant to do the VAT return, we charge £60 per return, then you are still £1k better off before tax and £800 better off after tax at 20%. Easiest £800 you will ever earn. You also get a 1% reduction on the flat rate % in the first year.
We have a number of clients who operate like this. Off the top of my heard probably about a dozen. Seeing a potential client tomorrow who also operates like this who was pointed our direction by another contractor who we signed up last week.
