Limited Companies

A limited company in the commercial environment is generally a company with its liability limited to its share capital. There are other types of limited company such as those limited by guarantee but, within the freelance industry, the term limited company refers to those limited by their share capital.

When agencies refer to a limited company, they tend to mean either a Personal Service Company which is formed to provide the services of an individual freelancer or an Umbrella company used to provide the services of many freelancers. The alternative to using a limited company is to be paid directly by the agency under PAYE, which means that legitimate business expenses cannot be treated as tax allowable on an ongoing basis.

The reason for this limited approach is consolidated in Chapter 7 of the Income Tax (Earnings and Pensions) Act 2003, which states that “the services which the worker provides, or is obliged to provide, to the client under the agency contract are to be treated for income tax purposes as duties of an employment held by the worker with the agency”. In other words, you must be paid via the agency’s PAYE scheme. The only alternative to this option is to provide your services via a limited company.

The use of a Personal Service Company has other diffculties attaching to it such as the provisions of the Finance Act 2007 related to Managed Service Companies and the impact of Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (IR35).

So, the simplest, most compliant way of running your contract is via an Umbrella company.