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| Contractor Area |
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Guides to Contracting
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Contracting - Is it right for you? |
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It is common for businesses to use contractors instead of hiring permanent staff when the work is short-term and expert skills are needed for a finite period or the extent of the workload is unknown. Contractors are not employees of the business but have a contract to provide certain services.
Contracting has shown to be an attractive prospect for many. For those looking into the possibility of contracting, it is important to note that contracting is not suitable for everyone. So before taking the plunge an awareness of the benefits as well as the downsides needs to be considered.
| Benefits of Contracting |
- Financial Rewards
Higher Pay Rates. Contractors tend to command very high rates due to their skills, incentive to accept a short-term position and compensation for no employee benefits and paid holiday leave.
Tax & NIC Savings. Contractors can operate through a limited company and this provides tax and national insurance savings compared to their employed counterparts.
- Flexibility
Independence. Many contractors enjoy the fact that they are their own boss. There is a feeling of independence compared to employees.
Flexibility. With the freedom to choose who you work for and for how long. Although holidays are not paid for, there is flexibility to choose to take as much holiday as you wish.
- Development of skills
Adaptability. The ability to work for different companies in varying industry sectors exposes contractors to different company cultures, operations and structures. Broader Experience. As a result, contractors build a CV with advanced knowledge, skills and experience compared to those permanently employed.
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| Downsides to contracting |
- Continuous responsibility to find work
Short-term. Contracts tend to be short-term and so lining up the next contract or negotiating an extension to the existing one is an on-going task. There is always a level of uncertainty about where the next contract is coming from.
- Managing your finances
Financial Responsibility. Contractors are responsible for managing their own finances, especially in times without a contract.
Increased Administration. Also, operating through a limited company increases administration. However, this burden is significantly reduced with the help of appointing an experienced firm of contractor accountants.
- Reduced benefits
Adaptability. The ability to work for different companies in varying industry sectors exposes contractors to different company cultures, operations and structures.
Contractors miss out on the employee benefits such as company cars, health cover and pension schemes. Holidays and periods of sickness are also not paid. However the increased contractor rates are set to provide adequate compensation. |
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The Options – Limited Company or Umbrella? |
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The latest rules essentially mean that two choices remain available for contractors. Either operating through your own limited company or using the services of a PAYE umbrella company.
Limited Company
By setting up a limited company, the company can have a contract with the client/agency. The director controls how much to pay themselves as a combination of salary and dividends, depending on the impact of IR35 legislation. |
- Reasons for
Lower Tax & NIC Liabilities.
The best means of minimizing tax and national insurance liabilities.
Tax deductable expenses.
More tax deductable expenses can be claimed
VAT Flat Rate Scheme
Take advantage of the VAT Flat Rate Scheme
Easier than you think
It is not significantly more difficult than the umbrella solution, especially with the help of a good firm of Accountants.
- Reasons against
More Administration
There is a bit more administration and responsibility on the Director’s part. With a good firm of Accountants, the directors should expect to spend no more than 15-20 minutes per month. Accountancy & Administration Fees
A good firm of Accountants can help reduce the burden as much as possible, but these services attract fees.
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PAYE Umbrella
This involves working your contract through a PAYE umbrella company, rather than your own. Effectively you become and employee of the umbrella company. |
- Reasons for
Simple & Easy
Just submit timesheets and expense claims to the umbrella company and you’ll be paid like an employee
Short Term Solution
If you intend to contract for a short period, say 3 months, you may not wish to set up a limited company and instead be happy to pay more tax and national insurance, as well as the umbrella company’s fees.
A good alternative if you are not sure whether contracting is right for you and you are just in between permanent jobs
- Reasons against
Higher Tax & NIC Liabilities
The tax and national insurance advantages of being a contractor are eliminated. Your salary will be treated as if you are a permanent employee, paying full PAYE tax and national insurance.
Less Control
You lose control to the umbrella company
Umbrella Fees Payable
The umbrella company will charge administration fees, making the entire method far more costly than a operating through a limited company.
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The IR35 Legislation – What you need to know |
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This legislation was introduced in April 2000 following the Government’s concern that small limited companies were being used to disguise employment. Individuals working through an intermediary will fail the IR35 test if their terms and conditions or working practices are of employment.
The IR35 legislation is designed to increase both the Tax and National Insurance (NIC) to the Inland Revenue from the service industry. On the whole it is more tax efficient to distribute income as dividends, usually subject to the payment of a small salary. To this end, it introduces the concept of "deemed salary" which will be taxed and subject to NIC as if it has been paid as a salary.
The test is to determine from the outset whether or not the worker is effectively an employee. The overall picture will be made up by how the contractor operates on a day to day basis – the reality of which must be reflected by the contract.
| Indications of being inside IR35 |
Financial Risk
Being paid by the hour, week or month. Working stipulated number of hours a week or a month. Being paid for overtime.
Substitution
Required to do the work yourself rather than hire someone else to do the work for you.
Control
Having someone tell you at any time what to do, when to do it or how to do it. Required to work at the premises of the person you work for, or at a place or places they decide. Not able to work on other contracts simultaneously. |
Indications of being outside IR35 |
Financial Risk
Being hired to undertake a specific project for a finite duration. Having a contract that is project based with deliverables and milestones. Obligation to correct unsatisfactory work in your own time and at your own expense. Having the possibility to make a loss on the contract.
Substitution
Having the freedom to hire other people on your own terms to do the work you have taken on and paying them out of your own pocket.
Control
Being able to decide how, when and where to carry out your services. Providing the main items of equipment you need to do the job for the client, not just the small tools many employees provide for themselves. Having a number of customers at the same time.
We would advise contractors to seek legal advice to determine their position under the rules. If you are caught by IR35, you may be able to change the way you work (working practices) and use an IR35 'friendly' contract to help bypass the legislation.
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The Limited Company – The first steps |
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Appoint an Accountant
This is an important decision. A good accountant will provide you with expert advice whether you are operating inside or outside IR35. Good accountants work in a smooth and efficient manner, ensuring that they meet their obligations and commitments, whilst providing you with peace of mind that all matters are being dealt with effectively.
Form a Limited Company
The company formation should be organized before the contract is signed. The client/agency usually request to see the Certificate of Incorporation and prepare the contract paperwork with details of the company name it is entering into a contract with.
The formation is a straightforward process and there are many companies on the market providing company formation services.
Establish your IR35 Status
When you are in negotiations for a contract try to establish whether the contract and engagement of the contract is inside IR35 (caught by IR35) or outside IR35 (IR35 friendly). Whilst you agency may suggest an opinion, it may be worth having your contract reviewed by an industry expert.
Open a Bank Account
We are happy to help with the opening of your Business Bank Account with the provider of your choice. We administer the registration process free.
Register for VAT
Once your company is formed, we can advice you registering for VAT and the best options available to you. There are two different ways to operate VAT. The standard way, where you claim back VAT on items that you buy through the company. The second is to operate under the VAT Flat Rate Scheme. Most contractors choose The Flat Rate Scheme as it enables more of the VAT charged to be retained. We administer the registration process free.
Register for PAYE
The company shall need to operate under HM Revenue & Customs’ Pay As You Earn (PAYE) Scheme. We administer the registration process free.
Register for Corporation Tax
The company shall need to register for Corporation Tax via Form CT41G. We administer the registration process free.
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