BECOMING A CONTRACTOR
Introduction
UK contractor numbers continue to rise as many more people are opting to become their own boss, according to new research. A study produced by Kingston University and commissioned by the Association of Independent Professionals and the Self-Employed (IPSE) has concluded that there are now more than 1.88 million freelancers and contractors in the UK.
In particular, there has been a strong increase in the number of female professionals who are looking to start their own successful business, with a 41.2 per cent rise in numbers since 2008, compared to 30.5 per cent growth in the number of males. We will now look at how to become a Contractor in the UK.
Making the decision to go self employed
The contracting sector is evolving fast and many professionals are taking the step into contracting because of the benefits. Individuals who choose to become Contractors have several reasons for doing so. The two main reasons are greater earnings capability and the benefits of being your own boss.
Additionally Contractors gain more varied experience thus enhancing their CV and future marketability. But before deciding to leave permanent employment and go contracting it is essential that you determine the marketability of your skill set. In other words do you possess skills that are in high demand and you can easily find work.
Also, do not quit your job until you are sure that you have a contract to go or you are confident of gaining a new contract. As a Contractor you must be highly proficient in your chosen field of expertise with the skills and contacts to succeed as a Contractor.
Getting your first contract
- Through Agencies
- Linkedin and Social Media
- Direct Contracts
Getting your first contract will depend on your individual circumstances and the preference of the client. Even if you have many contacts in your chosen industry and source your own contract it is more likely that the client will prefer the agency route so as to maintain an arms-length relationship.
UNDERSTANDING IR35
What is IR35?
In a nutshell IR35 is a piece of legislation designed to prevent contractors from acting as 'disguised employees'. Tax Compute Accountants will conduct an IR35 review and ensure that your business is compliant with IR35 legislation and you are acting within the legal framework. Our review will ensure that you are trading legally and correctly as a contractor or freelancer. It is important to note that there are significant financial benefits in working outside of IR35.
Are you caught by IR35?
The first and most important point is to establish whether you are 'employed' or 'self-employed' under HMRC's rules. Essentially the question is whether the contract under HMRC rules is classed as an employment contract. There are basic tests to determine whether the contract is one of employment or not and this will determine whether the Contractor is self-employed or employed.
A Contractor will be outside IR35 if he/she can show that:
- Control - You control how the work is done and how it is completed. It is important that a contractor can demonstrate a certain amount of autonomy in the way they undertake a project.
- Substitution - Other suitably qualified contractors or sub-contractors can take over the work from you. The right to provide a substitute in a contractual agreement is an important factor when demonstrating to HMRC that the contract falls outside the scope of IR35. However, you should still retain the risk and control.
- Mutuality of obligations - Outlining the obligations of Client and Contractor to ensure that there is no obligation for further work when the contract ends. (This would normally be the case for an employee). The contract needs to state a clear end date or termination of the contract based on the completion of the project or works.
DECIDING ON YOUR CONTRACTOR STATUS
When you decide to become a contractor you will need to consider what will be your trading status. Are you going to use an umbrella company, form a limited company, work through an employment agency or simply act as a sole trader? Your individual circumstances, IR35 status and your annual remuneration will be major factors in making that decision. The overriding factors will be which one gives you the greater financial benefit and least administrative burden. A cost versus benefit analysis will help make that decision, taking into account all the relevant issues. Make sure that you receive sound advice from us before making your decision. However, it should be noted that if you are outside IR35 then a limited company is always by far the best option.
Umbrella Company
An umbrella company is a company that acts as an employer to contractors who work under a fixed term contract assignment. The umbrella company will be responsible for billing and collecting payment from the client. They in turn will pay the contractor the agreed salary net of payroll tax, NI and the agreed management fee.
Umbrella companies have become more prevalent in the UK since the introduction of IR35 legislation and it is estimated that 14% of the UK's professional contractors are currently managing their business by working through an umbrella company.
Limited Company
HMRC defines a limited company as an organisation that you can set up to run your business - it's responsible in its own right for everything it does and its finances are separate to your personal finances. Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.
Sole Trader
The simplest method of contracting as your own boss. As a sole trader, you run your own business as an individual and you keep all your business's profits after you've paid tax on them. The term 'Sole Trader' doesn't mean that you cannot employ staff, it simply means that you are responsible for the business, not that you have to work alone.
Agency
Some agency workers are engaged by an employment agency to perform fixed term assignments at various businesses. Other agency workers are permanent employees of the employment agency, directly employed by the agency and sent to work for different businesses. This category is really about employment rather than being a contractor and running a business.
SIGNING THE CONTRACT
This is the last step in the process and there are several contractual relationships that can exist between contractor and client.
- Contract between limited company and client
- Agency contract
- Umbrella Company
CONTRACTOR INSURANCE
When working as a contractor it is absolutely essential to take out contractor insurance as a safeguard against any malpractice claims that are brought against you. Although you maybe an expert in your chosen field mistakes can still happen and it could lead to significant losses for the client. If this were to happen the client may then sue you for negligence. So make sure you have adequate Professional Indemnity and Public Liability insurance.
Remember mistakes can be costly and in some cases could run into hundreds of thousands of pounds and bankrupt you. Although not compulsory we at Tax Compute Accountants recommend that you take out indemnity insurance. Cover can start for as little as £40/month and of course it is tax deductible.
Don't delay and consult a reputable insurance broker for advice. You can also visit www.contractoruk.com for information on contractor insurance.
LIMITED COMPANIES FOR CONTRACTORS
A limited company contractor is simply a contractor that uses a limited company to run his contracting business. By using a limited company the contractor gains the best tax advantage and keeps his/her business affairs separate from personal finances. The contractor through his limited company will sign Contracts with agents and clients. He/she will also utilise a separate bank to record and book all revenues and expenses.
At first it may appear to contractors that running a limited company will create additional work and red tape and you may therefore consider the umbrella option as preferable. However, running a limited company is not rocket science and the whole process is made relatively easy for the contractor as the accountant will do most of the bookkeeping and compliance
There are many advantages for contracting through limited companies;
- Tax efficient and can claim more expenses.
- Take advantage of the flat rate VAT scheme, the 5% allowance and the employment allowance.
- Retain risk and control.
- Many clients prefer to deal with limited companies or agencies so as to maintain an arms-length relationship.
ACCOUNTANTS FEES
How much do accountants charge for bookkeeping?
This varies considerably between different accountancy practices. You could spend as little as £20/month or much more depending on the amount of transactions and of course the accountancy firm you engage
For Contractors the bookkeeping is relatively straight forward and provided the contractor uses our spreadsheet to record all revenues and expenses then the cost is included in our standard £80/month premium service. If the Contractor wants Tax Compute to organise all the bookkeeping then there would be an additional £20/month
How much does an accountant cost for a small business?
Most contractor accountants adopt the fixed monthly fee basis for their clients. Charging for accountancy services by time the traditional hourly billing has had its day. The rates vary depending on the type of service the contractor requires and the firm he/she chooses to engage. Rates can be advertised as low as £60/month or as much as £150/month or in some cases much more. We at Tax Compute charge £80/month for a premium service. Please see our "Accounting Prices" section for full details.
What do Accountants do for small business?
We at Tax Compute can help small businesses and contractors in areas that many other accountancy practices have limited experience of. For example;
- As Chartered Management Accountants we have worked in real businesses and therefore have real business knowledge.
- Our training is both practice and industry based encompassing all areas of financial and management accounting as well as financial management and taxation.
- Because we understand how businesses work we can;
- Better help to achieve your goals
- Suggest ways to improve overall profitability
- Provide advice on improving cash management
- Help you with preparing budget and cash flow forecasting and provide you with effective business solutions
Finally, at Tax Compute Accountants our mission is in building long term relationships with our clients and providing them with a premium service that exceeds expectations. Are you in tune with our mission statement? We'd love to hear from you so please call Jon Gunning on 0333 666 7555 or email us at info@taxcompute.co.uk
