Startup contracting: what you need to know

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February 24, 2016
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The latest labour statistics show that self-employment is at an all-time high, 4.66 million people now making a living this way. Tens of thousands take the plunge every month, swelling the ranks of the self-employed – contracting one of the most popular options for those choosing to go it alone.

Bringing more flexibility, autonomy, and the potential for higher pay, it’s no wonder so many are joining the growing contractor workforce. Nonetheless, you’ll need to do your research before you make the switch, as contracting brings some added responsibilities that staff in-house don’t face.

Here’re some things you ought to aware of before you commit to contracting…

The legal structure specifics

As a contractor, you’ll essentially be a one-person business, and as such you’ll be duty bound to operate that way. For many, starting up as a sole trader simply isn’t an option (recruiters tend to avoid them) so you’ll be left with three distinct choices when it comes to structuring your business. These are:

  • Forming a limited company
  • Signing up to an umbrella
  • Taking a risk with a tax scheme

Now, each brings their benefits and drawbacks – ranging from more paperwork to (potential) problems with the law – so it’s important to weigh up their pros and cons before you take your pick. Take a look at our recent guide to setting up a contracting business and use that to shape your decision, and be willing to seek more expert opinion if you’re still unsure.

The tax facts

Closely linked to your legal structure will be your tax responsibilities, and you’ll need to get to grips with these to avoid the wrath of HMRC.

As a limited company contractor, you’ll need to complete an annual self-assessment, as well as an annual return, annual accounts and a corporation tax return. However, these really aren’t too much hassle nowadays with the help of good bookkeeping and accounting software.

In contrast, umbrella company contractors don’t generally need to worry about these – they’ll essentially be employees of the umbrella company. As a result, they won’t face the same tax obligations as a limited company contractor, but they’ll lose the greater tax efficiency that limited companies experience. Generally, it’s more profitable to work as limited company – despite the extra paperwork it brings – as umbrella company contractors tend to face more taxes than their limited company equivalents. Umbrella company contractors will soon see some expenses disallowed too, which will also impact on their profitability.

Those that operate through complex tax schemes, meanwhile, are by and large avoiding tax. Often operating on the edge the law these schemes can spare you tax bills in the short-term, but ultimately you’ll probably face bigger tax bills in the long run.

That’s as the taxman has a knack for catching those behind these schemes – up to 85% ending up overturned by HMRC. If something sounds too good to be true – especially where tax is concerned – it probably is.

The ins and outs of IR35

Elsewhere, a good grip of IR35 is crucial to any contractor’s success, as gone ignored it could lead you into all kinds of hassle.

Essentially a piece of legislation designed to tax ‘disguised employment’ it impacts upon contractors whose work arrangements closely mirror in-house employees (but for the amount of tax they pay). Its aim is to claw back tax from these contractors and to limit their financial advantages, which aren’t as deserved as your average small business –in the government’s eyes at least.

A complex piece of legislation you can discover more in our guide to IR35, whilst we’ll also include a stringent review of your position as part of all of our packages.

Keen to make the move into contracting? Find out how we can help through our guide or contact us on 0161 669 4221 or via info@biaaccountancy.com

Contractor, startup

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