You are not ‘contracting’ – you are starting your own business

At some point during your job hunt, you will ask yourself whether contract positions are worth considering. The promise of high day-rates and more freedom is certainly appealing, but there is much more to contracting than simply doing the same work for more money. There is the additional risk you accept of being out of contract for long periods. You can wave goodbye to paid sick leave and holidays.

You will also need to consider the way you operate. Umbrella companies can leave you with the worst of both worlds: continuing to be taxed as a permanent employee, whilst shouldering the risk of being self-employed. Setting up your own limited company will give you more freedom, but you have to operate as a business or risk being taxed under IR35 legislation.

ContractingIR35 is a tax legislation designed to pick up people who are in so-called ‘disguised employment’. Put simply, if HMRC decide you are actually acting as an employee rather than a business, you will need to pay tax accordingly. This can be more costly than a permanent job as you have to factor in the costs of Employers’ National Insurance. If you are operating outside of IR35, as most contractors are, there is the risk of a considerable tax bill if you’ve accounted incorrectly.

The best way to avoid falling foul of IR35 is to look at contracting for what it really is: you are an entrepreneur running your own small business. Do it right and not only will you avoid tax shocks, you can actually build your business and increase profitability. Here are a few of ideas to get you started:

  • Outsource some routine work. specialise in subcontracting for IT Professionals. They can create dashboards, communication plans – even write up your meetings based on your whiteboard photos. As well as providing you evidence to pass HMRC’s ‘Actual Substitution test’, this will also allow you to work more efficiently – taking on more or higher value contracts;
  • Consider taking on fixed-price pieces of work, or work with additional payments for hitting key milestones. Let’s be honest, you wouldn’t be contracting if you were not confident in your ability to get things done. Fixed-price contracts or contracts with milestone payments can be more lucrative than pure day-rate contracts and will be attractive to the companies you work for as their risk will be greatly reduced;
  • Market your company and build your brand. It is surprising how many contracts are initiated through networks rather than job boards. Build a presence on Linked in and create your own company page. Raise your profile further by writing white papers on areas of expertise and maintaining a blog.  Don’t confine your marketing to the Internet. Business cards are still an important networking tool to use at meetings, conferences and networking events.

So there we have it. What started as a simple job search has resulted in you becoming director of your own limited company, subcontracting work and taking on lucrative fixed-price tenders. What started off as a desire to avoid IR35 has propelled you into running your own small business. Congratulations and best of luck for the future.