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.


One thought on “You are not ‘contracting’ – you are starting your own business”

  1. I have to disagree somewhat with some of the statements above, such as, ‘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’. If you are with an Umbrella Co. you are not classed as self-employed as you are paying tax as an employee under PAYE (you will not have to complete a tax return) PLUS you have to pay the Employers tax and umbrella fees. So I do agree that you get shafted from all sides but there is no risk as such.

    In reality there are 2 different types of contractor; those that ARE small businesses and often work for multiple clients (more as a consultant) and those who take a contract role as that is all that the employer is offering. The former is more likely to be self-employed and the latter more likely to use an Umbrella Co. I therefore disagree with the title of this article as only the former is in that situation.

    Also, when you say ‘more freedom’ to some extent that is correct as you can leave with sometimes as little as 1 week’s notice and go to another contract of your choice (you have to FIND a suitable one first though!) However, more often than not you are exactly like a permanent employee (same hours, have to be on site and leave at particular times etc.) and therefore you will fall foul of IR35 rules and be effectively forced to use an Umbrella Co. Your contract will also be less beneficial than a permanent employee’s too; not as much paid holiday or sick pay, benefits etc. (not always but usually).

    A lot of people set up their own contracting companies when they shouldn’t as they are not in the right IR35 classification – however, they play the odds and take the risk of possibly being investigated by the taxman (usually they are not) then they maximise their tax situation and have more take home pay.

    Contracting is a minefield and at the end of the day you may not always be self-employed but you will have to manage your own career and look after yourself as 9 times out of 10 you will be viewed as a very disposable asset and 2nd class to the permanent employees you work alongside.
    I say all this after 10 years spent contracting. Think very carefully before you do it – not least because once you start it is very hard to get employers to believe you will want to be a permanent employee ever again.

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