Contracting - don't know what I need to know!

[Royalbloo]

Soooo...my current role has been made redundant and I'm on garden leave until mid-August. I've been offered a 3 month contracting role for then, for an accountancy firm who will help me set up a ltd company and ensure tax and NI are paid.

I really want to do it and I think it'll be great experience for me, but I'm well aware there is a LOT I don't know about the contracting/self-employment world and when I try to look up information I get loads of irrelevant info.

Can anyone help regarding vital info I need to know and what I can claim VAT back on (?) please. I have no one to ask in real life!

Many thanks!

I usually look at the daily rate and multiply it by 5 then by 45 - sort of roughly deducting 20 days annual leave, 5 days bank holidays, 2 weeks off sick.

If that is way lower than a salary then avoid unless desperate.

If it is inside IR35 the annual cost is about 20 %, so roughly you need to be earning a day rate that is at least 20% more.

Not included in my crappy rough guide are benefits you would get as a permy - pension, etc so add a bit for that.

Also if you need to travel to your workplace or pay for accommodation or meals, you need to factor that in. If you are having to pay for B&B/travelling it will hit you hard.

I'll never get rich.

Missed out that Inside IR35 you cannot claim your travel/accommodation.
Places where you might find work are generally not cheap to get to or stay.

@KirstenBlest

Missed out that Inside IR35 you cannot claim your travel/accommodation. Places where you might find work are generally not cheap to get to or stay.

Or get tax relief on paying them yourself As I said IR35 is the worst of both worlds. DH is outside at the moment (ironically on a Govt contract) but has said if he can’t find a contract outside he might go and work abroad for a bit.

I am a sole trader and have a lot of different clients. Not everyone chooses to be a limited company. IR35 only applies to limited companies but tax law in determining if you are an employee or not will still apply so use the HMRC tool on its website to work that out.

For a three month contract I would go with an umbrella company. They will charge a fee but they will take your day rate and process it into a PAYE salary and pay your tax, NI, student loan. Which means, unlike when you're Ltd, you don't have to save up for tax throughout the year. If the contract gets extended and/or you see yourself staying in contracting with scope for roles outside IR35, by all means look into the limited company, but in my experience and opinion its not worth it for a short period.
You will probably take home less money per month with an umbrella company, however the reduced hassle.

Since my long term contract fell under IR35 last year, I've been with an umbrella called Paystream who are really good. I know colleagues of mine have had good experiences with Trafalgar and Giant.

But regardless of whether you go Ltd or umbrella, check if the role will be inside or outside IR35 as this will massively affect your take home - when I was outside IR35 I could claim expenses for travel, food, home office equipment etc - I can't do any or that now I'm inside IR35.

Thanks, yes I forgot the tax relief, but that was in my rough estimate of 20%

As an aside. There are some well-known companies who offer PAYE contracts on something like £125 a day.

When I was contracting the work usually came via agents. The end clients started to insist that all contractors worked via Limited Companies as they didn’t want any employer/employee relationship to exist. If you didn’t have a Limited Company, then no contract. Umbrellas became less popular as most people incorporated. That’s all changed now as the move to make most people inside IR35 has removed the flexible worker market.

Xenia your clients

As people have said it is only worth setting up a limited company if you are planning to continue contracting after this initial one.

IR35 is very simple. All it means is 'are you a genuine contractor?' So would the role exist after your contract ends? Could it be filled by a permanant employee? If yes, you are not a genuine contractor and you are inside IR35. If your role is project based, ie once completed the role will cease to be needed, then you are outside IR35. The only rule change with it is that if you are caught inside it then the employer pays the penalties instead of you. This has led to employers being cautious.

You should only register for VAT if your turnover is going to be over £85k (roughly £360 per day, calculated at 48 working weeks). If you are over this you should consider flat rate VAT. This simplifies your accounting so you don't claim back any expenses (unless they are over £2k in a single transaction, this is usually IT equipment) but you put all VAT through at 16.5% on your gross income (not net). This usually works out better unless you stay in a lot of hotels.

You should pay yourself a salary up to the personal income tax threshold so you pay NI and get pension. The rest comes out as dividends. But a tax accountant can look at your situation to help you plan this. Important to remember that your salary must be put through a payroll system and reported to HMRC.

You will also pay corporation tax (currently 19% but changing). All expenses come out before corporation tax is calculated, this includes salary. But dividends come out after corporation tax (so only taken from profit).

Umbrella companies are fine as long as you get one that is operating legally. If they do anything dodgy then you are liable and they tend to get away with it. There was a dodgy loan scheme that people were using as a tax evasion scheme that HMRC made retrospectively illegal (several years go). This has led to loads of contractors owing £100k's. I haven't kept up to date with this so not sure if the court case is still going or if it has concluded as many were fighting. So do your research if they are offering you 90% return then they are dodgy. If you are getting 50-60%-ish then it's about right.

Feel free to message me any questions. I used to be a tax accountant for small limited companies

Sorry meant to say Xenia your Clients probably don’t/can’t dictate the way you work so you can choose to work as a sole trader and this won’t bar you from certain Clients

Caffeine, yes that is right and for people who do jobs for one client and move on to the nest etc the irony is from 1 April 2021 if they are sole traders IR35 new rules do not apply (only the traditional HNMRC test are you self employed or not) and those who formed limited companies may be caught by IR35. Despite that some companies from 1 April have been saying we will pay no contractors at all whether under IR35 limited companies or not (just for simplicity).

Obviously it depends on the work. mr Smith going in to do 3 people's plumbing leaks a day as a sole trade or limited company (he is the only owner of the business) is clearly not going to be his customers' employed plumber. IT whizz Jane who does 3 months plus contracting at a time only working for one company might well in reality be an employee. Some cases are really simple like my one person law firm acting for loads of different clients every day and others very complicated like some of the TV presenter cases where some are clearly doing a one off (I have been paid by the BBC for example in the past for something lasting 30 minutes) or doing a regular show for years and only the one show and nothing for anyone else and all the permutations in the middle.

Thanks all - they have said it's outside IR35 and a day rate of £350. This contract is likely to be extended (I believe) or I could be made a permanent employee at some point.

I'm going to get a copy of their contract and then run it past another accountancy firm specialising in contracting to get their view.

That is helpful (outside IR35). There probably is no legal reason yo have to set up as a limited company from the IR35/tax point of view but if they are saying the only way you can have the job is if you set up a limited company then that's the deal and you will have to do so. It will mean you have limited liability and the contract will be with your limited company.

@Royalbloo

Thanks all - they have said it's outside IR35 and a day rate of £350. This contract is likely to be extended (I believe) or I could be made a permanent employee at some point.

Can you send someone else to do your job? Can you to a certain extent decide your hours? Will you use your own equipment? Will you have any supervisory responsibility? Will you attend team meetings? Will you be invited to paid for social events? These are all things that help decide whether HMRC will consider you SE or not . They may have small co exemption from IR35 but it might be that you should in fact be an employee anyway

@purplepenguin91

As people have said it is only worth setting up a limited company if you are planning to continue contracting after this initial one.

IR35 is very simple. All it means is 'are you a genuine contractor?' So would the role exist after your contract ends? Could it be filled by a permanant employee? If yes, you are not a genuine contractor and you are inside IR35. If your role is project based, ie once completed the role will cease to be needed, then you are outside IR35. The only rule change with it is that if you are caught inside it then the employer pays the penalties instead of you. This has led to employers being cautious.

You should only register for VAT if your turnover is going to be over £85k (roughly £360 per day, calculated at 48 working weeks). If you are over this you should consider flat rate VAT. This simplifies your accounting so you don't claim back any expenses (unless they are over £2k in a single transaction, this is usually IT equipment) but you put all VAT through at 16.5% on your gross income (not net). This usually works out better unless you stay in a lot of hotels.

You should pay yourself a salary up to the personal income tax threshold so you pay NI and get pension. The rest comes out as dividends. But a tax accountant can look at your situation to help you plan this. Important to remember that your salary must be put through a payroll system and reported to HMRC.

You will also pay corporation tax (currently 19% but changing). All expenses come out before corporation tax is calculated, this includes salary. But dividends come out after corporation tax (so only taken from profit).

Umbrella companies are fine as long as you get one that is operating legally. If they do anything dodgy then you are liable and they tend to get away with it. There was a dodgy loan scheme that people were using as a tax evasion scheme that HMRC made retrospectively illegal (several years go). This has led to loads of contractors owing £100k's. I haven't kept up to date with this so not sure if the court case is still going or if it has concluded as many were fighting. So do your research if they are offering you 90% return then they are dodgy. If you are getting 50-60%-ish then it's about right.

Feel free to message me any questions. I used to be a tax accountant for small limited companies

IR35 is very simple. All it means is 'are you a genuine contractor?' So would the role exist after your contract ends? Could it be filled by a permanant[sic] employee? If yes, you are not a genuine contractor and you are inside IR35. If your role is project based, ie once completed the role will cease to be needed, then you are outside IR35. Except it isn't (as I am sure you know). HMRC take cases to special tax courts with armies of highly trained lawyers and they sometimes (often) lose, but the process takes years (5+) and bucketloads of cash, which is why all my project based outside IR35 work has dried up - clients simply don't want to be bothered with that even if at the end of it all they are proved right (as you alluded to). I've shut my ltd company and taken a non-project based permie job in a related field.

IR35 is a badly made complex law, poorly understood and badly applied - HMRC doesn't even accept the Courts' repeated finding on Mutuality of Obligation (just one part of the highly complex rules around IR35). It's s ridiculous shitshow.

@Royalbloo

Thanks all - they have said it's outside IR35 and a day rate of £350. This contract is likely to be extended (I believe) or I could be made a permanent employee at some point.

If they are large enough to make the determination and it's outside you are golden - remember it's now their responsibility, not yours. Make sure you get the IR35 determination in writing then stop worrying about IR35 - not your issue any more.

I’d be interested on what basis they have decided it’s “outside”. If you read some of the legal judgements around this it’s not simply what’s written in the contract, it’s also working practices, mutuality of obligation, right of substitution etc. How much control will you have over how the work is done, your working hours, location etc.

It’s not as simple as if you work on a project with an end date then you are outside. Almost all IT contractors are working on developments that have an end date but employers won’t take the risk of them being determined “inside” so the market has disappeared. My own accountant has lost 40% of her customer base and says she’s going to have to start marketing to new client bases.

Sorry I’m not trying to be negative. I’m probably a bit bruised through having to navigate all this for years! I guess if they’ve made the determination and you have it in writing then that is ok in one sense. But if HMRC were later to determine you were actually inside could they still come after you as well as the employer?

@Caffeinefirst

Sorry I’m not trying to be negative. I’m probably a bit bruised through having to navigate all this for years! I guess if they’ve made the determination and you have it in writing then that is ok in one sense. But if HMRC were later to determine you were actually inside could they still come after you as well as the employer?

No they can’t - that’s the whole point of shifting the determination to the client.

Of course, given the loan charge fiasco I wouldn’t trust HMRC on anything but the legislation is pretty clear.

You could probably work as PAYE not a limited company.
It might be worth asking the hiring comppany if they would give you a short term employment contract, where you would be treated as an employee. That is often what happens with things like maternity cover.

The whole thing is a mess. So many rule changes both regarding ltd and umbrella companies in the last 10 years. When I was a contractor initially you could claim tax relief on travel to work expenses with an umbrella company. The tests about whether you are an employee just aren't appropriate for a lot of IT contracts - no company in their right mind is going to allow you connect with your own laptop to their secure network.

I'm currently working inside via an umbrella, last year I was outside working via my ltd company. Sole trader not an option. Who knows what the rules will be when I'm looking for my next role. Permanent roles for the sort of work I do rarely exist directly in the companies I work for (I'm almost always working on one off projects) if they can't employ contractors the other option would be IT consultancies. But I'm cheap compared to that even though my day rate is quite generous.

And the knowledge about all this within companies is woeful. I was nearly let go once in a mass cull of contractors when new IR35 legislation was introduced into the public sector. I was employed by an umbrella company at the time, so the IR35 rules entirely irrelevant

@YellowScallion

And the knowledge about all this within companies is woeful. I was nearly let go once in a mass cull of contractors when new IR35 legislation was introduced into the public sector. I was employed by an umbrella company at the time, so the IR35 rules entirely irrelevant

Agreed - even amongst agencies who are meant to be specialists the knowledge of the rules is woeful. In some ways though contractors are are own worst enemies. IMHO no-one who is a "real" contractor should be working inside IR35. If everyone refused to take a role as a no-rights employee (which is what inside actually is), clients would have to buck up their ideas - but I know its a buyer's market at present. I am lucky I have transferrable skills and I wasn't a permitractor sitting in one place for a long time.

IMHO no-one who is a "real" contractor should be working inside IR35.

I'm not sure I'd agree with this, but I do think people need to be aware of what an inside role means for them, and whether working via a ltd company is worth it in that scenario. But an uplift in day rate can make up for a lot of rights.

Also in deciding if sole trader v limited company due to recent changes in taxation of dividends some of the bigger tax advantages of limited companies have gone.
As hinted above companies do differ on how they choose to deal with this eg some have just said no sole traders, no contractors no umbrella companies = everyone working most of the time here for us will be PAYE. Others at the other extreme say b ugger HMRC we do not want hassle of employees you can all be self employed if you want to be and we will all take our changes (that is not wise of course). Others look at each case following the tests above using HMRC CEST tool and case law etc and make a case by case decision.