Contractors Guide. Introduction. To be or not to be? The pros and cons of contracting

(1)

The Eagle Building 148 Leadenhall Street, Vilniaus str. 31

19 Rose Street, London LT- 01402 Vilnius

Edinburgh, EH2 2PR EC3V 4QT Lithuania

Tel: 0131 473 7030 Tel: 020 3427 3217 Tel: +370 5 205 9318

Email: [email protected] W: www.brightpurple.co.uk

Contractors Guide

Introduction

Bright Purple is proud to work with a huge network of talented freelance contractors, placing them into roles where they can add real value to our clients, especially within the IT and financial services sectors. A freelance contractor is defined as a person who is not committed to one specific employer in the long term. A contractor is free to enter into a fixed-term working agreement with a third party, either as an individual or as an employee of their own company, to assist in the running or completion of a specific project.

That is the technical definition but what does it actually mean to be a contractor? What is involved in the world of contracting? Who is best suited for this type employment? What are the upsides and downsides?

In this brief guide we aim to answer these questions and give you a better insight about what is involved. We cover some of the benefits and disadvantages, give some advice on how you can pursue this route and we give an overview of the key legislative issues that you need to be aware of if you are planning to work as a contractor.

To be or not to be? The pros and cons of contracting

While it’s not for everyone, contracting can give you a great platform to earn well and ensure you are exposed to a high degree of variety and challenge within the work place. It can, however, mean less job security as you are often employed over short term periods. You must also be someone who can easily adapt to a life of frequently changing workplaces.

Let’s start by looking at the benefits of being a contractor.

Income

The first is income as it tends to be one of the main reasons why most people consider contracting in the first place. Due to the short term nature of most projects, most employers are prepared to pay higher rates to contractors than to employees as it gives them greater flexibility over headcount and helps them realise savings in benefits that are paid to permanent employees such as holiday pay, maternity pay, redundancy etc.

Contractors who set themselves up and operate as a limited company can also structure their income in a more tax efficient way to further maximise their overall earnings potential.

Variety

As a contractor you have the freedom to move on to new roles on a regular basis without a long notice period and without impacting on your career history as it would if you were a permanent member of staff. Depending on your skills and experience level, operating as a contractor can also allow you the flexibility to enter into different market sectors, improving your overall commercial knowledge.

(2)

Tel: 0131 473 7030 Tel: 020 3427 3217 Tel: +370 5 205 9318

Holidays and Travel

While you don’t get paid holiday leave like those who are permanent employees within a company, as a contractor you have the flexibility to take extended holidays between assignments. Of course you won’t have an income during this period but it can also open up the opportunity of securing roles overseas, combining travel and work at the same time.

It all sounds great so far, right? However, contracting is not for everyone and there are some disadvantages to it.

Job Security

One of the main downsides is job security, or the lack of it, when working as a contractor. As a contract is

only secured for a specified timescale, there is no guarantee that another role will be available immediately afterwards so it can result in unwanted periods of inactivity and no income.

Benefits

While the fees you command may be higher than an employee’s pay, also bear in mind that when operating as a freelance contractor you are not entitled to any of the benefits associated with permanent employment such as holiday pay, sick pay, maternity leave, etc.and you will need to make allowance to compensate yourself.

Administration

Being responsible for all your own work-related administration is also a real downside for some contractors. Unless you opt for the support of an umbrella company (more on that below), additional paperwork and day to day attention to your affairs is required when you are operating as a contractor as you are effectively running your own business. We have set out some advice on some of these requirements in our website

covering matters such as invoicing and managing timesheets.

In most cases you will also need to appoint, and of course pay for, an accountant to manage your financial affairs or do this yourself as you are responsible for sorting out all income tax matters as a contractor. As you can see, there are a number of different factors to consider if you are in the process of deciding to become a contractor. We would strongly advise you firstly consider whether your skills are marketable enough to support you in the long term working in this manner.

(3)

Tel: 0131 473 7030 Tel: 020 3427 3217 Tel: +370 5 205 9318

Setting up as a Contractor

If you have decided to set up as a freelance contractor you need to firstly look at how to best structure yourself when operating with clients in the marketplace. There are two main routes that we would suggest you consider: the umbrella company and the limited company.

Umbrella Company

An umbrella company acts like an employer for freelance contractors, taking a small cut of their fee for the services they provide. A contractor will submit their timesheets and any expenses to the umbrella company

who will then invoice the client they’ve been working for. This means that all the paperwork is done for

them with the contractor being paid by the umbrella company as a PAYE employee – minus the

administrative fee they are charged.

The advantages of working with an umbrella company are: Administration and paperwork is all done for you

You don’t have to deal with accountancy issues or tax concerns It frees up more time for you, enabling you to leave your work at home It is a great option if you’re unsure about committing to contracting long-term There are, of course, some disadvantages, including:

Umbrella companies charge for their services

It is not as tax-efficient as setting up as a limited company

Most umbrella companies will insist on a minimum time period you must stay with them or a minimum level of charging

You don’t enjoy the same independence as running your own company

Limited Company

In setting up as a limited company contractors create their own business venture giving them complete control over their finances. This is the most popular way for a contractor to structure their business, making themselves a director and major shareholder of this newly formed company. By setting up a limited company you are able to keep the company finances separate from your personal finances and maximise tax efficiency.

The key advantages of limited company status are: It enables you to generate significant tax savings It gives you complete business independence It can give your business added legitimacy

It is becoming easier to set up thanks to new online technology The disadvantages of choosing this option are:

More paperwork and potentially more stress

You must either hire an accountant or manage all your business accounts You are solely responsible for all tax matters

Bright Purple has extensive experience working with talented contractors and the majority operate with limited company status. Before opting for this route, we strongly recommend that you firstly seek professional advice from a qualified accountant to ensure that operating as a limited company is best for your circumstances.

(4)

Tel: 0131 473 7030 Tel: 020 3427 3217 Tel: +370 5 205 9318

Compliance Issues

IR35

One of the key tax regulations you must be aware of as a contractor is IR35. The legislation was designed to tax what the Government has identified as "disguised employment" at a rate similar to employment. This could therefore apply to a contract worker who receives payments from a client via an intermediary (eg. their own limited company) and whose relationship with their client is such that had they been paid directly they would be employees of the client.

The criteria of when IR35 would apply can be somewhat complex. If you own more than five per cent of a

limited company and a single client contributes 60 per cent or more to your turnover and you have a

contract between your limited company and that client and you work in the client premises, using client

equipment and under their control then it could be deemed that you are in ‘disguised employment’

according to IR35 legislation. We did say it was complex!

There is some uncertainty as to whom the legislation applies to. There are some basic principles set out by HMRC to help decide if you are in disguised employment or not which includes:

Do you have a right to substitute yourself for another employee of the company? Is there ‘mutuality of obligation’ within the contract?

Does the client control what you do, how you do it, when you do it and where you work?

As we have said, it can be a complex area and we always urge contractors to get professional advice from an accountant or speak to the HMRC. While we are happy to give this initial overview of the legislation, Bright Purple makes no representation nor do we accept any responsibility for ensuring that the terms of any work taken on by contractors is IR35 compliant.

Insurance

Being a contractor carries certain obligations and legal responsibilities. You need to be aware that clients can make a legal claim for mistakes and/or negligence by contractors and, although rare, it does happen and can be costly. Even if you operate in an umbrella company structure, it is unlikely you will be protected. Bright Purple requires all of our contractor partners operating under limited company status to have a minimum of £1m cover in professional indemnity insurance. We also advise all contractors to ensure they have taken independent advice about putting in place the appropriate level of insurance cover before they begin trading.

Pre-employment Screening

As a recruitment agency there are a number of necessary compliance checks, in accordance with UK employment law & legislation, which we will make before our contractors start on site. This includes basic identity checks through personal identification and proof of address. We also need to ensure you have proof of your right to work within the relevant country where a role is based and would require a copy of your passport and work permit. Some of our clients also require us to carry out reference, credit and criminal record checks on all contractors which we are recruiting on their behalf.

If the contractor operates under the banner of their own limited company we will also require the following certification:

Company Registration Certificate VAT Registration Certificate

Professional Indemnity Insurance Certificate (cover up to £1,000,000)

(5)

Tel: 0131 473 7030 Tel: 020 3427 3217 Tel: +370 5 205 9318

Agency Worker Regulations

In October 2011, the UK agency worker regulations came into force, giving agency workers equal working and employment conditions with the employees of a client firm after a 12-week qualification period. While the new rules were brought in to protect vulnerable poorly paid agency workers from unscrupulous employment firms, it is broadly accepted that they were not intended to legislate against highly skilled workers.

The vast majority of the contractors which we place would fall under this ‘highly skilled worker’ category and are able to apply to be considered outside the conduct regulations (known more commonly as the opt-out). In order to do this you must serve formal notice on the recruitment agency before you are introduced to a prospective client. For contractors acting as a limited company or working via an umbrella company, the opt-out must be served by both yourself (as the worker) and the limited or umbrella company. At Bright Purple we follow the industry practice of automatically opting out of any agreement meaning the final decision lies with you (the contractor). Those who do not opt out by default are covered by the conduct regulations.

There are, however, good reasons for opting out of the conduct regulations. Firstly, most contractors choose this route of working as they value the freedom and flexibility of running their own one person buisness. By not opting out of agency worker regulations you are effectively setting yourself up to become a member of staff who would be ultimately working on a PAYE basis for one employer.

By opting out you also offer both the client and the recruitment agency an assurance that you will act in good faith. Depending on the agency and the role, your CV may not be considered unless you agree to do this. While an agency can not refuse to deal with a contractor who refuses to opt out, clients are allowed to make this restriction. This is often the case with clients in the financial services sector which require their contractors to agree to restrictions that limit their freedom to work for competitors.

Finally If you wish to steer around IR35 legislation, your position could be weakened by anything suggesting a close-to-employment relationship with the client which could be implied if you are opted in to the regulations.

A UK Government guide which outline all the details of agency worker regulations is available (here)

That nearly completes our Contractor’s Guide. We also offer further advice on interviews; invoicing and

timesheets on our website. Please click on the appropriate one to be re-directed to this information.

If you have any questions about any of the issues covered here or would simply like to talk to one of our team about contractor opportunities, please do not hesitate to contact us – our details can be found (here)