Setting Up as a Contractor
Deciding to start work as a contractor is an exciting and sometimes difficult choice
to make. Here at iProfile we have acknowledged this by producing this contractor
advice article. For many, the initial trepidation leads to a challenging
and lucrative long-term career. But you should consider some fundamental differences
before you actually begin working as contractor.
Contractor advice - Payment Structure
Most importantly, you need to decide how to set up your contracting business and
specifically whether to establish a payment structure through a Limited company
or an Umbrella company. Each offers its own advantages and tax considerations, so
it's critical to understand the differences between them. Someone working as a contractor
also needs to consider obtaining professional indemnity insurance, which can be
an invaluable form of protection.
Limited Company or Umbrella Company - What's the Difference?
As far as contractor advice goes differentiating between the above two is vital.
A Limited company is a one-person operation in which the contractor is the company's
director. He or she is responsible for all accounting, compliance, tax liabilities,
and other administrative and legal obligations
In contrast, with an Umbrella company the contractor engages the services of an
organisation to manage all the required administrative, accounting, taxation and
legal activities. This enables the person working as a contractor to focus on the
clients, leaving the back-end functions to a trusted party. With an Umbrella company
structure, the contractor is not an officer of the company and does not have any
rights or responsibilities associated with running the company. The Umbrella organisation
simply invoices the client (based on a timesheet or other document detailing the
contractor's work) and forwards payment to the person working as a contractor.
Contractor advice - Know Your IR35
One key consideration when, offering contractor advice, is deciding between the
two ways of working as a contractor - Limited company vs. Umbrella company - is
knowing whether or not you are operating inside the IR35 tax legislation.
IR35 enables the UK government to tax the person working as a contractor at a higher
rate, as if they were an employee of their client(s). Contractors covered by IR35
generally pay higher taxes (up to 25% more) compared to those outside of IR35.
Whether or not an individual working as a contractor will be caught by IR35 depends
on a number of factors, including the specific working arrangements and the terms
of the contract. Contractors should seek legal advice to plan for and determine
their IR35 liability. As a rule, those working as a contractor outside of IR35 should
choose a Limited company structure as opposed to an Umbrella arrangement, while
those under IR35 need to assess a range of other factors before making a final decision
on their payment structure.
Limited vs. Umbrella - Other Factors
Apart from your IR35 status, you should consider the following questions when choosing
a payment structure:
Ownership and Control. Is it critical that you are the owner of the company
and that you maintain control over its operations? If so, then the one-man, Limited
company option would be more suitable. Umbrella solutions are more appropriate if
you are comfortable working as a contractor but have no wish or need to actually
own/operate your own company.
Administration Issues. Do you have the time, knowledge and inclination to
handle all the back-end functions associated with running a company? An Umbrella
company enables you to delegate these tasks to an expert third party while you focus
on actually working as a contractor. On the other hand, you pay for the privilege
of having someone else handle these functions.
Short vs. Long-Term Contracting. If you have a long-term contract, it might
be wise to go ahead and create a Limited company. Conversely, if you are unsure
how long you will be working as a contractor, then it may make more sense to start
with an Umbrella solution. You can always convert your operation to a Limited company
later, if you decide to make a longer commitment to working as a contractor.
Once you've tackled the question of pay structure, it's a good idea to consider
professional indemnity insurance before you begin working as a contractor.
Professional indemnity insurance protects you against legal claims, in particular in cases where
your client claims some financial or substantive loss stemming from your work or
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Nowadays, many clients require the contractors they work with to have some level
of indemnity insurance coverage in order to better protect all parties. The costs
of indemnity insurance vary with the size of the operation, level of coverage required,
etc. It pays to shop around for competitive coverage that is best suited to you.
Contractor advice - Conclusion
Clearly, there's more to working as a contractor than simply going out and selling
your knowledge and services. By giving careful thought to these basic issues of
company structure and insurance protection, you'll be taking the first critical
steps toward establishing an efficient and well thought-out contracting operation.
Hopefully our contractor advice will help you achieve this.