Contractor Advice

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.

What are these?

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.

Contractor advice - Professional Indemnity Insurance

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 actions. If you are a contractor or consultant we guarantee to save you money on your Professional Indemnity Insurance. Our collective buying power guarantees best rates in the market. Click here to test us and get a quote.

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.