According to the latest ONS figures, just under 5 million people are self-employed in the UK and the number is rising. While becoming a contractor is not without risk, there are plenty of rewards to consider including being your own boss, constructing a diverse and impressive CV and making more money.
It’s important to consider the advantages and disadvantages of going freelance before you make the jump. If you do though, it can be one of the best ways in which to direct your own career development. Companies like dealing with contractors because it gives them the flexibility to hire in the skills they need without making a long term commitment.
If you’re ready to make the switch to being a contractor, the following guide to freelancing should help you to make some important decisions and get on top of IR35 compliance.
Undertake a self-audit
Going freelance opens up a world of possibilities. However, it’s important to take a reality check and map out your financial responsibilities and other commitments. If you’re stepping away from a regular salary, you’ll need a clear picture of your income and outgoings.
Being your own boss requires discipline and planning. Create clear business goals around invoicing and billable hours that are realistic and based upon thorough research. These can always be adjusted as your freelancing career progresses. Refine your CV and get it to agencies that are best placed to help you achieve your goals and find you the contracts you’re looking for.
Sole trader or limited company?
Before you register with HMRC, you’ll need to decide whether you’ll be trading as a limited company, sole trader or under an umbrella company.
Limited company
This is a separate legal entity that allows you to be paid a salary and/or dividends from the company’s profits. You’ll have to make regular filings including accounts to Companies House and HMRC. Your personal assets are protected through limited liability and there is potential for greater profits and borrowing power, improved credibility and reputation
Sole Trader
Sole Traders are self-employed and are responsible for all losses and any liabilities that their business incurs. However, you’re also entitled to take all the profits after tax. There is less paperwork than a limited company including simpler accounts, together with greater privacy.
Umbrella Company
An umbrella company acts as an employer of agency contractors. In this way it forms an intermediary between you the contractor, your recruitment agency and / or the end-client. This has various tax and recruitment benefits as agencies and clients have reduced liabilities when issuing contracts to limited companies. In effect, you’re employed by the umbrella company and they will collect your invoice and pay you what you’re owed after tax, NIC and an administration fee. This is a flexible and relatively simple option if you’re testing the waters as a contractor.
A quick overview of IR35
Before you start negotiating contracts with your first client, you need to understand IR35 and the changes that come into effect in April 2020.
The IR35 rules were put in place to determine whether you are legitimately self-employed or a disguised employee who should pay income tax and NIC under employment rules. Currently IR35 applies only in the public sector, but will take effect for private sector contracts in April 2020. The new rules shift responsibility for determining IR35 compliance from the PSC to the end-client.
If you’re considering becoming a contractor now, approach all contracts with an eye to IR35 compliance.
HMRC applies three basic tests for IR35 decisions. The first is mutuality of obligation, which regards whether you walk away from the assignment or whether the end-client as an obligation to offer you further employment?
The second test is personal service. In other words, do you personally have to complete the work as an employee of the end-client would have to?
The third and final test is to determine how and when a job must be completed and does the end-client exercise control over the way you work. This is to do with control.
HMRC will also look at the way your business works, for example, if you’re free to take other contracts or own your own tools and equipment. Decisions are made on a contract by contract basis so you’ll need to demonstrate compliance in every case.
There are several steps you can take now to ensure new contracts are within IR35 rules:
- Familiarise yourself with the Check Employment Status for Tax (CEST) tool
- Take measures to ensure you can demonstrate self-employment
- Check the terms of any contract to ensure that they clearly reflect and demonstrate your self-employed status
- Work with all parties to ensure IR35 compliance throughout the process
- Be aware that the rules don’t apply to small businesses
Negotiate your first contract
With all of this in mind, contracting gives you the opportunity to hone the skills that may have been neglected in your old job. Striking out on your own gives you opportunities for professional advancement and to be remunerated in a way that fully reflects your worth and value to the job market.
Be aware of the market value of any contract you’re offered and aim to prove yourself invaluable. Then your agreed starting rate becomes the basis for bigger and better contracts in the future.
