What to be aware of if you're looking to become a contractor

What to be aware of if you're looking to become a contractor

Gordon BrownTechnology

According to figures released by the Office for National Statistics, the number of people choosing to become contractors has increased by more than ten per cent in the last five years; which gives some indication as to how the market is changing.

One of the main advantages of choosing to become a contractor is that you get to determine when, where and how you work. This means your working life can be tailored around responsibilities in other areas, such as caring for children.

As a contractor or freelance worker you are essentially self-employed, but with this freedom comes a number of extra responsibilities you may not have previously encountered.

Should I set up a limited company?

You will be responsible for making your own tax and National Insurance deductions and it is advisable to employ the services of an accountant to keep relevant records and perhaps complete tax returns on your behalf if you are not fully comfortable with the process.

It is also possible to establish a limited company in an effort to limit the amount of tax and National Insurance you pay. While this is currently perfectly legal, you should be aware that tax avoidance is not and is something HM Revenue and Customs (HMRC) is keen to clamp down on.

Limited companies exist as a wholly separate entity to yourself in the eyes of the law, though owners, commonly referred to as shareholders, can include yourself or family members. The main advantage of setting up a limited company is that you can choose to pay yourself a salary that takes advantage of favourable rates of tax and withdraw other funds from the company in the form of dividends - which you are not required to pay National Insurance on.

However, it is worth noting that all UK limited companies are listed at Companies House. This means that members of the public can, in return for a small fee, access data including personal information relating to directors and shareholders.

Be aware of IR35

Whether you set up a limited company or operate as a sole trader, you need to be careful with a piece of regulation known as IR35. It was introduced in 2001 as HMRC looked to eradicate a practice whereby employees are listed as directors of companies in an effort to reduce the amount of tax they must pay.

Although it is a crucial piece of legislation - HMRC can impose significant fines in addition to charges for underpaid tax if you are found to fall foul of it - it is not very easy to work out whether it applies to you or not and as such, it may be a good idea to utilise the services of employment law solicitors.

The regulations hinge on HMRC's definition of self-employed and this is not exactly something they have made very clear. Generally, if you effectively act as an employer during a contract - you are told when, where and how to work - you are likely to be deemed to be employed and IR35 will apply to you, meaning you will be required to pay the same amount of tax and National Insurance as a salaried worker.

S660 and 'income splitting'

Simply put, the S660 regulations are designed to prevent owners of limited companies moving income to another shareholder, which could be a family member, so that a lower amount of tax is paid.

Although the S660 legislation came into being in the 1930s, it has been the subject of much confusion and misunderstanding in recent years, largely due to a number of high-profile cases, including that of Arctic Systems Ltd.

It had previously been a common practice in companies owned by a husband and wife partnership, but HMRC will now seek to recoup the "tax, interest and penalties" if you are found to have breached the legislation.

Unfortunately, this is another regulation that is not exactly clear cut and HMRC admits each case is different and the "whole arrangement" will be taken into consideration in the event of any investigation.

Author Bio

Chris Stevenson is the Online Marketing Manager at leading solicitors Slater & Gordon Lawyers.


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