Contracting

The first thing that most people think of is the financial benefits, and these are of course very compelling. For example:

• An average contractor rate can easily be double that of a full time employee, or even more.
• Contractors are paid very high rates due to their skills and flexible nature of the relationship and the fact that many positions can be relatively short-term.
• Depending on your individual skills, the state of the industry in which you work (or the market in general) and the location of a contract, you can command very high rates of pay.
• Contracting through your own limited company is the most tax efficient way possible and isn't as hard or time consuming as you might think.
• As a contractor, you may be paid for every hour that you work, as well as having the opportunity to work overtime at very good rates.
• If you operate through a limited company you have far better tax planning opportunities which can reduce your overall tax burden and increased your take home pay.
• You can offset all of your business expenses against your income to further reduce your tax bill.

For more detail on the financial benefits of contracting through a limited company, have a look at our pay less tax pages.

As a contractor you are, in effect, your own boss - something which can be very satisfying and extremely enjoyable! For example:

• Contractors have the ability to be far more independent than permanent employees. You have the freedom to work when you choose, where you choose and for however long you like.
• Changing contract can often be far easier than changing jobs.
• Contractors can take as much or as little holiday as they prefer, most permanent employed people don't get paid for any holiday entitlement unused during the year, as a contractor you will.
• The company you work for is not your employer, but is instead your client, which puts a whole different flavour on the relationship!
• Contract roles will give you much more flexibility when it comes to agreeing working conditions.
• As a contractor you also have more flexibility over the payment terms that you can negotiate.
• You have the opportunity to develop your career in a way that suits your personal circumstances at any given time.

You will naturally work in a variety of different contract roles and in many different companies, and this will help you to build a unique range of skills and experience. For example:

• Working as a contractor gives you the opportunity to test out other industry sectors to see if you can widen your experience.
• Contractors tend to gain a really good insight into different company cultures, processes, operations and structures.
• Working in many different companies gives you the ability to build up a wide-ranging CV and to establish an extensive list of reference contacts.
• A good contractor will become known within their own field for their excellent work and you may even find that your services become sought-after, rather than you having to apply for new positions all the time.
• As your experience and network grows opportunities will come along with other contractors contacting you with regards to opportunities with their clients.
• Carrying out project work in different organisations and environments gives a contractor the opportunity to develop existing skills and to learn new ones – making you an even more valuable commodity in both the contracting and permanent world.
• As a contractor you will be exposed to many different styles of working, not only in relation to your peers, but also in relation to your managers and your subordinates. This helps you to develop as an individual, in more ways that just your core skill set.
• Depending on the type of contractor you are, you will gain added experience of different types of products and/or services which will all widen your experience and make you more attractive and interesting to future clients.
• Contractors often come into new client organisations as the 'industry expert', which is not only a nice position to be in, it also adds to your credibility as an industry professional, widens your experience further and helps increase your daily rate.
• Working for different organisations gives you the ability to advance your career and your knowledge, without being limited by a single employer's processes, procedures or business ethos.

• Most contractors who leave permanent and go contracting earn more than if they'd stayed in the permanent world.
• Opportunities aboard become that much easier and you become more attractive to clients if you have a broader skill set and experience. Many roles aboard are contract based.
• If you don't like contracting you can always become an employee again.
• Your clients will see you differently, you will be treated differently. There are still pressures but they are different to those of the employed where what your boss thinks of you as a person can often be the driving force for your career rather than your skill. Managers often don't see contractors as such a threat to their empire.
• Heck it's just more interesting and exciting and again if you don't like it what have you lost?

As you will see, this is a fairly impressive list of positives, but it's only fair to point out a few of the negatives as well. Some of these include:

• Contractors are responsible for finding their own work and making sure that the money keeps coming in.
• You will also be responsible for negotiating your own payment terms and working conditions, which is something that you may not be familiar with in the early days (if you use a recruitment agent to find your contract they will usually be able to help here).
• Contractors are responsible for managing their own finances - for example things like tax, VAT and national insurance contributions - which may initially seem like a daunting prospect.
• Even in a buoyant market, there is always a level of uncertainty about where the next contract is coming from. This is no different to being an employee and worrying about redundancy (however the extra redundancy payment as an employee can be very handy).
• At some point you will have to decide whether to set up a limited company or trade through an umbrella company, and this can be confusing. Whichever route you choose, there will be paperwork to do and forms to fill in. This can be daunting until you know what you are doing, typically it actually only takes about 15 – 20 minutes per month administration to run your own limited company.
• Contractors don't get the same benefits and 'perks' that permanent employees receive. There is no sick pay and no holiday pay, so it's vital you manage your finances to cover for these times.
• Not having traditional 'colleagues' can be lonely if you are used to this environment. There are a lot of things you will have to deal with alone, which is why it is important to build up a good support network of experts around you who can help you to manage all aspects of your business effectively.
• Contractors can be the first to be laid off in a down turn however this is often balanced by the fact that in poor economic conditions companies tend to not hire employees due to 'head count freezes' so turn to contractors to fulfill the available roles. As a contractor you always have the freedom, the enthusiasm and the processes in place to get straight out there and find the next contract!

Yes of course we'd say this but we genuinely mean it, we'd like you to appoint us, but if not us then definitely think about appointing another accountant, it will save you money, time and worry, none of which you really need when just starting out contracting or going limited.

You are going to have lots of tax / money related questions such as:

• Amount to put aside per month for tax bills.
• What type of taxes will I have to pay and when will I have to pay them?
• What expenses can I claim and how do expenses affect my take home pay?
• Do I need to set up a business bank account and what happens if I don't?
• Do I need public liability insurance or Professional indemnity? What could be at risk if I have a problem in a clients office?
• How do I keep track of money coming in and going out (your SJD accountant will provide you with a simple spreadsheet to help you with this).
• How does VAT work? Who claims it, pays it and should I be on the flat rate scheme?
• Do I need a contract with the client?
• What's the typical time to wait for payment and how and when do I invoice?
• Do I need to be concerned about IR35?
• What should I try and do before I start contracting or freelancing?

Any accountant will tell you going limited is without a doubt the most tax efficient way to work. Our advice would be to steer clear of clever and technical offshore solutions, if you work in the UK, live in the UK, get paid in the UK then limited company formation is usually completed within 2 hours. There are substantial savings to your take home pay by going limited such as NI and VAT, for example if you are a contractor on £200 per day you'll save £9,000 per annum or if you're on £600 a day you'll save £20,000 per annum on NI contributions.

Are you on the flat rate VAT scheme yet? Most contractors benefit from this and saving opportunities can be substantial - for example if you're on a £200 per day contract you'll add £1,500 extra per year to your bottom-line and with a daily rate of £600 you'll add upwards of £4,500 extra per year (based on a 45 week year).

Remember you cannot claim for something you didn't actually pay for in the first place, or can't provide evidence of payment. You, not your accountant will be personally liable for any underpaid taxes so make sure you take advice from experts in the contracting market. The HM Revenue and Customs 'Expenses' (480) booklet is 100 pages long so it's no wonder that your head may be left spinning after reading it. Do your research, speak to an accountant or read our contractor expenses guide.

Pay your taxes on time to avoid all the nasty penalties – you'll soon get bored of paying penalties for being a few days late. Most penalties start off fairly small but over time penalties and interest charges soon mount up.

Take advantage of government schemes and initiatives. Just like understanding what benefits are available can seem like quite a challenge, understanding what schemes and initiative are available is equally difficult. The good news is that your accountant should be able to help you through this mine field. For example if you've been trading for over a year and have a legitimate reason for closing your company down, you might want to speak with an accountant about a special government tax relief scheme which could help reduce your tax liability down to as low as 10%.

Choose an accountant with relevant experience, if you're a contractor or freelancer is your accountant a expert in this field? Managing the tax affair of Contractors and Freelancers is different from managing the accounts of the local engineering company, there is specific legislation that applies to contractors - before appointing an accountant find out if they are specialists in the contractor market.

Lets face it, it's a dull subject and anything you have to wait 30 years to receive if never going to be interesting but please speak to an IFA/pensions advisor about setting up a pension, or even a pension through your company if you're going limited. This way the company gets tax relief and it uses up some of the remaining funds in the company account in a very tax efficient way.

There are special rules which govern the use of child care vouchers which directors of companies and/or their company secretaries can make use of; these could save as much as £486 per month.

Don't leave your business current bank account with a huge balance - instead move it over to a high interest savings account. There are still a few banks who are interested in providing savers with good rates of return, albeit lower than the good old days but every little helps. Also using a bank that doesn't charge for business banking will help.

We hope this little guide helps, unfortunately there aren't any special secret schemes that HM Revenue and Customs have told only one or two accountants. Paying less tax is possible but only with the support of an expert in their field, experienced knowledgeable accountant, it's why we at Apex Accountancy can help.

You'll probably incur some expenses during the course of your contracts, simply pay for these with your own money and then your company will reimburse you. To do this you'll just need to do either a bacs transfer from your business bank account or write yourself a cheque from your company bank account cheque book.

Please be aware the next bit is very simplified and doesn't include everything but it will hopefully help you understand how expenses affect your tax bill, for a more detailed explanation it's best discussed with your accountant.

Expenses aren't taxed, so if your contract is for example £10,000 a month and you didn't have any expenses this month and you withdrew all the £10,000, you would pay tax on the full £10,000.

However, if you had £2,000 of expenses, you would now only pay tax on the £8,000 and pay less tax. It doesn't work exactly like this as it doesn't include the affect of your PAYE salary, dividends or even the flat rate VAT scheme but hopefully it will give you a basic understanding of how expenses affect your tax bill.

Remember! You must be able to provide evidence you actually incurred the expenses if HM Revenue and Customs ever asked you, this is usually achieved by keeping receipts.

If you're a contractor working through your own limited company and are outside IR35 then life is very simple. HM Revenue and Customs rules state that expenses can be claimed provided they are wholly and exclusively for the purposes of your business. This means you can claim things like: company formation fees, accountancy fees, business travel and accommodation, postage, stationery, telephone calls, employer's N.I. contributions, subscriptions, insurance, contributions to an executive pension plan, business entertainment etc.

• Meal Allowance - You can claim actual meal costs whilst you are working at a remote site, away from your normal place of work, or when staying away from home overnight, but daily, round sum claims for meals are not permitted.
• Travel Expenses - You can claim the cost of travel to and from your temporary place of work. Mileage rates are 45p per mile for the first 10,000 miles in any fiscal year and then 25p per mile thereafter. This allowance is to cover fuel and running costs of the vehicle. If you are travelling to work as a passenger in a car you are entitled to claim 5p per mile. You can also claim for parking and the congestion charges but you may not claim for parking fines or speeding fines. The cost of travel by public transport can be claimed but you must have a valid receipt. A mileage allowance can also be claimed for travel by motorcycle and bicycle at rates of 24p per mile and 20p per mile respectively.
• Accommodation - The cost of hotel or bed and breakfast accommodation can be claimed as an expense, as can the reasonable cost of additional meals taken in conjunction with overnight accommodation. There are no set allowances for accommodation but the cost must be deemed to be 'reasonable'; this also applies to the cost of meals.
• Clothing - You cannot claim for ordinary clothing which would form part of an 'every day' wardrobe even if you would not be likely to wear your working clothes anywhere other than at work.
• Training - Providing the training course is wholly and totally relevant to the performance of your duties under your existing contract then you can claim this as an expense
• Pensions - Pensions are big news as they represent one of the few remaining tax breaks available to contractors. You can invest part of your income into a Company pension scheme. You save not only the income tax that would ordinarily be payable but due to the pension contribution, your employers and employees national insurance contributions are lower than they would have been. The amount of tax relief can be as much as 48% meaning that for each £100 invested you pay £52 and the tax man pays the rest.

It is advisable to hold onto your receipts because although your accountant will not need to see them, the Revenue, if they choose to investigate, can go back as far as six years One final word, remember you cannot claim for something you didn't actually pay for in the first place, or can't provide evidence that you did. You will be personally liable for any underpaid taxes NOT the company you're working through or taking advice from. You should therefore steer clear of companies and scheme providers promoting generous expense allowances with 'NO' receipts required.