What do you need to consider?
Working outside of IR35 and knowing what is claimable are just two of the important issues when freelancing or contracting. Having knowledgeable accountants who have worked in this area is vital. As a contractor there are a number of important issues to consider, whether you are just starting out or have already started trading. Top three things to consider as a contractor
How best to trade?
This is a question that all new contractors ask: whether it is better to trade as a Sole Trader, through a Limited Company or an Umbrella Company. There are pros and cons to all methods and so it’s important that you choose the right method for you. As a Sole Trader you do not have to take IR35 into consideration (as it is your customer’s responsibility to ensure you’re operating outside of IR35) and it is more tax efficient than an Umbrella Company, but less so than a Limited Company.
A Limited Company is the most tax efficient but there is a bit more work and more responsibilities compared to a Sole Trader. IR35 also needs to be considered if you have a Limited Company. An Umbrella Company is not very tax efficient but can be less hassle which can be more convenient if you only have a short term contract.
It may be useful for you to take a look at our take home pay calculator to get an idea of how much you will take home for each. As a very basic summary, IR35 is a piece of legislation designed to prevent contractors from acting as ‘disguised employees’.
This is when the relationship between the client and contractor is much the same as an employer/employee relationship and therefore the contractor should be paid through the PAYE system. It’s imperative that you have an IR35 review to see if you are inside or outside of the legislation.
If you are caught inside IR35 but trade as though you are outside of it then you are at risk of penalties if HMRC should decide to look into your business in more detail. You may have underpaid NI which may need to be backdated and paid to HMRC along with further penalties and interest. We have hundreds of contractor clients and so our accountants are extremely knowledgeable in all areas concerning contractor tax requirements, and are able to give you honest advice on how HMRC will view your business.
Our accountants would be happy to review your circumstances and give you their opinion on whether or not your business falls within the legislation, meaning that you can be safe in the knowledge that you are trading in the correct way.
Registering for VAT as a contractor
If you trade as a Sole Trader or through a Limited Company you can often take home a substantial amount more if you were to register for VAT (typically on the Flat Rate Scheme). As long as your customers are VAT registered they can reclaim the extra 20% you charge to them when submitting their own VAT Returns, and as such it will not cost them anything extra.
If you were to register on the Flat Rate Scheme you would then pay over a smaller percentage of the VAT collected from your customers and keep the remainder, resulting in considerable savings and larger profits for your business.