Contracting as Self-Employed?

[sbsbsb]

Hello,

I was hoping some of you could lend some advice.

I have been offered a 1 year contract providing software development services to a software company. If it makes any difference, the contract is a consultancy services agreement and would allow me to substitute someone else in my place if I can't perform a task.

This is my first contract and I've had conflicting advice from several different people over whether I can do this by simply registering as self employed with HMRC or not.

One contact says that I should register with HMRC and as long as I get another contract during the year, then I won't been seen as an employee of the company for which I am providing the service. However, I almost never see anyone on these sorts of forums talking about this - usually only ever setting up their own LTD company, or using an umbrella company.

Other contacts recommend that I use an umbrella company - but I seem end up with less money in my pocket this way by my calculations.

I'm not adverse to the extra paper work that would come with registering as self employed, but I am worried about making the wrong choice here and getting into trouble with the tax man!

I'd really appreciate any advice!

Thanks in advance!
Rich

[pmeswani]

Hello,

I was hoping some of you could lend some advice.

I have been offered a 1 year contract providing software development services to a software company. If it makes any difference, the contract is a consultancy services agreement and would allow me to substitute someone else in my place if I can't perform a task.

This is my first contract and I've had conflicting advice from several different people over whether I can do this by simply registering as self employed with HMRC or not.

One contact says that I should register with HMRC and as long as I get another contract during the year, then I won't been seen as an employee of the company for which I am providing the service. However, I almost never see anyone on these sorts of forums talking about this - usually only ever setting up their own LTD company, or using an umbrella company.

Other contacts recommend that I use an umbrella company - but I seem end up with less money in my pocket this way by my calculations.

I'm not adverse to the extra paper work that would come with registering as self employed, but I am worried about making the wrong choice here and getting into trouble with the tax man!

I'd really appreciate any advice!

Thanks in advance!
Rich

I don't know why I am responding to this, but here goes. No agency in their right mind would employ anyone who doesn't go through an Umbrella or their own Ltd company. If your Agency is happy for you to be Self Employed, knock yourself out. However, by going Self Employed, you will have to pay Income Tax and National Insurance and may not be able to get any PL or PI Insurance. So if you mess up and you can't fork out the money, the debt will fall onto the agency. Also, if you don't pay your taxes (both Employee and Employer portions), the debt will fall onto the agency.

If you believe this arrangement is ok, and the Agency is happy to have this arrangement with you, go for it, and Good luck. There is a good reason why the majority of people on here will either go Umbrella or Ltd, and I hope you can work it out for yourself.

Sorry if this comes across as harsh, but unless you understand the risks of contracting.........

[centurian]

Also, if you don't pay your taxes (both Employee and Employer portions)

There is no employer portion if you are registered as self employed. And NI is at a lower rate too

I think the OP is getting conflicting signals down to the terminology. Many contractors describe themselves as self-employed, but in reality, hardly any are. Contracting through a Ltd company is not strictly self employment. You are an still employee and/or director of a company.

If true self employment were an option, I would consider it. Pay 9% NI instead of 24% and never have to worry about IR35 ever again.

[chef]

To balance that out, when I first started contracting I was taken on by my old permie company following a round of voluntary redundancies. As they were more than hapy taking me on direct and it needed sorting very quickly I worked for them as Self employed. No hassles no worries, plus I would have been without doubt caught by IR35 if I was working via Ltd anyway.

After this I setup my own Limited and from then onwards worked for all other clients in this way until I moved to Germany. Germany has very different rules about where the blame lies if you don't pay your taxes, it's simple, you are at fault. Also, German's don't like small 1 man companies and would much prefer them to either fork out circa 10k and form a Gmbh or work as a Freelancer/Self Employed providing you can prove that you have multiple income streams and aren't effectively a permie in disguise. Therefore working as self employed on the continent is far easier than in the Uk and that's what I do at present.

In short, self employed is an option as much of the risk is then placed upon the client or the agent if you decide not to follow the rules and you can claim, as far as I'm aware, all the business expenses you would as a Ltd but given the extra risk involved it's a very rare situation that a client or agent would allow you to work for/via them as self employed in the Uk. However if they do then, as NLUK has said, you want to ensure you have PL / PI insurance that covers you as self employed otherwise it's you personally who will foot the bill from being sued if things go very wrong.

[pmeswani]

There is no employer portion if you are registered as self employed. And NI is at a lower rate too

I stand corrected. I wasn't 100% sure if there were any employer liabilities with Self Employed, but made the assumption that there was.

[Clare@InTouch]

As others have said it's not normal for contractors to be self employed as agencies generally won't touch you, and you'll pay higher tax & NI.

An umbrella company is easy as you're effectively just paid like an employee, so you don't have to worry about too much admin. The downside is that you pay nigh on the same tax as you would as an employee.

A Limited Company is the most tax efficient route as it gives you more flexibility over when you withdraw money, and therefore the personal tax that you pay. There is a bit more admin involved, but it's not horrendous and any decent accountant can guide you every step of the way. There are costs involved in setting up and closing down a company, but these should be outweighed by tax savings provided you earn at least £30,000 a year.

IR35 can play a part as if the rules apply then the tax benefits of being Limited are restricted due to having to take 95% of your income as salary. It's still better than a brolly though as you get a 5% admin allowance plus you can benefit from the flat rate VAT scheme.

I would suggest you call an accountant and talk it through as they can explain the options in detail, and provide you with a projection of the income under each method. You can then decide if it's worth going Limited. They can also probably review your contract from an IR35 perspective before you make a decision.

[Greg@CapitalCity]

Purely in terms of tax efficiency, your options from most tax efficient, to least are;
(1) Ltd company
(2) Self employed
(3) Umbrella

If you are working through any agency, then as others here have mentioned, being self-employed will not be an option. Too much risk falls back to the agency, which is why you will never find an agency who will do this (unless they don't know what they are doing). If however you are contracting direct to your client, then self employed is an option.

If you feel your work will be outside of IR35, then a limited company will be a more tax efficient option for you (which is why you see on here so many contractors use them). But its horses for courses - you may just want to go self employed because you like the sound of it. Stranger things have happened!

[SueEllen]

You both forgot Limited Liability Partnerships.

There are a couple of contractors on these forums who works through one.

[Wanderer]

This is my first contract and I've had conflicting advice from several different people over whether I can do this by simply registering as self employed with HMRC or not.

If you can do self employed then it may be a simple and relatively tax efficient way to do it (see Greg@CapitalCity's list of methods). Generally though, you will find that agencies or clients won't allow workers to be engaged as self employed because they could turn around to them at some later stage and claim that you are really a permie and entitled to permie employment rights.

If the client is apparently offering self employment as an option then they either don't know the full implications of what they are doing or you have misunderstood what they want and they may turn around to you and say that you have to go LTD or umbrella.

Also understand that working as a LTD company, you have limited liability to your client as the client has a contract with your company not you personally. If something goes wrong they can come after your company (which will have few if any assets) rather than you personally.

[Greg@CapitalCity]

You both forgot Limited Liability Partnerships.

True. And also offshore schemes run through Portugal and Singapore