If you have developed a series of skills and experiences within an industry, but are tired of being told what to do and want to branch out and be your own boss, then becoming a contractor is something you must give serious thought to.
While it can be daunting at first to think that you will be responsible for all aspects of your working life, the vast majority of contractors will tell you that the positives far outweigh the negatives. From the financial benefits to the added freedom of being able to choose when and where you work, very few people who make the move into contracting regret their decision.
So if you’re looking to set up a business to obtain and complete contracts within your chosen field, what are the key things you must consider?
What sort of business will it be?
There are three main legally recognised forms of business. These are a sole trader, partnership and limited company.
Before deciding upon a limited company , you must determine if you will be bound by the IR35 legislation. This was brought in to prevent salaried full-time employees being listed as limited company directors to limit the amount of tax and National Insurance they pay.
It is based around HM Revenue and Customs’ (HMRC) definition of self-employed and unfortunately, this is far from clear cut. However, as a general rule, if you determine when, where and how you work and your relationship with the end client is business to business, you are likely to be deemed to be self-employed and will fall outside of IR35, leaving you free to set up a limited company.
However, if you have no control over the work you do, when and how you do it and you work under the strict instructions and direction of the client, then HMRC is likely to categorise you as an employee. Do not fear though, this does not mean you cannot operate as a contractor, but that you should enlist the services of an umbrella company to take care of deductions on your behalf. Working in this way helps you to concentrate exclusively on contracting, rather than running a limited company.
Get set up
So if you have determined that you are outside of IR35 and want to set up a limited company, the first thing to do is choose a name. This is far less trivial than you might first think and it is important to select something that represents what you do.
It is a good idea not to limit yourself to a geographical area when choosing a name – i.e Wolverhampton Web Design – as you will hopefully be able to expand and grow your business outside of this area as you gain success. After all, it is possible to claim expenses for travel and accommodation when operating as a limited company, so you may well wish to take on contracts across the country.
Once that is decided, you’re ready to get in touch with Companies House and register your business.
Some clients will only offer contracts to limited companies, so you may find that choosing to go down this route opens up a lot of new opportunities for you.
However, while this may be the case, it is important that you keep detailed and accurate accounts, as HMRC may ask to see them. While this will seem incredibly daunting at first, it is possible to enlist an accountancy service provider who will assist you in the setting up and running of your personal services company.
These companies will also be able to help you with determining the correct salary to pay yourself. Possibly the biggest advantage of setting up a limited company is that you can minimise the amount of income tax and National Insurance you are required to pay.
You will be able to pay yourself a salary and access additional funds through dividends and directors’ loans from your limited company.
Depending on the type of business you run and how it trades, you will be required to take out insurance policies to cover you against damage to things such as stock, machinery, premises, vehicles or accidents involving yourself, your employees or the public. Again, this is something that an accountancy service provider can help with in order to ensure the right amount of cover for your personal services company.