Being self-employed is very different to being a permanent employee. There are many more risks, but there are also many advantages. You will effectively be selling your experience, skills and time and will usually be paid by the day or hour.
From the client’s perspective, calling on consultants and contractors offers them a solution to a short-term requirement. A consultant or contractor can potentially offer more flexibility than a permanent member of staff whilst delivering skills an in-house team may not have.
Every consultant has their own reasons for choosing this manner of employment. Some of the most commonly cited are:
The opportunity to be in control of your own destiny
The potential to earn more money
The freedom to choose when and where to work, and when to take a break or holidays
More varied work and experience.
Advice when considering becoming a consultant or contractor
Making the change to self-employed status can be rather daunting; after all it’s your livelihood at stake. With constantly changing legislation it can feel like an overwhelming task to remain fully up to date with your legal and financial obligations. We strongly advise that you take independent legal and financial advice when setting up a business as a solid foundation is paramount.
Contractor own Limited Company
Setting-up your own limited company helps puts you outside the scope of IR35 and can help you build up your own brand and reputation. You also benefit from “Limited Liability” status which helps protect any personal assets you have.
Setting-up a limited company (and being a director of your own limited company) does however give you certain statutory responsibilities and costs:
You need to prepare accounts, tax returns and have a system for invoicing and collecting funds owed
There is an initial cost in setting-up a limited company
You need to ensure your company has all appropriate insurances
Accountancy costs in preparing year-end accounts and tax returns.
We have provided summary information below to help you understand some of the core challenges facing self-employed people.
Historically people saved National Insurance contributions by drawing out “wages” via a dividend. IR35 ensures contractors pay tax similar to what you would pay if you were employed rather than being a contractor.
IR35 Legislation introduced in April 2000 affects anyone who is working via an intermediary, such as a company or partnership. IR35 will only apply if the individual is working for a client under circumstances that if it were not for the imposition of the Limited company or Partnership (known as the “intermediary”) would be one of employment. (The Inland Revenue argues that in these cases the individual is “a disguised employee”)
Anyone working via an intermediary will be caught by new rules if they fail the ‘IR35 test’. This test determines whether the person would be an employee if they were contracting directly with the ‘client’, rather than using this intermediary. If their terms and conditions or working practices are of employment then they will be caught by IR35 legislation.
The IR35 legislation is designed to increase both the Tax and National Insurance (NIC) to the Inland Revenue from the service industry, which on the whole has found it more tax efficient to distribute income as dividends, usually subject to the payment of a small salary. To this end, it introduces the concept of “deemed salary” which will be taxed and subject to NIC as if it has been paid as a salary. The Government’s concern is that small limited companies are being used to disguise employment, so this is the test which has been applied:
“Where the employee is provided by his/her Company to an ultimate client on terms which would normally constitute an employment with that client, this is called a relevant engagement and the IR35 rules apply.”
When trading as a consultant, there are a number of important insurance considerations to keep in mind. As a consultant you provide professional advice which is relied upon by clients. This means if you make a mistake in your work you have a direct financial responsibility to your client for the errors. While you may consider the possibility remote, research shows that clients are becoming more litigious.
Many of our clients are insisting on evidence of professional indemnity insurance and having this protection will prove to our clients that you are professional in your approach and will help in obtaining future work. These policies are reasonably priced and will also provide peace of mind.
Professional Indemnity provides financial protection for your company and is designed to meet the cost of defending claims made against you, including damages that may become payable. Claims can occur where a client suffers a financial loss as a result of alleged mistakes or omissions on your part. In order to fulfil a contract for Bid Solutions, you must have no less than £1 million professional indemnity cover.
A Public Liability policy will protect you against your legal liability where you accidentally cause damage or loss to someone else’s property; it will also cover you if you accidentally cause injury to someone while working at a client’s premises. In order to fulfil a contract for Bid Solutions, you must have no less than £5 million public liability cover.
Employer’s Liability insurance is arranged to protect employers against claims for injury or illness brought by employees. Employer’s Liability (Compulsory Insurance) Act 1998 requires that employers maintain cover to a minimum of £5,000,000 in respect of such claims. Many contractors don’t take out this type of policy but it is a statutory requirement. Most insurers provide £10 million cover as standard. In order to fulfil a contract for Bid Solutions, you must have no less than £5 million employer’s liability cover.
Tax & VAT Investigation Insurance
Protects you in the event of an investigation by the tax authorities – more and more contractors are investing in this type of policy in light of IR35 and the complications it may bring.
Home Office / Equipment Insurance
Since more and more contractors are working from home, these types of policies are intended to cover the loss or damage to equipment, premises and documents in the event of theft, accidental damage or any other unforeseen circumstances.