NEW BUSINESS • 16 JANUARY 2023 • 4 MIN READ

What is a contractor - as well as some common pitfalls

A man is concerned about his taxes as a contractor, asking his online accountant for advice via phone.

SECTIONS

What is a contractor?

What does being a contractor mean?

Common pitfalls

IR35 for contractors

Other things to remember

Who are Beany?

Becoming an independent contractor takes courage – you’re usually replacing your safe and regular wage for the uncertainty contracting may bring. On the one hand, you can choose the type of work you perform, but on the other hand, if you don’t work, you don’t have an income.

The modern economy is made up of many self-employed people taking on short term projects and this trend continues to grow. Although there are many advantages, there are many disadvantages as well.

In this blog, we’re going to cover:

What is a contractor?
What does being a contractor mean?
Some common pitfalls
What is IR35 and how it relates to contractors

What is a contractor?

Self-employed people are sometimes referred to as independent contractors – they mean the same thing. As a contractor, you seek and perform services for clients. They usually negotiate their own fees and working arrangements and can work for more than one client at a time.

Independent contractors have different rights and obligations to employees. This is because they provide services to another person or business, as opposed to being employed by that person or business. This means it’s important to understand the difference between the two.

If you’re an independent contractor who works for a single client you could be caught by the IR35 rules, so make sure you check out the IR35 section in this article.

Not sure if you’re a contractor or an employee? HMRC has very practical and clear guidelines.

What does being a contractor mean?

You are self-employed.
You usually have a high level of control over the work you perform, your hours, work location and how you do the work.
You typically would use your own tools and equipment or be responsible for sourcing them.
You are responsible for paying your own taxes and VAT and putting money away for your pension.
You aren’t covered by national employment standards. This means you don’t get things like annual leave or sick leave.
You are in charge of invoicing, accounting and administration of your business.
If you don’t work on a public holiday, you won’t be paid.
Not only that, if you don’t work, you don’t get paid!

Common pitfalls

Not putting aside enough for tax – transfer money regularly to a separate bank account and don’t touch it. We recommend allocating 30%-40% of your income to cover these taxes.
Not getting advice upfront – get the experts involved early. Your accountant can help you decide the best structure to save you tax. A solicitor (e.g., Legal Vision) should look over any new contracts to reduce future liability.
Paying tax and VAT late – this costs you money on penalties and interest.
Not sending your invoices on time – if you don’t send it, you don’t get paid!
Having your hourly rate set too low – this is easier if you’ve previously been a paid employee in the industry. A good rule of thumb would be your old hourly rate + 20%. This may seem a lot at first, but remember that you need a markup to cover annual leave, sick leave, and public holidays. Our separate blog deals specifically with pricing your products or services.
Not making time for record-keeping and administration. You need to keep your records for at least 6 years as per HMRC’s requirements. You can leave your books to us by using our bookkeeping services, so you can focus on growing your business.
Work is often inconsistent depending on what contracting work you undertake. Short term gigs end and you’ll need time to find another gig and this can be time consuming.

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IR35 for contractors

IR35 is a tax law in the UK that is intended to prevent tax avoidance by individuals who work as contractors or freelancers, but who would be considered employees if they were directly hired by the client.

Under IR35, contractors and freelancers must pay tax and National Insurance contributions as if they were employees, rather than as self-employed individuals, if they meet certain criteria.

This criteria covers factors such as the level of control the client has over the worker, the worker's level of integration into the client's business, and the worker's level of financial risk.

Up until 5 April 2023 all public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply. If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply.

From 6 April 2023, all contractors who provide their services through their personal service company, regardless of the size of the client to whom they provide services, will be solely responsible for assessing their own employment status and deducting tax and NICs from their fees if they conclude they are a deemed employee.

Other things to remember

Even if you are a contractor, you should always have a contract of service with your client to set out the terms applying to your services. Make sure your contract is specific for your client – you may have different contracts under different circumstances
You are expected to have your own equipment and tools needed for your job. Find more about what expenses you can claim as a business owner.
Getting loans and mortgages – this can be harder than when you were an employee. You will need to demonstrate to the bank your business history and provide a forecast of your projected income and expenses for the next 12 months. For the first couple of years, this will be extremely difficult unless you have an ongoing contract for the future.
Insurance and income protection – you need to consider the impact to you and your family if you cannot work due to either an accident or sickness.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would.
We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.

Charlotte Wass

General Manager, Beany UK

Chartered Accountant and Chartered Tax Adviser based in London. I love autumn, otters and Malteasers, and I hate spiders, peanut butter and the London Underground.

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