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 First time Contractors
 An introduction
Anyone who has made the move from permanent employment into the contracting arena will invariably agree that the concept was at first daunting. It is, however, important to recognise that for most people the financial benefits of contracting by far outweigh the pit-falls and it is true to say that most IT Contractors earn far more then their counterparts who opt for permanent employment within the same role.
On the subject of potential earnings, the going rate for contracting is approximately £30 per hour, which can undoubtedly be considered as very high when you consider that the average IT salary for permanent staff is £25,000 per annum.
Of course it must be appreciated that all rates of pay are dependent upon the skill-set of the individual contractor and state of the market place.
The risk element of contracting lies in the fact that you, the contractor, are fully responsible for finding yourself a role, managing all of your own finances, and of course, negotiating terms and conditions for every contract that you work on. Some contractors have no option but to sign the terms laid out for them by the employer, however it is sensible, as someone who is deemed to be 'self employed' to provide your own terms and conditions of employment.
At the moment the current market is relatively quiet although it has improved since the 1980's and early 90's when the market plunged into recession.
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Finding jobs in IT contracting
The most commonly used method employed by contractors to find work is the Internet. A commonly utilised search engine is JobServe (www.jobserve.co.uk ) who claim to have nearly 20 000 IT jobs online. There is, however a wide range of other search engines which can help you to find contract vacancies.
After you find a vacancy that appeals to you the next step would be to email your CV to the agency who is advertising the post, this information will all be listed as a result of any search entered. It is then advisable to phone up the agency as a follow up call once your CV has been with them for a day or two.
The agency charge commission for placing you in work, however, they invoice the employer, so you receive the net pay (gross pay, minus PAYE and NI) that is initially agreed.
If you are working for £35 an hour the agent may charge you out at £42 and take the extra £7 as commission. It is important that you make yourself aware of the commission fee the agency is charging. It is typically about 20%.
For more information and help about job finding such as guidance on CV writing and locating IT recruitment agents, there is a comprehensive site designed especially for IT contractors. It is called Contractor UK and can be found at www.contractoruk.com
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The nature of Contracts
Most temporary contracts are about 3-6 months in duration but although most contracts will not tend to last longer then 12 months and many contactors may find themselves at a firm for several years due to renewals of their terms.
An agreement must be signed between you (your invoicing company) and your new client, or between your invoicing company and the recruitment agency that sourced the contract for you. To have your own invoicing company is one of the main ways that you can operate as a contractor. This method and others will be discussed in the next section of the guide.
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Is your contract caught by IR 35?
IR35 is the colloquial name given to the legislation introduced by the government in an attempt to prevent people using Limited companies to gain a tax advantage. If you are, in reality, employed as opposed to being self-employed then you will be caught by the legislation. The term "IR 35" refers to the Press Release IR35 issued by the Inland Revenue at the time of the 2000 budget. For more detailed information about the legislation, which contractors are caught by IR35 and its implications please click here
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Ways you can operate as a contractor
Over the years, the most common way for a contractor to operate has been through their own limited company because of the tax advantages (which far out weigh that of any other method) However, due to the introduction of the IR35 legislation these tax benefits are no longer attainable for those who do not pass this badge of trade.
It is for this reason that some contractors now use an umbrella company. As a general rule, if you are not caught by IR35 and are considered as genuinely 'self employed' it is still advantageous to operate through your own limited company.
The only other option is to become an employee of the recruitment agency itself. Each option is discussed respectively below.
1. Your own limited company
You may also come across this entity being described as a 'personal services company' or your 'invoicing company' but the fact that it is a limited company means that it is legally a separate entity from yourself and you have limited liability.
This arrangement is different from a Sole Trade as there are no separate entities and you are fully liable for any losses for example.
Setting up
Company set-up costs are from around £100 plus, if you have an accountant or 'company supplier' organisation do it for you. Generally the lower the price the more of the work you have to do yourself- e.g. setting up the initial meetings of the company.
You can apply directly to Companies House, which is the cheaper option, although it can be far longer process and will also involve you taking on the entire administrative burden.
Once the company is formed you must appoint a company secretary, who fulfils a legal requirement to record company meetings and perform administrative duties. This could be a parent or your partner as within a small limited company, the role of company secretary is minimal. However, many small companies get an accountant to act as Company Secretary to make sure that nothing is forgotten.
For more information about our legal advisory division and additional services click here
As the director of your own limited company, you will be responsible for issuing invoices to your client or agent, issuing dividends, running a payroll, registering and accounting for VAT, and a number of other tasks. Normally it is necessary that you have access to accounting professionals for certain company duties such as the year-end preparation of the statutory accounts.
Some accountants will fulfil duties for you on a fixed fee basis and others charge a variable fee depending on the time spent. It is a good idea to be fully aware of what services are included in any fixed fee agreement that you sign to.
It is also important to remember that within the accounting arena 'you get what you pay for'. Firms that ask for very low monthly fees are unlikely to be providing a highly professional service, which may place an additional burden upon you in the long term.
Accountants, when appointed, normally carry out the following duties:
· Preparation of company year-end statutory accounts
· Payroll administration
· Personal Taxation - completing your self assessment forms
· Completion of VAT returns
· Completion of P11D, P35, P60, and other forms on your behalf
· Tax Planning Advice (e.g. Dividend Planning)
2. Umbrella Company
An umbrella company is a facility that turns the contractor into an 'employee' and in return, provides an invoicing vehicle for the contractors' business. It works by removing the administrative burden from the contractor although in the status of an employee, the contractor does not receive the same tax benefits as one who runs their own limited company.
The umbrella company issues the invoice to the client or recruitment agency on the contractors' behalf, calculates tax and NI contributions and pays the contractor their net pay directly into their personal bank account.
Traditionally the umbrella facility was perceived to be a more expensive option then running your own limited company, with less tax benefits, however after the introduction of the IR 35 legislation, the disadvantages have decreased for those caught by the ruling. If you are caught by IR 35 it is not as advantageous to run your own limited company, although it is important to seek advise as to whether your contract can be altered.
Over the last 3 years there has been an emergence in Internet based umbrella companies. They typically charge contractors a percentage of their gross monthly income or a fixed monthly fee. Some umbrella company's charge as much as 6% of the contractors income but market the service as being a lot cheaper then this by maintaining that you can supplement your income by claiming for various expenses, eg. Travel, These umbrella companies argue that you can increase your net pay by claiming expenses that you don't even need to have incurred in the first place because they have a special dispensation from the Inland Revenue. A special dispensation from the inland revenue means that an employer (the umbrella company) need not declare all of their employees expenses on a P11D form, it does not mean the contractor should not provide receipts to vouch for what they spend.
In the event of a Revenue investigation into your personal affairs they will only allow claims that are wholly, exclusively and necessarily incurred in the course of your employment, and are vouched by receipts. Advice to the contrary is factually incorrect, misleading, and could involve you in a claim from the Revenue for back taxes.
3. PAYE through the agency
It is also an option for you to become 'PAYE' through the agency payroll service. It is the case, however, that only certain agencies will allow you to do this and it is also least tax beneficial.
Timesheets
As a contractor you will normally have to fill in a timesheet, which details the work that you have done for the client and the number of days or hours that you have worked within a given time period. Each timesheet will then need to be signed, typically by your supervisor or manager.
If you operate through a limited company, the timesheet will need to be submitted to the recruitment agency who can then use this to invoice your client.
If you are with an umbrella company, you will be sending your timesheet through to them. Most agencies/clients require that you attach an invoice to the time sheet that details the total amount that you are owed for services performed.
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Insurance cover
There are various types of insurance policy that a contractor can chose to take out to cover them for claims made against them for negligence and accidents and work.
For a comprehensive listing of the types of cover available and when they should be used visit the Contractor UK website insurance page at: http://www.contractoruk.com/insurance/index.html
Future training
Now that you are contracting, there is a danger of your skills becoming out of date. Obviously this is true of permanent staff, however, unlike you, they will have access to free training and are often exposed to a timely and structured training diary.
With this in mind it is a good idea to invest in regular training so that you can keep up to date with technological changes. There are also a number of free Internet and CBT (Computer based training) programmes available.
There is, of course, also the possibility that if you are a long-term contract, your client will send you on training along side the permanent staff. So don't be afraid to push for this if you feel you can justify yourself to your client.
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