Contract vs. Permanent
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
The consultant market has experienced significant growth in the past five years. Whilst there are more options than ever for clients, there has never been a greater need to audit the credentials of those engaged. The advice provided in BQ7 regarding freelancing is the most comprehensive we have ever pulled together. This is supplemented with the key findings from the largest ever Contractor Survey we completed in the summer of 2019. 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.
Consultant with your own Limited Company
Setting up your own limited company can help put 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
There are many websites offering advice for small businesses. Two particularly useful ones are http://www.contractoruk.com and http://www.umbrella.co.uk
We have provided summary information below to help you understand some of the core challenges facing self-employed people. With so much in the balance regarding the introduction of the
latest changes to off-payroll working rules (IR35) in April 2021, we strongly recommend you consult the very latest updates from the HMRC directly.
Current Legislation
Historically people saved National Insurance contributions by drawing out “wages” via a dividend. IR35 ensures contractors pay similar amounts of tax to that which 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) paid 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 employment with that client, this is called a relevant engagement and the IR35 rules apply.”
Insurance Requirements
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
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.
Public Liability
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 £1 million public liability cover.
Employer’s Liability
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 million 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 fulfill 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.