A contractor is one who provides services to a specific client under specific terms. They can be classified either as an employee or as self-employed. With the former, they work for a client through an umbrella company or agency. As the latter, they work independently or have a limited company of their own. If you decide to work as a contractor, you will be responsible for your own business dealings. You will have control of how and when you will do your work. There are also various benefits that you can derive from working as a contractor.
Control over work
As a contractor, you will have more freedom in choosing what work to accept or reject. You are not obliged to accept a contract. An employee is obliged to do the work provided by their employer. A contractor, on the other hand, has a contract for services with a client on an agreed schedule. They assume liability for any errors or omissions. Once the project has been completed, client is not required to offer more work to the contractor.
Freedom over when and where to work
If you work as a contractor, you decide when and where to work. You may be required to work on the client’s site at some point. While your client may have a clear idea of the required deliverables, they cannot control your working patterns. Your compensation will be based on the completion of specific ‘milestones’ which is defined in the contract.
Tax Benefits of Contractors
Contracting work offers both tax advantages and disadvantages. As a contractor, you are not entitled to employee rights and benefits such as redundancy pay, holiday, and paid sick days afforded by employers.
Rights of Contractors
Contractors are not entitled to receive sick pay and other benefits given to employees. However, they have some legal rights protected by the law such as right against discrimination and a right to a safe and healthy working environment. If you are working for an employment agency, you also have rights supported by the Conduct of Employment Agencies and Employment Business Regulations 2003. Also, you do not have the right to redress if the client decides to end your service or choose not to renew your contract. The termination process should, however, be clearly set out in your contract.
Legal structures for contractors
The first thing you need to consider when starting out as a contractor is to decide on a suitable legal structure. Up until the 1980s, contractors operated as a sole trader. Things changed, however, when the HMRC came up with a ruling making recruitment agencies liable for unpaid tax if they hired self-employed workers and paid them gross. This prevented recruitment agencies from hiring sole traders. As a result, contractors were forced to set themselves up as a limited company.
When the IR35 was introduced in 2000, different company structures evolved. Deciding on what structure to use depended on various factors such as whether or not contractors are covered by the IR35 rule. It is therefore important to have a little knowledge of the IR35 rule.