What is a Contractor?
We use the term to describe a person working on a temporary basis for an end client, usually having been placed there by a recruitment agency. Many contractors call themselves consultants or freelancers. Typically, they will be brought in to work on a specific project for a set period of time being paid a daily or hourly rate, or to cover a permanent employee’s period of absence eg, maternity leave.
This is my first contract… How does it all work?
Once you have secured your first contract role, agreed a rate of payment and a start date with your recruitment consultant, a contract needs to be signed between your Invoicing Company (either your own limited company or an umbrella company) and Netsource Ltd.
Most agencies, including Netsource will require you to invoice using a limited company. This can be your own limited company (mainly referred to as a Personal Service Company) or an Umbrella Company.
What is a limited company?
Firstly, to form a limited company, you will need a UK registered address. Setting up and running a limited company, where you become a director and shareholder, is the most tax efficient way of working and has a number of advantages.
For example, you can claim back a wider range of expenses, including accountancy fees, equipment and software costs. Also, you will have complete control over your financial affairs.
Running your own company is not very difficult and, with the assistance of a good accountant, is no more challenging than any other form of trading. Under the limited company business structure, your company and personal finances are kept separate. Limited companies are subject to corporation tax on their profits and if your limited company is going to turnover £81,000 or more per year (correct as at 2015, subject to change by HMRC) then you must register for VAT. As a director of your own limited company you will have certain legal, financial and administrative responsibilities.
There are many contractors who prefer not to get involved with any of the inevitable paperwork involved in setting up and running your own limited company. They prefer to leave that to someone else, concentrate on their contracting role and simply produce a weekly or monthly timesheet in order to get paid. If you think this is you, then maybe the limited company route of contracting is not for you. Should you only intend to contract for short periods of time between longer terms of permanent employment then you should probably consider using an umbrella company?
What is an umbrella company?
An umbrella company is a company that acts as an employer to independent contractors who work under a temporary contract, usually through an agency such as ourselves. It offers contractors most of the benefits of being a limited company without the responsibility and cost of the financial and day to day management. The umbrella company issues invoices on your behalf to Netsource and, when payment of the invoice is made by us, they will pay you, having made deductions for your tax and national insurance (PAYE). There are many umbrella companies in the UK but before choosing one, you should bear a few things in mind.
Working in conjunction with Revenue and Customs, providers of umbrella services can allow their employees to offset legitimate business expenses against tax. You should ensure you are classed as an employee of the umbrella company and be given a contract of employment. They should invoice Netsource for all of your work, chase and collect payment and deduct tax and National Insurance at source, plus offset legitimate business expenses against tax. An umbrella company should never charge you a percentage of your earnings as their fee, they should charge a fixed amount and you should know exactly how much this is per month or per week. Processing of expenses should be included in this fee, they should not charge any extra for this. One more important thing to find out is whether or not the company possesses appropriate qualifications in accountancy to be able to manage your tax affairs responsibly.
How do I choose between a Limited Company or an Umbrella Company?
It’s important, from the outset of your first contract to set up your new business in the best way for you, to minimise your long term tax liabilities, while maximising your income. Your choice is between setting up a limited company or using the services of an umbrella company.
Although the umbrella company route is a simple one to follow, it doesn’t offer a great deal of benefit for individual contractors in terms of reducing tax liabilities. It’s also important to bear in mind the fees charged and that many umbrella companies insist on either a minimum level of charging or a minimum time for which you must pay for their services.
If you operate your own limited company then typically, you will spend in the region of £1000 per annum in accountancy fees, irrespective of how much your company turnover is. Compare this with how much you will spend on fees paid to an umbrella company.
In terms of your ability to maximise your income, forming a limited company is the most attractive option, allowing you typically to take home a greater percentage of your gross earnings than with an umbrella company.
Ultimately, the choice of company will be determined by your own individual needs. Netsource cannot make this decision for you and recommends that you consult a number of umbrella companies and accountants who can advise on setting up limited companies. This will ensure you have a fuller understanding of all the options to enable you to make the decision that’s right for you.
If you really don’t have a clue where to start, ask your Netsource recruitment consultant for a list of umbrella companies and accountants. Please be aware that we do not make any recommendations as to who you should choose when deciding how to proceed as we are not qualified in accountancy and are unaware of your own personal financial circumstances.
Do I need an accountant?
If you have decided to trade through your own Limited Company then you really should have an accountant to help you with the all of the various forms, obligations and taxes amongst other things.
Do I need to be registered for VAT?
It is not necessary to register a Company for VAT until its turnover hits a certain level, i.e. once the sales exceed £81,000 in a year (correct at 2015, subject to change by HMRC) or you can make a voluntary registration even before hitting this threshold. The benefit of registering is that this enables you to recover any VAT that you incur on things that you buy for the business (e.g. computer equipment/accountancy fees). However, you will need to fill out a quarterly VAT return yourself if you do not have an accountant to do this for you.
VAT registration usually takes about 8 weeks, but this will not prevent you from invoicing your agency or reclaiming VAT on expenses. Until the Company is registered you simply raise sales invoices without adding on VAT. Once the Company is VAT registered you must show the registration number on your invoice and add VAT at the appropriate rate. Any VAT payable must be paid by the last day of the month following the VAT quarter and there are penalties for late payment.
In order to recover VAT on things that you buy for the business you must obtain a “VAT Invoice/Receipt” showing the supplier’s VAT No. Always ask for a VAT invoice or receipt as they will not automatically be provided every time.
When will I get paid?
Payments are normally made calendar monthly (although there are some exceptions which mean this differs slightly, depending on which of our clients you work for) and invoices are paid within 10 days of receipt after the end of the month.
If you work for a client who requires you to complete a weekly timesheet rather than a monthly timesheet then we will always require you to submit timesheets in complete weeks and therefore, the month will always be either a 4 week month or a 5 week month, ending closest to the calendar month end date. Our Accounts Team or your own Recruitment Consultant will always be able to tell you how many weekly timesheets you will need to submit that month.
How much will I get paid?
Your rate is negotiated between you and your recruitment consultant at the time your CV is put forward to the client. Once you are issued with a contract, this rate is set for the duration of the contract and is the gross amount that you will be paid. Your deductions for tax and national insurance are a matter between you and your limited company or umbrella company. We cannot advise how much tax and national insurance will be deducted from your gross rate as this depends on your own personal circumstances.
Who do I speak to about payment?
In the first instance, you should contact your Recruitment Consultant by telephone on 0161 950 8844 or by email. They should have explained the timesheet procedure and payment cycle to you at the start of your contract depending upon which of our clients you are working for. Alternatively, speak to the Accounts Team on the same telephone number or email to firstname.lastname@example.org.
How long will I have a job for?
A contract can be for just a few days or it can be for as long as 12 months. You’ll be told how long the initial contract period will be for when you first discuss the role with your recruitment consultant. They will also be able to tell you the likelihood of whether the contract will extend beyond the initial period and you will have more of an idea about this yourself once you start working for our client and see how much work there is for you. Due to the very nature of contracting, there is no guarantee of a role being for the long-term.