Some questions for IT Contractors please

[Nazbit]

Hi there,

I've been a Software Developer for 10 years and I'm thinking quite seriously about going contracting. I've been looking at sites such as contractoruk.com, contractorcalculator.co.uk and itcontracting.com and I've also read all of the contracting threads on the last 10 search pages on here.

I wonder if any of you could spare a few minutes to help me with some questions, mainly about the practicalities of getting set up?

How does the actual recruitment process work?

Presumably (once set up as a limited company) I register with various agencies and they find suitable placements to put me forward for. I would also be using linked in and job sites to do my own hunting.

Do you still have job interviews? Are they with the recruitment agency or the client company? Who chooses which contractor to hire, the agency or client?

Is there a financial difference between arranging a contract directly with a client compared to going through a recruitment agency? Presumably the agency take a cut, is that from your end or are they billing the client seperately?

I assume that you keep timesheets and then once a month invoice the client for your time worked. Is the agency involved anywhere in this process?

Do you have a solicitor review the contract before you sign?

Do you have an IR35 specialist review it before you sign?

What percentage of your contracts have been through agencies versus direct with a client?

What percentage of your contracts have fallen inside of IR35?

I have more but I'll leave it there as I don't want to put people off reading and replying to a wall of text.

Thanks for your help.

 

[Zefan]

I'm currently exploring this avenue too, so will be interested to see any answers from experienced contractors.

 

[Maccy]

I'll try and answer as much as I can, only been contracting for a year though!

How does the actual recruitment process work?

Pretty much the same as permie recruitment, only difference is the start dates are usually more immediate. In fact I think there was generally less paperwork/hassle with both of my contract recruitment processes!

Presumably (once set up as a limited company) I register with various agencies and they find suitable placements to put me forward for. I would also be using linked in and job sites to do my own hunting.

Reach out to recruiters now, use Jobserve, same as any job hunting - networking is key for contracting. You can set up your limited company whenever you're ready, if you're going to be VAT registered then I'd hang fire on that until you have a contract in place with a start date to maximises the benefit (if you're using the flat rate VAT scheme).

Do you still have job interviews? Are they with the recruitment agency or the client company? Who chooses which contractor to hire, the agency or client?

Yes, my first one was with the client over Skype (as it was a role in Sweden) and my current was with an agency but the guy interviewing me was also a team lead within the client. I pretty much got the role because my current lead I've worked with before so he got me in there pretty much. The client will ultimately have the end decision as they want to know if you have the skillset and can meet the requirements.

Is there a financial difference between arranging a contract directly with a client compared to going through a recruitment agency? Presumably the agency take a cut, is that from your end or are they billing the client seperately?

You could probably squeeze a slightly higher day rate by going direct to the client, however IR35 might come into play. Agencies will take a cut but you tell them your day rate and then they'll add their markup, generally you won't see or know anything about it.

I assume that you keep timesheets and then once a month invoice the client for your time worked. Is the agency involved anywhere in this process?

It will vary from place to place, but usually there's a timesheet system in place that the client authorises and you would send an invoice to the client/agency depending on the setup - the hours worked on the invoice would need to match the timesheet obviously!

Do you have a solicitor review the contract before you sign?

No, get yourself a decent accountant (I can refer you if you like) who can offer a contract review as part of the service; mine also checks for IR35 etc.

Do you have an IR35 specialist review it before you sign?

See above.

What percentage of your contracts have been through agencies versus direct with a client?

Both of mine have been with agencies and I'd prefer to stick to this approach to minimise any IR35 risk.

What percentage of your contracts have fallen inside of IR35?

Both of mine have been outside, I wouldn't consider anything inside.

Let me know if you have any more questions or PM/Trust me

 

[Nazbit]

Thanks. I know that a lot of these things seem very simple / daft questions but it's one of those things, if you don't ask you don't know.

So I think that the set up process would go something like this...

1 - Register the company
Register a limited company with companies house
This basically seems to be a case of picking a name which doesn't infringe on anyone else, identifying directors and shares.
Do you pay for a registered office address and mail forwarding for privacy reasons? Do accountants typically throw this service in?

2 - Find an accountant
Find an accountant specialising in IT contracting Who will offer IR35 review.
Do you use someone local or a national chain with online / telephone interaction?
How important do you think it is to meet in person? Do you do this often?

3 - Set up basic services
With advice from accountant/solicitor/financial advisor set up:
Business bank account
Indemnity / liability insurance
IR 35 tax investigation insurance (??)
Pension scheme
VAT registration if needed

Did I miss anything?

Any extras like life insurance, loss of earnings insurance, healthcare plan etc bearing in mind they may attract taxable benefit in kind, might be better off buying privately than as a company - see accountant.

4 - Getting Paid
Again all down to a conversation with an accountant but my understanding is it would go something like this:

• Pay self around 11k annual salary as an employee
• Pay employers NI on that salary
• Pay employees NI on that salary
• Pay tax free pension contributions
• Pay business expenses such as travel, computer equipment, training, insurance, accountant etc
• Then pay 19% corporation tax on remaining profitR
• Remaining profit to be taken as dividends as and when required and subject to tax at 7.5% to 34k and 32.5% from 35-150k.
• There would be more and less tax efficient times to take dividends depending on the tax year and how much I've worked.
• Enough money to be left in the company at all times for cash flow and to cover tax obligations.

Am I there or there about?

Thanks

 

[Nazbit]

@Maccy How do you deal with references as a contractor?

I will have some references from my permenant jobs but further down the line will former clients be willing to receive phone calls from new clients for references? I assume not?

Is it worth asking them to write a "testimonial" that you could keep on file?

 

[Maccy]

I've always had references available on request, but I've got a list of people who I could call up and would give me a reference with no issue at all.

 

[Zefan]

The one thing I see wrong with your above plan is the salary. Unless there's some other reason you want to draw salary as opposed to dividends, you should keep your salary just below level where NIC payments kick in. You'll still be credited with them as long as your salary is above the Lower Earnings Limit (LEL), which is currently £116 per week; £6032 per year.

 

[Nazbit]

I thought that the reason for 11,850 salary is that it's the personal tax free earnings limit. So yes there will be an amount of NIC (about 350 employees and about 400 employers) due on that amount but it will be 11,850 tax free. With the remaining money taken as dividends at 7.5% up to 34k and 32.5% after that.

 

[Zefan]

I thought that the reason for 11,850 salary is that it's the personal tax free earnings limit. So yes there will be an amount of NIC (about 350 employees and about 400 employers) due on that amount but it will be 11,850 tax free. With the remaining money taken as dividends at 7.5% up to 34k and 32.5% after that.

That would be true, except that any unused personal allowance gets added to your £2000 tax free dividend allowance. That means, as I understand it, that you're best taking the maximum non-NIC contributing salary, and then the remaining £3868 of your £12,500 personal allowance slides over to make your initial tax free dividend pot £5868. That means you won't pay NICs, but also won't pay any income or dividend tax on the rest of your personal allowance.

I am only just looking in to all of this for the first time, so there's a good chance I could be mistaken

You can do it the way you've described, but it relies on the exemption of employers NIC contributions under £2000, which is on a bit of dodgy ground from my reading, specifically when in the context of single director limited companies.

Give this a read if you haven't found it already, they suggest both ways are suitable however one is a little simpler. https://jf-financial.co.uk/2019/01/...-dividends-2019-20-limited-company-directors/

Looking again, I think they have actually goofed at the end, with the calculation for corporation tax saving from the higher salary option being messed up.

 

[Nazbit]

If it's true that the unused tax allowance is added to your 2000 dividend allowance then yes I'd agree your way would work out better.

We need to find an accountant

Where are you on your contracting journey? Just mulling it over or made a start?

 

[Zefan]

I've sort of stumbled in to the possibility of it really. I'm currently a regular permanent employee within a team that includes a contractor, however there are many more positions becoming available soon so I'm looking to jump across. The takehome pay would be almost double what I'm currently on, and there are a number of negatives linked to the regular roles so it's a no brainer. If it wasn't for this opportunity I would likely have not considered contracting, but I'm glad I have now.

You're right, an accountant will likely make very light work of these numbers! It seems like a bit of a hustle really, not something I shy away from but I'm wary of potentially making a misstep that could cost thousands down the line should HMRC move the goalposts, especially with the trajectory of IR35.

 

[Nazbit]

I think that you have to be every careful going from a permenant position to contracting for that same organisation. That is specifically one of the "disguised employment" scenarios identified by HMRC.

I think that they will tighten up IR35 regularly but that creative accountants will probably find loopholes.

If it all gets shut down I guess the worst case scenario is we have to go back to permenant employment.

In terms of getting in to trouble I think as long as you research and speak to suitable accountants etc it's probably as safe as you can be. Get contracts reviewed and keep a statement of working practices on file. Tempted to get the first couple of contracts reviewed by more than one party and then at least I can demonstrate doing everything possible to determine the IR35 status and pay the appropriate tax

You can also get IR35 tax investigation insurance at different levels to cover you for either an investigation, a barrister and potentially even insure the payment of a fine up to a certain amount.

 

[Jokester]

Any employer that knows what they’re doing won’t allow a permie to immediately go contract with them as they will now carry the tax liability under the recent IR35 changes (comes in next year).

 

[dowie]

Is it worth asking them to write a "testimonial" that you could keep on file?

Linked in could be useful for this, plenty of contractors regularly ask for endorsements from former clients and they're displayed publicly on their profile. (OK not quite the same as a reference as given its public rather than confidential nature but multiple useful ones with qualified statements of why they were pleased with your work etc.. could be pretty useful).

In terms of official references in general, plenty of employers just confirm your job title and dates of employment, the current HR department at any former employers can do that on request.

If you did get someone to write a "testimonial" to keep on file then they'd perhaps be contacted regardless by HR/background checking firm etc... you might as well get them to do so publicly on linkedin to assist further with landing the role too.

 

[Nazbit]

Linked in could be useful for this, plenty of contractors regularly ask for endorsements from former clients and they're displayed publicly on their profile.
.

Yes I think that would be a good idea.

QUOTE="dowie, post: 32634662, member: 66955"]
In terms of official references in general, plenty of employers just confirm your job title and dates of employment, the current HR department at any former employers can do that on request.
.[/QUOTE]

Is that the case for a contractor though. As there was no actual direct employment was there.

 

[dowie]

Is that the case for a contractor though. As there was no actual direct employment was there.

Well someone at the company ought to be able to confirm you were contracted there, I'd presume that was HR. I'm not a contractor so someone else might need to answer that, have worked with a lot of contractors over the years so thought the linkedin thing I'd seen would be useful to highlight (quite useful for employees in general too I guess).

 

[Zefan]

Any employer that knows what they’re doing won’t allow a permie to immediately go contract with them as they will now carry the tax liability under the recent IR35 changes (comes in next year).

Indeed, that sort of thing would sound alarm bells for me. My team consists of contractors, as well as permanent staff from company A and company C. In my case it would be going from employer A to Mt own company, providing services to company B who in turn provide services to company C.

 

[DAIR]

Hi there,

I've been a Software Developer for 10 years and I'm thinking quite seriously about going contracting. I've been looking at sites such as contractoruk.com, contractorcalculator.co.uk and itcontracting.com and I've also read all of the contracting threads on the last 10 search pages on here.

I wonder if any of you could spare a few minutes to help me with some questions, mainly about the practicalities of getting set up?

How does the actual recruitment process work?

/* For me its been very similar to having a permie position interview. The main difference (i've found). Is that the whole process is more streamlined.... For example the client doesnt care about where you see yourself within the next 5 years lol. /*

Presumably (once set up as a limited company) I register with various agencies and they find suitable placements to put me forward for. I would also be using linked in and job sites to do my own hunting.

This is how it works. Although I feel it's always better to try to cut the middle man/woman out of the process and secure contracts directly with the client.

Do you still have job interviews? Are they with the recruitment agency or the client company? Who chooses which contractor to hire, the agency or client?

Yes. The client needs to know you're capable of doing a job. As metioned above... The process tends to be very straight-forward. Usually one stage either in person or over the phone.... For example I had one 40 min telephone interview... A day later a was offered the role.

Is there a financial difference between arranging a contract directly with a client compared to going through a recruitment agency? Presumably the agency take a cut, is that from your end or are they billing the client seperately?

If working through an agent. You'll be required to bill the agent.... This has been my experience.

I assume that you keep timesheets and then once a month invoice the client for your time worked. Is the agency involved anywhere in this process?

Agents will require the client to sign off on time sheets. Once approved.You'll then receive the monies x days later.

Do you have a solicitor review the contract before you sign?

No. But you can have accountants review contracts on your behalf.

Do you have an IR35 specialist review it before you sign?

I have taken out insurance in the past. To cover this sort of thing. My current account also offeres a contract review service.... At least I think they do lol... Cant remember

What percentage of your contracts have been through agencies versus direct with a client?

I'd say 80%.

What percentage of your contracts have fallen inside of IR35?

0%. My last contract was with the UK gov. And I had no issues at all. I know this isnt the case for all positions within the UK gov.

I have more but I'll leave it there as I don't want to put people off reading and replying to a wall of text.

Thanks for your help.

 

[Nazbit]

@DAIR thanks

 

[DAIR]

Another piece of advice.

Make sure you always check the payment schedule. In other words, Make sure you know when (after you invice the client or agent) you'll be paid. As this will vary. This week I almost signed a contract before double checking this... I thought the section was missing. So decided to call the agent to confirm. Turns out the detail was in the contract I had just failed to see it. Anyway the agent tells me they pay contractors 35 days (THIRTY FIVE DAYS). After they receive the invoice.

This was ridiculous. I informed them that I was currently being paid weekly and that the most I would be prepared to wait was 2 weeks. Couple hours later they sent me a revised contract. I'll now be paid 14 days after my invoices are posted.