Tax issues when working as an independent contractor
Contracting independently is a popular way of working, and many people choose to render their services to companies in this way. Independent contractors can choose which projects they work on, which hours they work, and how much they work – giving them more freedom in setting their work-life balance.
It is a very effective way of working for people in certain industries, such as construction or information technology. However, contractors need to take care when dealing with tax issues as they are not in the usual position where an employer calculates and pays the correct taxes on their salary. Secondly, by arranging your tax affairs optimally, you can ensure that you do not pay more tax than is necessary.
Issues around IR35
The most prominent problem that contractors run into when dealing with their tax affairs is HMRC legislation around the treatment of contractors who are effectively employees. In the eyes of HMRC, there is a difference between individuals who are self-employed, working for many different employers to make a living, and an individual who operates as a contractor – but who is only working for a single employer over the medium to long-term.
The last group is what HMRC sees as “disguised employees.” If that is the case, you need to reassess how you are set up as a contractor, as you could lose out on both the perks of formal employment and the benefits of working through a limited company.
Other contractor taxation problems
Another problem that many contractors struggle with is in holding back enough of their revenue to be able to fully pay what they owe to HMRC. It is important that you keep back some of the income that you get from your contracting to be able to service your tax bill, as being unable to pay your taxes on time can lead to heavy penalties.
Also keep in mind that contractors who earn a high income will need to register for VAT. Failing to register for VAT if your income level requires that you do so can lead to very heavy sanctions from HMRC, and you need to make sure that you correctly charge VAT on invoices and pass through the VAT that is owed to HMRC.
How to get help
Perhaps the easiest way to take care of the tax question is for a contractor to work under an umbrella company. Umbrella companies receive the revenue from your clients and then pay you as an employee, taking care to pay to HMRC all the tax that you are due to pay. Umbrella companies can also assist you in claiming back expenses where appropriate.
Some contractors prefer to work for their own limited company and to hire an accountant to arrange their tax affairs. Accountants will charge a fee for this, but they will help you to make sure that you are paying the correct taxes, and that your tax affairs are structured optimally.
Whichever route you choose, you do need to find professional help. Not paying taxes or paying too little tax can result in very serious repercussions. You also do not want to pay more than is necessary – professional advice will help you to retain as much as of your income as the law allows.
