Contractors generally receive higher rates of pay than similarly-skilled full-time employees and they also have the freedom to choose who they work for and when they take holidays. Of course, being a freelancer is not all sunshine and rainbows, it requires dedication and organisation.
The latter is something that many first-timers struggle with in the early days, which is to be expected having spent so much time having all of their tax affairs and working schedules taken care of by their full-time employer. Failure to get up to speed on the latest tax legislation, for example, can result in legal action and hefty fines – not what you want when you’re starting out.
1) Make sure you are fully registered and legally compliant
Before you start pitching for contracts, you should ensure that you’re complying with the laws of the land.
If you are setting up a limited company – as more IT professionals seem to be doing these days – you’re obliged to provide information to HMRC within three months of starting up your venture. As you register your business, you’ll need to familiarise yourself with corporation tax and VAT, two things that long-term permanent employees have probably never considered before.
Setting up as a limited company brings numerous advantages, especially from a tax point of view. You’ll be able to make expenses claims when travelling to jobs and buying new equipment, claiming the money back when you make your corporation tax contributions. You’ll certainly need to get up to speed on IR35, which is explained in more detail here. It’s easy to get carried away with the excitement of finally being your own boss, but if you fail to abide by the law, you could be hit with a substantial financial penalty, leaving your new venture facing an uphill battle before you’ve even got started. Don’t try to run before you can walk.
2) Don’t assume you know it all – things change
Just like the IT industry, the UK’s tax laws are constantly evolving, so you cannot afford to fall behind. The aforementioned IR35 legislation is a good example of a law that has created confusion ever since it was first introduced in April 2000.
It’s a law that HMRC has been attempting to update and clarify for a while, and a 48-page review of IR35 was published at the start of January. However, as ContractorUK suggests, the review was somewhat underwhelming and has left many questions unanswered. We won’t have heard the last of this, and it would surprise nobody to see some more concrete reforms made in this area in the near future. It’s of the utmost importance that IT contractors keep close tabs on the situation.
With a general election scheduled to take place in a couple of months’ time, the possibility of further changes to the nation’s tax and corporation laws is strong. Again, it’s vital that freelancers don’t get too comfortable with existing regulations and are able to adapt to any impending reforms.
3) Get outside help
It’s your expertise as an IT contractor that ultimately pays the bills, so you don’t want to waste too much time planning your future schedules, launching marketing drives or interacting with potential clients via social media. You can only do so much yourself.
That’s why it’s crucial that IT contractors know when to ask for help and where to find it. You don’t want to be spending huge sums on external support, so you’ll need to keep a sharp eye on your ROI. But the fact remains that outsourcing your marketing and tax tasks to specialist third-party agencies allows you to concentrate on what you do best, safe in the knowledge that these other important facets of your business are being taken care of by experienced professionals.
4) Working abroad? Know your tax liabilities
Not so long ago, a person’s success as an IT contractor would have hinged on their ability and willingness to travel overseas, as the most lucrative jobs were located in the US or Asia.
While the UK has caught up in recent years, with the government bidding to create a northern tech hub that the government hopes will rival the best in the world, it’s still important for IT contractors to assess where the big money is. Naturally, those who focus their attention on lucrative overseas markets will have numerous other obstacles to overcome, not least obtaining a working visa for the country in question.
Before taking on contracts outside the UK, you’ll need to consider the logistics of doing so and whether it is indeed cost effective once you’ve calculated your overheads. Naturally, you also need to be aware of your tax liabilities while working abroad.
Much depends on how long you will be working at a particular site. If your company is registered in the UK, but you are working on a site in Asia or the US, for example, you can claim expenses against your hotel stays, travel etc. just as you would in the UK, as long as you are there for less than 24 months. As things stand, this is the threshold for what HMRC deems to be a “temporary job”. If your contract runs for longer than two years, it will be classed as a permanent position and your tax liabilities will change, so make sure you are aware of your contract start and end dates.
5) Get organised and don’t leave things until the last minute
As mentioned, being an IT freelancer brings many new responsibilities, so good time manegement is imperative. This involves moer than keeping track of the start date of jobs and the scheduled completion of work. it measn keeping on top of your billing and payment deadlines – particulraly those of the tax authorities. HMRC is attempting to close a substantial unpaid tax deficit, so you can expect little sympathy if you miss the self-assessment deadline. The tax authority recently revealed that London is the worst region for late returns, while male contractors are 10% more likely to file a late return than women.
Not an exhaustive list
While these five tips are vital for IT contractors to consider when they go it alone for the first time, this is by no means an exhaustive list. Being your own boss brings many advantages, but it isn’t an easy ride.