How to become an IT Contractor - Becoming an IT Contractor

This year has been an interesting year from a news reporting point of view. Alongside the general economic uncertainty, we have also seen the birth of the Agency Workers Regulations, and confirmation by the Chancellor that IR35 is to stay - albeit in an 'improved' form.

Agency Workers Regulations

The AWR, which provides employment rights to all workers after 12 months on an assignment, went live on 1st October 2011. Despite the initial concerns that the new rules would have a big impact on the contracting industry, the demand for contractors appears to have been little affected.

Most contractor umbrella companies have adopted the 'Swedish Derogation' model, which pays contractors between assignments, and minimises the impact of the AWR on end clients.

Limited company contractors who are genuinely in business on their own account should not be affected by the AWR, although the wording of the legislation has done little to provide clarity to those potentially affected.

IR35

Following a report from the Office of Tax Simplification (OTS), the Chancellor opted to keep IR35 at the 2011 budget, as he believed that abolishing the rules would put 'substantial revenues at risk'. IR35 is to stay, but the way it is administered is undergoing an overhaul, including better guidance and more accurate targeting of potential targets. A new IR35 Forum now meets on a regular basis, and is tasked with overseeing improvements to the current IR35 regime.

From a compliance point of view, the advice remains the same - make sure you have any contracts reviewed by employment status specialists, demonstrate that you have taken steps to comply with the IR35 legislation, and consider taking out tax investigation insurance just in case.

Taxation

HMRC has increased its efforts to clamp down on pretty much every area of potential tax avoidance, including effectively outlawing Employment Benefit Trusts (EBTs).

New penalties also apply for the late submission of self assessment tax returns.

From a tax point of view, limited company contractors now benefit from a 1% drop in Corporation Tax from April 2011, although various changes to the income tax rates and allowances mean many contractors will be worse off as a result.

The higher rate tax threshold has been reduced, and if you earn over £100,000 per year, your personal allowance is reduced by £1 for every £2 you earn over this threshold. The highest earning contractors have to pay 50% tax on earnings over £150,000 per year.

Demand for contractors

IT as a whole has proved to be remarkably resilient to the economic downturn, with more people than ever working in the industry according to e-skills, with the highest concentration of both permanent and contract roles located in the South East.

Although rates have come under pressure across the board, as clients seek to cut costs, many contractors working in investment banks have famously been forced to absorb rate cuts of 10 or 15% in recent months, bringing back memories of the first credit crunch in 2008-9.

Unsurprisingly, the demand for contractors from within the public sector has fallen drastically, with some reports suggesting that the number of contract openings advertised has dropped by 50%.

On the positive side, digital contractors have had an excellent year, as the demand for mobile / smartphone technology continues to soar, as retailers and other customer-focused industries aim to out-do each other by impressing potential customers with useful apps, as well as social media offerings.

One suspects that the outlook for the contracting industry in 2012 is very much married to the fortunes of the UK economy as a whole.

We'll be back with more news in 2012, and thanks for visiting the site over the past year!