How to become an IT Contractor - Becoming an IT Contractor

This article was kindly provided by 1st Option.

Is it 2007 all over again?

Many will recall with a shudder the turmoil that the contractor industry experienced in 2007 after the introduction of the Managed Service Companies Legislation. Strong action from the Treasury to counter what it viewed as deliberate tax avoidance led to the introduction of draconian measures and meant that many freelance professionals had to reorganise how their affairs were administered.

One of the most significant features of that chapter in history was the chaos that ensued - freelancers who were forced to switch from their existing trading structures, sought, in many instances, to create a personal service company structure. The result of this was overload and delay at Companies House and with Banks that provide facilities to small business. Reports of delays of up to 3 months to procure a business account or even an "off the shelf" company were not uncommon.

Surely history could not repeat itself? Or could it? The arrival of consultations around the Agency Workers Directive, the EAA Conduct Regulations and even Brief 50/09 has potentially created another monster which in turn could lead to major upheaval as freelance professionals see the need to reorganize their affairs.

Agency Workers Directive

In the case of the AWD, the consultation wording suggests that contractors working directly on the agency's payroll or via a managed umbrella scheme will fall within the scope of the directive and if so, could result in their need to make a wholesale change. The attractiveness of freelancers engaged in these structures will diminish and the big question is whether they will choose to switch "en masse" to using a personal service company (a route which the consultation proposes should remain unaffected).

It's clear that the Agency Workers Directive is on its way and it will affect the industry. What is not yet known is its ultimate scope and how much upheaval its introduction will cause. Perhaps most noteworthy is the significant paradox between these provisions and those associated with the Managed Service Companies legislation of a couple of years ago. At that time, PAYE umbrellas were exempted from the legislation and provided contractors with a safe haven to which they could turn. This time around it seems that umbrella companies are almost certain to be included in the final draft.

Is it time to incorporate?

Therefore now could be a good time for PAYE contractors to begin thinking about the way they are trading before Companies House and the banks collapse under the strain.

Those employed directly on the payroll of a recruitment business or who are using an umbrella company will be entitled to equalised pay, holidays, employment rights, working conditions, training and career opportunities at their client's site. In simple terms, they will become significantly less attractive to market and more cumbersome to administer. Moving to a limited company should definitely be given consideration.

Of course, no contractor should be forced to incorporate against their will or as a condition of securing any assignment. Administering a limited company is certainly not a universal approach suitable for all. Nevertheless, for many flexible professionals, who may earn even an average rate, a limited company structure offers additional tax efficiencies, financial flexibility, more control and of course it seems certain to protect them from this new legislative sledgehammer.