Why don't IT contractors operate as sole traders?

Free umbrella service for contractors
Save over £1400 p.a on fees
Click here or call 0845 602 7712.

Why don't IT contractors operate as sole traders?

Posted Nov 17, 2009

Sole trading is the most popular, and simplest way to set up in business in the UK. There are nearly 3 million sole traders in the UK compared to just over a million limited companies.

Once you have told HMRC that you have started out as a sole trader, you are in business. Unlike the limited company structure, your business and personal finances are combined, and you will be taxed under the self assessment system.

Sole traders do not have to undertake most of the administrative tasks required of limited companies (such as dealing with Companies House and corporation tax), however should anything go wrong with your business affairs, your liability is not 'limited' (as it would be under the limited company route).

However, despite the popularity of the sole trader business structure, you are very unlikely to find many IT contractors who do not work via a limited or umbrella company.

As we discuss in our article on IT contracting as a sole trader, the Income Tax (Earnings and Pensions) Act 2003 - and previous Acts - prevent 'self employment' when an agency is involved, as the obligations of the Act would mean the agency would have to treat the contractor as an 'employee' and deduct PAYE and NICs at source.

Additionally, any agency or client who took on a sole trader contractor could also be liable for and tax on which the contractor had defaulted.

Even in the absence of any legislative reasons why you could not contract as a sole trader, the limited company route is far more tax efficient. Even if you are caught by IR35, you would still be better off as a limited company contractor.

Please scroll down for related articles

Contractor Services

Clarity - Chartered Accountants - Fixed Fee £95/month. No hidden extras.
Together we're stronger! - Join PCG, representing contractors
Professional Indemnity Insurance - Essential contractor PI cover
AccountsNet CA - PCG Accredited. Great Value @ £65pm - View Demo
inniAccounts - Online Accountants, 24x7 Access, Free Demo
Qdos - IR35 experts - Providers of low cost contractor insurance
Free Umbrella Company - Save over £1400 p.a. on fees with Springboard
Free IR35 & Tax Review - Call ICS on 0800 195 3750
K & B Accountancy Group - Fixed fee contractor accounting only £75pm
Parasol - the UK's favourite umbrella company
planIT Services - Umbrella, Ltd company, free formation & IR35 review
Cloud 9 Group - Umbrella Solutions only £9.95 per week
Key Directories: Contractor Accountants | Umbrella Companies
Financial Services: Income Protection | Contractor Mortgages | Pensions
More Services: Compare Business Insurance | Company Formation

How do I move from an umbrella company to my own limited company?
David Houston explains why switching between an umbrella and a limited company should be a fairly straightforward process,

VAT return errors - what should contractors do?
What should contractors do if they have made an error on a previously submitted VAT return?

How are limited company dividends taxed?
Limited company contractors, who fall outside the IR35 rules, will derive their income via salary, and dividends. But how are dividends actually taxed?

What does a contractor accountant do?
What should limited company contractors typically expect their accountants to do?

Contractor travel expenses - what is the 24 month rule?
An explanation of the 24 month rule with respect to contractor travel and subsistence expense claims.

How much do contractor accountants cost?
How much do contractor accountants charge, and what other factors you should consider before signing up?

Should contractors use the HMRC contract review service?
Why contractors are advised against using HMRC's own IR35 contract review service.

What factors would trigger an IR35 investigation by HMRC?
We look at what factors would typically trigger an HMRC investigation into a contractor's tax affairs.

How much does it cost to set up a company?
There are various ways contractors can set up their own limited companies; via an accountant (a popular way), via a company formations agent, or direct with Companies House.

How do you register your limited company for corporation tax?
If you have set up a limited company for your contracting business, how do you register to pay corporation tax?

Can I share my contractor income with my partner, or family members?
If you are a limited company contractor, is it worth sharing some of your income and profits with your partner or a family member, and can it be justified?

Does my limited company have to appoint a secretary?
From April 2008, since the introduction of an initial wave of Companies Act 2006 legislation, limited companies no longer have to appoint a company secretary.

What is BN66 and how does it affect contractors?
How does BN66 prevent double taxation treaty abuse, and how does it affect contractors who have used offshore tax avoidance schemes in the past?

What expenses can I claim via my limited company?
The expenses you are allowed to claim through your limited company are dependent on the IR35 status of your contract.

Why don't IT contractors set up as sole traders?
The most popular way to start up in business in the UK is as a sole trader. So why do IT contractors avoid this route, and work via their own limited companies or via an umbrella company scheme?

IT Contractor FAQs - Frequently Asked Questions