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Why don't IT contractors operate as sole traders?

Published on Nov 17, 2009 |

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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.