Is contracting as a sole-trader possible?
By Contractor Hub, May 4 2016 04:00AM
A sole trader is someone who runs their own business as an individual and keeps all their business’ profits after the tax has been paid. Also, despite the name ‘sole trader’ it is possible to hire additional staff if they so wish.
Although life isn’t too complicated for this type of contractor, there will still be financial and legal responsibilities, such as filing out and returning a tax return each year and ensuring National Insurance Contributions are paid on time.
A sole trader will also be entitled to many benefits including being able to claim on a wide range of expenses for the running of a business.
As with most things in life, there can be some negatives with this type of contracting, and as a sole trader, you may find it difficult to secure contract work.
This is because recruitment agencies will only look to work with limited company and umbrella company contractors; this is due to the Income Tax Act 2003, which doesn’t allow an agency to become involved between a supplier and a client.
As a sole trader, this legislation would mean that the agency would have to treat you as an employee due to tax purposes.
Becoming a limited company contractor
Many people will decide to instead set up their own limited company, as not only will it be in some ways easier to find work, it also comes with many more benefits.
Setting up a limited company will mean becoming both a director and shareholder of your business where you will have complete control over the running of the company and any of its financial affairs.
Going down the limited company route is the most tax efficient method of working compared to working as either a sole trader or an umbrella company contractor.
Typically, you can be taking home up to around 75-80% of your earnings as a limited company owner.
Other pros to working as a limited company contractor include:
• Being able to claim a much larger and wider range of expenses – mostly anything that you have bought for the running of your business within reason.
• Having more tax benefits, such as having access to the Flat Rate Scheme – this basically means you can keep hold of some of the VAT you receive from your clients.
• Having complete control over your financial affairs.
• It’s not as much of a risk as some people may think, for example, you are seen as being completely separate from your business; so if your business should face financial difficulty, you won’t be at risk of losing your house etc.
• It’s also not as difficult as many people may think. There will be a certain amount of paperwork involved, however, as long as you have a good contractor accountant, much of the financial burden of can be taken care of by a professional, and it doesn’t have to be costly either.