Contractors' Questions: Has sole trading got the edge on 'Ltd' contracting?
Contractor’s Question: I set up a limited company on the understanding that this was the best way to maximise income but it seems my clients just want to hire me as a self-employed sole trader. Why might this be?
Also, is it easier to close down my limited company if it’s barely used? Or should I keep it? I’m in the digital sector and am direct-to client.
Expert’s Answer: There are indeed ‘pros’ to operating as a sole trader. You have the freedom to work on different projects; will not be tied by an employment agreement and pay less in National Insurance than you would pay as an employee.
In the freelancing and contracting sectors, one of the ‘cons’ of being a sole trader is that legislation as good as puts a stop to recruiters engaging you. But because you are direct-to-client, this disadvantage of sole trading should not apply.
Other sole trading ‘cons’ will though – you’d have to undertake the costs of running your own office, rent, insurance, computer and internet costs. Plus, you won’t qualify for employment benefits; will have to make provision for your own pension and you’d have no employer security.
By contrast, working through your own UK limited company is a good option if done correctly as it can increase your net take-home pay. If not done properly however, it can result in you paying out much more than you expected.
So when working through your limited company, you must be cautious not to fall inside the IR35 legislation, such as by being under the direct ‘Control’ of the end-client, without ‘Substitution’ possibilities. With all your assignments as a ‘Ltd’, it is recommended that you do your due diligence first to ensure you are working within guidelines that put you outside of IR35.
Meanwhile, your clients should have no concerns engaging you through your company if they also ensure they are not caught by IR35, such as by ensuring their contract terms do not depict a right of control or direction about how you perform your work. Their staff would obviously need to reflect these terms with you in their day-to-day interactions with you.
As regards any potential reluctance to engage you as a limited company, clients can be concerned about possible penalties being imposed if they are found to be breaching IR35. For you as a consultant, the consequences of being caught by IR35 can include demands for NI and income tax on all earned income, plus likely penalties imposed by HMRC.
In practical terms relevant to your circumstances, if your current contract ends then you would have the option of making your limited company dormant until such time you wish to work through it again. The cost of doing this is minimal and is limited to year-end return filing charges. However, if you do not wish to use your company in the future and decide to close it, you can do so by completing a form and sending it to HMRC with a cheque for £10.
Whichever option you like the sound of, strongly consider appointing a qualified tax advisory firm to assist you with operating your limited company. This not only offers you protection you from any unintentional omissions but should also help maximise your earning potential.
And protection is one final ‘pro’ of running your own limited company. With a ‘Ltd’, your personal liability for any business debts is limited whereas as a sole trader, you’ll be personally liable for any debts run up by your business – meaning your personal finances could be at risk if something goes wrong.
The expert was Daryl Gould, a director of Access Financial.