IT Contracts are Once Again Plentiful

Now that the summer holidays have been and gone, the demand for IT contractors gets stronger by the day, reports Barry Roback, Chief Executive of the JSA Group of Companies, UKís number one specialist accountant for IT contractors. However, both those who are thinking about returning to contracting as well as those tempted to try contracting for the first time should be aware that the legislative landscape has changed substantially since the pre-millennium contracting boom years of the late 1990ís.

Roback reports that there are currently between 50,000 and 60,000 IT contractors working in the UK and of those signing up with JSA, about 84% are ìfirst timersî to the market. Even those who previously worked as a contractor are finding that the recruitment and employment regime has changed significantly since their last phase of contracting. At a time when demand is threatening to once again outstrip supply, a raft of new legislation means that agencies can now only deal with contractors whose affairs are totally compliant and properly constituted within the law.

Both new and returning contractors should therefore abide by the following 6 golden rules of contracting to ensure that a) they are attractive prospects to agencies; b) they are in a position to maximise the financial benefits from their employment and c) they stay on the right side of the law.

1. Choose how to organise your financial affairs. As 96% of all new IT contracts are now sourced by agencies, contractors will either have to arrange for Limited Company status, or work on a PAYE basis through the agency. The former is invariably more tax efficient because most agencies will not allow contractors to claim for work related expenses. Where contracts are outside IR35, a further advantage is that some of the reward for contracting can be paid as a dividend rather than salary, which effectively carries a lower effective rate of income tax. Despite changes at the last Budget (which slightly reduced this benefit), dividends still remain more tax efficient than PAYE income. However it is vital to work through a properly incorporated limited company or through a managed composite company. Self-employment is generally not an option.

2. Forget about contracting ìOffshoreî. The majority of new contracts are UK-based since increasingly, overseas assignments are now sourced locally. The law is quite clear that if the work is performed in the UK, the remuneration for it is subject to UK tax, wherever and whenever it is paid. Contractors should not therefore have any dealings with offshore Management Companies, particularly as the new Money Laundering Regulations have cracked down on these arrangements. ìOffshoreî countries in the firing line include Jersey, Guernsey, Isle of Man, Cyprus, Cayman Islands and Gibraltar.

3. Determine your IR35 status. Contractors wishing to establish themselves as a genuine independent business should try to avoid taking on assignments which are under the direct supervision and control of the end user, or else they may jeopardise their IR35-exempt status. The Inland Revenue recently won a Special Commissionersí case (which JSA is currently appealing) on the basis that the contractor was not IR35-exempt because the end user had the right of control even if they did not exercise it. Whilst this might seem an arcane argument, it would appear to give the IR carte blanche to decide whether a contractor is genuinely independent, regardless of the actual circumstances.

4. Consider carefully all the alternative methods when arranging a contract. If a contractor is not caught by IR35, but does not want to go to the effort and expense of acquiring a limited company, a tax-efficient alternative is to join a managed ìcompositeî company. Instead of a one-person limited company, contractors become a shareholder and director of a multi-person limited company, that is, a company with at least one other shareholder/director. This structure offers all the advantages of a managed service but still retains many of the advantages of an individual limited company. Even for contractors caught by IR35, a simple ìUmbrellaî Managed Service will still enable them to take full advantage of the quite generous travelling and subsistence allowances that are available to site based workers.

5. To ìopt outî or not to ìopt out, that is the question. Top end contractors can make themselves more attractive to an agency by opting out of the recently implemented Conduct of Employment Agencies and Employment Business Regulations. In addition to the time consuming and costly administrative burden placed on agencies by these regulations, they also effect their ability to charge additional fees to end-users who wish to offer permanent jobs to contractors or to re-engage them through other agencies. Compliance with the regulations also significantly slows down the engagement process. However, since 6 July 2004, it has become possible for Limited Company contractors to opt out of the new regulations. In return for opting out, agencies are likely to reward contractors with the best contracts available and possibly at slightly higher rates.

6. Do not leave your affairs in the hands of amateurs. The needs of a contractor are as specialised as any other professional. Contractors should only engage the services of an experienced advisor who understands the intricacies of contracting and self-employment, not just to ensure they stay on the right side of the law but also to help maximise the tax benefits that are still available.

Barry Roback also offers another couple of tips. Contractors should always be professional and not necessarily ape the style of the organisation they are working for. Detachment ñ in attitude, dress style and working methods ñ are vital ingredients in proving to the IR that they are truly independent operators.

Finally, contracting should be seen as a career in itself and agencies and end-users expect contractors to have invested their own time and money in training and updating their skills. ìGone are the days when IT specialists could float in and out of contracting at will. Even though the current demand for contractors is firm, agencies and end-users are only really interested in those with a serious, dedicated work ethicî Roback advises.