If you have been contracting for a few years, it’s quite possible you would have encountered comments from permanent members of an organisation alluding to the fact ‘you lot’ are ‘overpaid’ and quite possibly underworked!
For those who have recently ventured into this arena, the attitude encountered would be noticeably different.
With contracts now on the decline, Brexit, the imposition of compulsory time off, blanket pay cuts combined with what can only be described as an all-out attack on personal service companies by the Government. What was once deemed an enviable position by many ‘Perms’, has now become a difficult environment in which to operate.
There is no sugar coating it, contracting today is markedly tougher than it was five years ago. Compliance requirements are much more stringent and hefty fines are now the norm for any form of non-compliance.
Directors must now manage a multitude of risk, from Auto Enrolment, RTI and Low Cost Trader calculations, maintaining registers of people with significant control, dividend declarations and taxation.Along with all of this, one of the most important areas of risk is assessing contracts to ensure they constitute an agreement that will not bankrupt you at some point in the future.
No one said it was going to be easy. It is essential however you know your options, plan and act to survive the hard times.
Hard times essentials
There is a reason contractors typically get paid a higher rate than their permanent counterparts, that is to fund themselves through the lean times.
It is foolish to think you will always be in a contract, therefore it is essential to build and maintain sufficient reserves. Reserves will allow you to continue operating, that is seeking contracts, when turnover is scarce.
It’s easy to fall into the trap of only marketing your services at a given rate, the problem with this is the market may have moved on and not be there at all. The fact that you once ran a contract at £1000 per day does not entitle you to run your next contract at £1000 per day.
It is far better to be in a contract looking for a better paid one, than out of contract holding out for one at £1000.
Lose the ego. If you have been out of contract for longer than two months you need to let the market dictate your rate and not the other way around.
Director Loan Account
Paying personal tax is not something you want to do if your company is currently not operating a contract. You can restrict dividends and utilise the directors loan account to extract funds as a temporary measure during these times. This is a deferral process and care should be taken to understand the implications if a temporary issue becomes permanent.
Go inside IR35
There are now many contracts being offered explicitly inside IR35, these are typically in the public sector. You can operate these contracts outside of the limited company through designated umbrella providers. This can provide an opportunity to reduce compliance cost by making the company dormant. The tax implication on you personally will be minimal.
Go on holiday
Banging the same drum month in month out can be disheartening, if the market is slow, why not use this time to head off to the Sun and cheaper parts of the world where your dividend income will last far longer than hanging around the cities of the UK. You can still check in with agents via email and interviews can be done via teleconference in most instances.
Accepting a permanent position may provide shelter in a storm. With guaranteed income, sick pay, holiday pay and all the trappings of employment, if you have been out of a contract for a long period of time, you should keep all options open. Going permanent can bring a multitude of options with regards to how you manage the demise of the limited company, see below:
Members Voluntary Liquidation
Closing your company after a period of trading can allow you to release the reserves at an attractive 10% tax rate. However, with new anti-avoidance legislation introduced in April 2016, you should engage a professional to ensure you will get the desired treatment.
Sell the company
You may think selling the company is a not an option, after all who will want to buy a moribund entity, where the key worker is leaving. There are acquisition vehicles operating in this market actively looking to buy companies that have assets, in most cases with contractor companies this will be a pot of cash.
Selling your company may be the desired option where the anti-avoidance applying as a result of closure via MVL will potentially have an impact. This exit provides certainty to shareholders without restriction.
If the reserves of the company are not significant, i.e less than £25k, we are able to prepare accounts to cessation and close the entity down by way of a simple strike off. It may be possible to achieve capital treatment on the distribution of reserves up to the £25k limit, potentially giving access to Entrepreneurs Relief and a 10% tax rate.
Creditor Voluntary Liquidation
It’s a sad fact of life that more than half of all companies incorporated will fail. If you have liabilities greater than your assets or cannot meet your liabilities when they fall due, there is a danger you are trading whilst insolvent.
You have a fiduciary duty as director to act in situations like this, failure to act could result in your personal wealth and assets being exposed to creditors. If you think this may be the case, contact us immediately.
The contracting environment is changing, it still provides a flexible way of working and puts control in your hands, however the hurdles are getting higher and the cost of non-compliance and errors is high.
Never has it been more important to engage an accountant who can not only deal with the compliance issues, but also provide the advice and guidance you need to ensure you manage and mitigate risk.
We have Contractor Specialist Chartered Accountants in Essex, Chartered Accountants in Canary Wharf and Chartered Accountants in Manchester waiting to take your call.