What Is A Contractor? - More Than Accountants

What Is A Contractor?

Most often, there are instances that you find yourself working with a contractor or perhaps you want to be a contractor yourself. But what is actually a contractor and what makes them different from other types of employment?

Types of Employment

If you are looking for a job in the UK, then there are three various ways that you can choose from:

  • You can choose to become an employee in a company and obtain a salary and benefits, whether you are a permanent employee or on a fixed-term contract. Moreover, your employer will deduct National Insurance Contributions and PAYE Tax from your earnings. Someone will be supervising your work, at the same time you are obliged to perform the work that you’re contracted to do. As an employee, you also have some employment rights.
  • There are also workers who work on a temporary basis, either as a Casual Worker or an Agency Temp. These are usually short-term contracts or sometimes on a zero-hour contract. Yet, employers will also deduct PAYE Tax and NI contributions from their pay. Additionally, these workers also enjoy employment rights.
  • Lastly, some people also choose to become self-employed individuals. Sometimes they are also referred to as a limited company, contractor, sole trader, or a freelancer. Currently, self-employed individuals only enjoy very few employment rights.

What Is A Contractor?

Contractors offer their services to clients based on specific terms. The following are the three classifications of a contractor:

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  • They can be classified as an employee or as a worker if they are hired by the company through an Agency or Umbrella Company. Their employer will be the Umbrella Company or Agency and not the client himself.
  • These contractors can also be classified as self-employed in case they have their own limited company or they are a sole trader.

However, a contractor is quite different from a temp regardless if both of them are working for a client through an Agency.

  • A temp will be paid by the Agency. Just like a permanent employee, they will be working under the Client’s control. They will be told what to do when to start and finish their work, and they will also be supervised. At the same time, temps are also qualified for holiday and sick pay. Starting in October 2011, these temps are given equal treatment based on the new Agency Worker Regulation. Most people choose to work as temps on a short-term basis or perhaps for a transitional period while they are looking for another permanent job.
  • On the other hand, a contractor is totally responsible for their actions. Also, they have complete control over when and how they do their work including their business dealings. These contractors could either be a sole trader who pays their own taxes, an owner of a limited company or employed through an Umbrella Company that pays them as well as their taxes. Contractors could choose to work or not work through an Agency. They could take a range of assignments from numerous clients at the same time. However, they could hire a substitute that can do the work for them. Generally, contractors are higher-paid professionals who do contract works in the long-term.

What is the difference between a contractor working for a client and an employee at the same company?

Generally, contractors will enjoy the following benefits:

  • Significantly, contractors will have more freedom with regards to the work that they want or don’t want to do. They are not required to accept any contract. This type of set up is also known as  “Mutuality of Obligation.” Whereas in an employment contract, also known as a “contract of service”, the employer must provide work to the employee and the employee must perform that work. A contractor also has a “contract for services” however it does not include this obligation. The contractor conforms to providing service to the client based on the agreed schedule. The contractor accepts liability for any mistakes or omissions committed. After the project mentioned in the contract has been finished, then the client will not give any more work to the contractor. In case the client chooses to give more work, then the contractor is not obliged to accept it.
  • Contractors have the freedom and control when it comes to when and where they do the work. Typically, the nature of the work involves working on a client’s site. Although the client will presumably have a clear idea of what the deliverables will be, however, the contractor’s working methods can’t be defined by the client.
  • Employees are being paid by the number of hours that they’ve worked, usually on a weekly or monthly basis. While contractors will be paid upon the completion of particular milestones which are described on the contract. They could also send an invoice to their clients and ask payment for the services that they provide regularly, usually on a monthly basis.
  • Contractors can also enjoy some tax advantages. However, there are also some disadvantages, for instance, the lack of employment rights and benefits. Generally, employees of the company will be provided with holiday pay, redundancy pay, paid sick days etc, but contractors are not.
  • Contractors will not be paid, in case the client decides to terminate or does not to renew the contract. The contract between the two parties should describe clearly how termination will be handled. For instance, either party should provide a notice to terminate. Also, either side can choose to terminate the agreement instantly once there is a breach of contract that occurred from either side.
  • The rights of the contractors can be seen on The Conduct of Employment Agencies and Employment Business Regulations 2003.

Legal Structures For Contractors

If you are just starting out as a contractor, then one of your first tasks should be to decide on a more suitable legal structure when working as a self-employed person.

Up until the 1980s, being a sole trader is one of the typical ways of operating as a contractor.

However, during the late 1980s, HMRC introduced a rule which requires the Recruitment Agencies to be responsible for unpaid tax in case they choose to employ self-employed workers and paid them gross. This prompted Recruitment Agencies to stop using sole traders. As a result, contractors were forced to set up their own limited company. Ultimately, the Agency does not have any responsibilities for unpaid taxes anymore if they choose to deal with a limited company.

After the introduction of IR35 in 2000, there are now various company structures that can be used. Your choice on which structure to use will greatly depend on various factors. For instance, whether or not the IR35 rules can be applied to your contracts. Hence, it is critical that you understand what IR35 means.

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