Contractor Taxes – Helpful Tips for Your Options

The “Contractor Tax” is in fact the main expression used to explain how contractors take into account and pay taxes and national insurance. There are many companies that use contractors for specific tasks or for assistance in special projects. The implications for the Tax Contractor are broad and require careful consideration. The main options for contractors are: –

Self employed

A self-service provider pays the “Contract Tax” just like an ordinary self-service person, such as a plumber. A record of expenses incurred, materials, etc., must be maintained and the annual tax return must also be compiled. A self-employed person must open their own accounts and send them to clients.

In addition, a self-employed worker will have to register for VAT if their turnover is more than $ 73,000 (2011/12). VAT is really taken into account, and it is also paid by HMRC every 3 months, it is paid, even if the invoice was not paid at the time of publication of the VAT return.

The main trap with this choice is that many companies will use only a specialized contractor working in a limited organization. HMRC uses tests to determine that the contractor is really busy with himself, and is not an employee disguised as the client company, which has serious consequences for the amount of taxes paid by the Contractor.

Creating your own company

A company can be started simply by buying from the shelf. For the organization it will require its own bank account. Again, if the billing exceeds $ 73,000 (2011/12), an additional problem arises in the collection and payment of VAT.

While this option may give the contractor more freedom to manage your business the way you want, additional commitments make it necessary to retain more detailed information and may include additional costs. However, the amount of the tax paid by the Contractor can be reduced through the use of dividends, instead of paying high salaries.

The focus on contractors should be tested to show that the individual manager of the company is an independent contractor and is not considered to be a type of employee disguised as the client company. The failure of these tests will incur additional costs and potentially large fines around the additional tax expected from the Contractor. When a dispute arises with HMRC, the cost of protecting the status of an independent contractor can be high and cannot be recovered.

Umbrella company

The use of Umbrella companies increased when HMRC reduced the gaps that contractors used to reduce taxes on contractors.

The real way it works is that the service provider becomes an Umbrella employee. Each week or month, the contractor completes the schedule and details its eligible costs. Umbrella invoices the customer. When the invoice is paid, the Umbrella Company will deduct the taxes of the contractor and the National Insurance immediately before making the payments to the bank account of the counterpart. This simplifies the whole process and helps guarantee the payment of the correct amount of Contractor Tax.

An additional benefit is that working through the Umbrella Company guarantees that there is no evidence to guarantee that the contractor is not a disguised employee.