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Outside IR35 Contracting in the UK

A contrarian guide

Are you a software engineer in the UK, tired of the employee grind and ready to take control of your career? It's time to break free from the myths and dive into the world of contracting outside IR35. Forget the notion that you need years of experience or a grand graduation from permanent roles. Contracting is a path you can embark on from day one, and it's not as daunting as it may seem.

Embracing the Business Mindset

First and foremost, contracting outside IR35 means running a business. It's not about masquerading as an employee; it's about providing value, pursuing growth, and maximizing profits. The government recognizes and supports this entrepreneurial spirit, rewarding you with tax benefits for your contribution to the economy.

As a skilled professional, contracting is your gateway to shedding the employee mentality and seizing control of your future. Inside IR35 "contracting"? That's just being an employee without the perks. No, thank you.

Breaking the Experience Barrier

Contrary to popular belief, you don't need a decade of experience to start contracting. Just like you don't need to be a Michelin-star chef to run a successful catering business. As a junior developer, contracting offers higher pay, diverse experiences, and the chance to operate independently. It's a fantastic stepping stone to entrepreneurial ventures and a faster way to build a stellar CV.

Sure, contracting comes with its challenges – a bit of self-reliance, adaptability, and some extra accounting responsibilities. But the benefits far outweigh the drawbacks. Embrace the opportunity to redefine your career trajectory from the start.

Your Contracting Starter Kit

So, what do you need to kick off your contracting journey? Here's your essential checklist:

  1. Register your LTD company (the hardest part is picking a name!)
  2. Set up a business bank account (go traditional or embrace the FinTech revolution)
  3. Secure essential business insurance (Professional Indemnity, Public/Product Liability, Employers Liability)
  4. Prove your right to work in the UK (British passport or settled status document)
  5. Obtain a background check (DBS) if required by your client
  6. Occasionally, some types of clients may require Security Clearance
  7. Register for VAT (don't sleep on the flat rate scheme)
  8. Find a savvy accountant or learn the ropes yourself

Forming Your LTD Company: The Foundation of Your Contracting Journey

One of the first steps in your contracting journey is forming your own Limited Company (LTD). This is your business entity, your vehicle to navigate the world of contracting outside IR35. But don't let the process intimidate you – it's simpler than you might think.

The most common structure for contractors is a private limited company (LTD). This structure offers you limited liability, safeguarding your personal assets in case your company faces financial challenges, while providing maximum flexibility.

The company name is where you can get creative. Choose a company name that resonates with you, something unique and memorable. Make sure it's not already registered, and keep it simple – you don't want clients struggling to spell it or find you online.

As the owner of your LTD, you'll typically issue 100 shares worth £1 each and allocate a portion of them to each shareholder. You can, of course, be the sole shareholder and director, wearing multiple hats in your company. It's like being the captain of your own ship.

There is some paperwork involved. Your LTD will need a Memorandum and Articles of Association – the legal documents that outline how your company will operate. These need to be signed by the directors and shareholders (which could all be you!). This is akin to the constitution for your business. The text of these documents is fairly standard.

Once you have all your documents and information ready, it's time to submit them to Companies House. You can do this online, and the process usually takes less than 24 hours. And just like that, your LTD is born!

Forming your LTD company is the foundation of your contracting journey. It's the first step in establishing yourself as a business entity, ready to take on the world of contracting outside IR35. So, pick a name, allocate shares, prepare the paperwork, and make it official. Your LTD is your key to unlocking the doors of contracting success.

Navigating the VAT Maze

VAT, or "value added tax" (also known as "indirect tax,") can be a source of confusion when you start contracting with your own UK LTD. But fear not, we will demystify it for you!

Once your business exceeds £90,000 in revenue (which is likely in your first year as an IT contractor), you will be required to register for VAT with HMRC.

But here's a pro tip: consider registering for VAT from day one, even if it's optional. Why? For one, it looks more professional. But there is a more pragmatic reason as well - HMRC's "flat rate" VAT scheme. It's a sweet deal for IT contractors just starting out, who don't typically have a lot of company expenses. It simplifies accounting and can potentially put a little extra cash in your pocket.

Here's how it works: instead of tracking and calculating VAT on every single purchase and sale, you just apply a fixed percentage to your gross turnover (that's your total sales, including VAT). For IT contractors, that magic number is usually 14.5%. So if you invoice your client for £10,000 + the standard 20% VAT (so £12,000 total), you'll pay HMRC just £1740 (14.5% of £12,000). And that's an easy £260 gained for your business. Might not seem like much, but it adds up through the year!

In contrast, under the standard VAT scheme, you'd charge 20% VAT to your clients and then reclaim the VAT you paid on your business expenses. But as a software contractor, you likely won't have a ton of VAT-eligible expenses, especially when you're starting out. With the Flat Rate Scheme, you don't have to bother with all that - and the difference between what you charge in VAT and what you pay to HMRC is yours to keep.

So when you're setting up your Limited Company, give some serious thought to the VAT Flat Rate Scheme. It could simplify your life and give your business a nice little boost. Of course, everyone's situation is different, so it's always a good idea to chat with an accountant to figure out what works best for you. But for many IT contractors starting out with their own LTD, the Flat Rate Scheme is a no-brainer!

Setting Up Your Business Bank Account: Traditional vs. FinTech Options

If you want your LTD to get paid, you're going to need to open a dedicated business bank account. This is absolutely crucial for keeping your personal and business finances separate, which makes things like taxes and accounting much simpler. Plus, most clients will only pay into a business account.

Now, you have two main options when it comes to business banking: traditional high-street banks and newer, digital-first FinTech providers. Let's break down the pros and cons of each.

Traditional High-Street Banks

These are the big names you know - Barclays, HSBC, Lloyds, NatWest. If you already have a personal account with one of these banks, it can be a good idea to see if they offer business accounts too. Having all your banking in one place can be convenient, and your existing relationship might make the application process a bit smoother.

However, be prepared for a bit of paperwork, some grilling conversations - and a lot of waiting. Traditional banks often require more documentation for business accounts, like proof of address, ID, and sometimes even business plans or revenue projections. The application process can take a few weeks, and you may need to visit a branch in person or have one or more phone or on-line conversations.

On the plus side, high-street banks often offer more comprehensive services, like in-person support, business loans, and credit cards.

FinTech Banking Providers

In recent years, a new breed of digital-first banks has emerged, aimed at making business banking simpler and more accessible. Names like Tide, Starling, Monzo, and Revolut are popular choices for contractors and freelancers.

The big advantage of these providers is speed and simplicity. You can usually apply entirely online, and accounts can be opened in a matter of minutes. They often require less paperwork too - some just need proof of ID and a selfie!

FinTech banks are built for the digital age. They offer powerful mobile apps, seamless integration with accounting software, and features like real-time notifications and categorized spending insights. Many also offer perks like fee-free spending abroad, which can be handy for contractors who travel for work.

However, they may have some limitations. Most don't have physical branches, which can be an issue if you deal with cash. Some also have restrictions on maximum account balances or transaction volumes.

Making Your Choice

So, which is right for your IT contracting business? It really depends on your specific needs. If you value in-person support and anticipate needing other business banking services, a traditional bank might be the way to go - and starting with your current bank can simplify the process.

But if you're comfortable with digital-only banking and want the speed and simplicity it offers, a FinTech provider could be a great fit. Many IT contractors love the ease and tech-savvy features these banks provide.

Whichever route you choose, the key is to get your business account set up early. It's a critical step in establishing your business and starting to win those lucrative contracts!

Protecting Your Business: The Essential Insurance Coverage for IT Contractors

As an IT contractor, you're not just a tech wizard - you're a business owner. And like any business, you need to protect yourself and your company from potential risks. That's where insurance comes in. While it might not be the most thrilling topic, having the right coverage is essential to safeguard your business and give you peace of mind.

When you're starting out, there are two key types of insurance that most clients will require: Professional Indemnity Insurance and Public Liability Insurance.

Professional Indemnity Insurance: Your Safety Net for Professional Mishaps

Picture this: you've just delivered a software solution to a client, but they claim there's a glitch that's causing them major financial losses. They're pointing the finger at you and threatening to sue. That's where Professional Indemnity (PI) Insurance comes in.

PI Insurance protects you against claims of negligence, errors, or omissions in your professional services. It covers the costs of defending and settling these claims, which can include legal fees, court costs, and any damages awarded. Even if you've done nothing wrong, the cost of defending yourself can be crippling without PI Insurance.

As an IT contractor, PI Insurance is often a contractual requirement. Clients want to know that they're protected if something goes wrong with your work. Having PI coverage shows that you're a professional who takes their responsibilities seriously.

Public Liability Insurance: Protecting Against Third-Party Damage

Now, imagine you're on-site at a client's office, and you accidentally spill coffee on their expensive server, causing damage. Or maybe a client trips over your laptop cable and injures themselves. In these situations, Public Liability Insurance is your lifeline.

Public Liability Insurance covers you against claims of third-party injury or property damage that happen because of your business activities. This could be at your own premises, at a client's site, or anywhere else your business takes you.

Like PI Insurance, Public Liability coverage is often a requirement for IT contracts. Clients want to know that if something goes wrong, they won't be left holding the bill.

Other Insurance to Consider

While PI and Public Liability are the big two, there are other types of insurance that can be valuable for IT contractors:

  • Cyber and Data Insurance to protect against cybercrime and data breaches
  • Personal Accident Insurance to provide income if you can't work due to injury
  • Employers' Liability Insurance if you hire any staff, even temporarily

The world of insurance can feel overwhelming, but it's a crucial part of running your IT contracting business. PI and Public Liability Insurance are the foundation - they show clients that you're a serious professional and protect you against some of the biggest risks you face.

Where to get it - and how much it costs

When it comes to securing your essential insurance coverage, you have a couple of options. First, it's worth having a chat with your business bank. Many banks have partnerships with insurance providers and can offer competitive deals or recommendations tailored to your needs as an IT contractor.

Alternatively, you can look to some of the key players in the UK insurance market who specialise in covering IT professionals and small businesses. Based on industry data, companies like Hiscox, Simply Business, AXA, and Get Indemnity are popular choices, with Professional Indemnity policies starting from as low as £8 per month and Public Liability from around £5 per month for standard coverage levels.

Of course, your exact premiums will depend on factors like your specific services, turnover, and coverage needs. It's always wise to get a few quotes and compare not just the price, but also the level and quality of coverage (some of your clients may have specific requirements about coverage), before making your decision.

  • Professional Indemnity Insurance: IT contractors can expect to pay between £5 and £75 per month, depending on the level of coverage and specific business factors.
  • Public Liability Insurance: Costs range from £8 to £65 per month, influenced by the level of cover and business specifics.

As your business grows, it's worth reviewing your insurance regularly and considering additional coverage. But for now, make sure you have PI and Public Liability in place before you start signing contracts. It's a small price to pay for the security and peace of mind it provides!

Following the Contrarian Path

Contracting outside IR35 is not for the faint of heart, but it's a path filled with opportunity and rewards. It's about breaking free from the employee mold, embracing a business mindset, and taking control of your career.

So are you ready to challenge the status quo and redefine your career trajectory? The world of contracting awaits, and it's time to make your mark.

Remember, contracting isn't a destination reserved for the seasoned veterans; it's a journey you can embark on from the very beginning. Embrace the contrarian path, and watch your career soar to new heights.

Jordan Dimov is an experienced software consultant specializing in business process automation, Python code quality, cloud solutions, software engineering training and AI. With over 20 years in the industry, Jordan helps companies boost their productivity by building high-quality, scalable, bespoke software solutions.

Consulting some of the fastest growing brands in the UK and globally, the founder of A115 has a no-nonsense educational approach to modern enterprise software engineering.

Jordan's expertise spans a wide range of technologies and domains:

* Building cloud-based ETL data pipelines for industries like commodity trading and asset management
* Developing e-commerce platforms, online payment processing, and bespoke invoicing, billing, bookkeeping and accounting solutions
* Creating generative AI applications using Python, FastAPI, HuggingFace models, and vector databases
* Productionising code and optimizing software architecture for performance and reliability
* DevOps and infrastructure-as-code using AWS CDK, Azure, Terraform, and Kubernetes

Some of Jordan's notable projects include:

* A position and P&L visualization tool for Shell's trading desks, saving millions by improving efficiency
* An AWS-based platform for automating power trading auctions at Shell and LimeJump
* A high-throughput trading analytics platform for Centrica using Python, Kafka, and serverless tech
* Building multi-currency e-commerce and payments infrastructure for international expansion for a number of clients
* An innovative SMS parking payments system processing 100K+ transactions daily for the city of Sofia, Bulgaria

With strong communication skills, Jordan excels at understanding complex business needs, defining technical solutions, and leading teams to deliver results. He brings a focus on code quality, software security, and process optimization to every project.

Contact Jordan to discuss how he can help your company leverage technologies like Python, cloud platforms, and AI to solve business challenges and achieve your goals.

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