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What is Contracting?

Over the past few years, contracting or self-employment has been on the rise in the UK. Currently (2014), nearly 4.6 million people, or 15% of the total workforce, are working as contractors or are self-employed. As per official statistics, the UK has more than 2.9 million home-based businesses or 59% of all businesses. These small businesses are contributing nearly £300 billion to the UK economy.

As the number of new contractors increases, many of them have questions about the transition from an employee to a contractor. Our series "Path of Education for New Contractors" aims to answer all major questions of new contractors.

This article focuses on four key questions.

  • What is a contractor?
  • Which fields have the demand for contractors?
  • Why do companies hire contractors?
  • Who can become a contractor?
  • Features of contractors

What is a contractor?

A contractor is someone who runs a business independently and who is responsible for the profit and loss of the business. Contractors are not paid through PAYE (Pay as You Earn), so there are no regular deductions of income tax or National Insurance on their income. However, a contractor must complete a self-assessment form annually to enable HM Revenue and Customs to calculate how much tax and National Insurance is due. Contractors do not get the benefits of full-time employees.

Which fields have the demand for contractors?

Contractors are required in all leading fields such as professional services, skilled trades, caring professions and leisure, sales and customer service, education, and even management. As per a report from the Office of National Statistics, the top contractor occupations in 2014 are:

  • Construction and building (engineers, surveyors, supervisors, and workers)
  • Cab drivers and chauffeurs
  • Carpenters and joiners
  • Farmers
  • Shopkeepers and traders
  • Gardeners
  • Cleaners and domestic services
  • Teachers
  • Painters and decorators
  • Hairdressers and barbers
  • Plumbers
  • Childminders

Example 1: To illustrate further, let's look at some positions available on a contract basis on one of the job portals.

  • Junior Engineer (Telecom)
  • Senior administrator (Office Administration)
  • Android developer (IT)
  • Communications officer (Marketing)
  • Site manager (Construction)
  • Warehouse Quality checker (Pharmaceutical)
  • Meter installers (Electrical or gas)

These are only few examples, but as you can see, there is a demand for contractors in a variety of roles across all fields.

Why do companies hire contractors?

Between 2011 and 2014, temporary or contractual employment has grown at a rate of 13.8% in the UK. However, total employment growth has increased by just 2.5%. This means the contractor market has grown at nearly six times the rate of the regular job market. So why are companies hiring more contractors than full-time employed staff?

  • Cost effectiveness: Companies have to pay contractors only on a per hour/day/task basis at an agreed rate.
  • Apart from the contractual pay, there are no other additional costs applicable to employees, such as:
    • National Insurance
    • Pension contributions
    • Holiday/sick/maternity pay
    • Training
    • Management and supervision
    • Administration
    • Notice period
    • Overheads (meals, office events)
  • Faster results: As most contractors are highly skilled, they start delivering value faster than full-time employees who may require a certain training and hand-holding period.
  • Accountability: Contractors are brought on board for solving specific problems with clear deliverables, and so it is easier to make them accountable for their performance. This is in contrast to in-house staff who may get distracted in company meetings, go on leave/holiday, or get involved in routine operational matters, neglecting the specific long-term project.
  • Broader experience: In most cases full-time employees may have the experience of working only within the client's company and so they may have a very internal mindset. By comparison, contractors usually have broader industry experience, working with different clients and different projects, so are more capable of resolving issues and problem solving.
  • Specific expertise: Contractors can be brought in for short-term positions, which may require certain skills only for a specific period. For example, a company may want a Systems Applications Products (SAP) consultant to implement a particular SAP program. This is a short-term project but requires specific expertise. A full-time employee may not be a good in this instance, as there may be no work for this employee after the project.
  • Flexibility: It is easy to dismiss contractors if their performance is not acceptable, because they do not have any rights related to employment. When seeking to dismiss full-time employees, companies have to follow strict procedures. There is a risk of failure, which may mean them paying out compensation.

Who can become a contractor?

Professionals who want to work on their own:

Professionals may want to work on their own for various reasons, such as higher rewards, lower taxes, better work-life balance, more opportunities to learn and grow, greater flexibility, or more creative freedom.

For example, a highly-skilled IT professional, say an Oracle Database Administrator, realizes that he can make more money by becoming a contractor. Or it could be that the professional desires a better work-life balance and wants to do work as per his own flexibility. So this professional may want to leave a full-time job and take up contracting.

Professionals with full-time jobs and who want to be contractors on a part-time basis:

UK laws allow a person to be both employee and self-employed, eg take up part-time contracting jobs, in addition to working for a company. Some people take up part-time contractual assignments either to supplement their income or to test the market to become full-time contractors eventually.

For example, an accountant can become a contractor. An accountant may want to take up independent assignments after their normal working day finishes or at weekends, for a higher income. They could choose to become a contractor to facilitate this.

Features of contractors:

Being a contractor is very different from working as a full-time employee. Let's look at some aspects, which distinguish contractors from employees.

Place bids or submit quotations to get work:

Contractors need to submit a bid or quotation for securing a particular job. Let's say a company is hiring a manufacturing engineer on contract. In such case, the applicant has to submit a bid that will include the rate per hour/day/task. Based on different bids and the qualifications of the bidder, the company will shortlist one or more contractors to suit their requirements.

Example 1: A corporation is hiring a site engineer for three projects. The scope of work is surveying 80 properties and providing their submissions to the CAD team within eight weeks. The job posting has provided a compensation range of £16 to £20 per hour. To get this project, different engineers will submit their quotations or bids to the client, which will include rate per hour and estimated number of hours required to complete the project. Based on the bids submitted and the qualification of the engineers, the client will shortlist one contractor.

No direct reporting:

Contractors do not have any immediate bosses in their contracting company. They may have certain objectives, and they will have to work closely with certain people in a team, but they do not directly report to one boss.

Example 2: Continuing with the above example, if the company was hiring a full-time employee for the job, the employee will have one boss in the CAD team, let's say the head of CAD team. However, in case of a contract, the contractor may have a main point of contact in the CAD team, but that person is not the contractors boss. The contractor is free to do the work in his way as long as he can get the desired results.

Payment by hours and days:

Contractors are not paid a fixed salary. Based on the terms of the contract, contractors are usually paid either on a daily or an hourly rate. In a daily contract, clients will set a rate per day, let's say £300, for a fixed number of days. Whereas in an hourly contract, the payment is done on the basis of hours of effort.

Example 3: Let's say a client requires a CNC programmer for a certain period. The broad scope of the work is programming and creating/editing drawings and figures. The client is offering a rate of between £14 and £16 per hour. Unlike a full-time job, where the programmer will be paid a fixed salary, the contractor will be paid for the number of hours they work.

Submission of invoices:

Unlike full-time employees, whose salaries are credited every month without any paper work, contractors need to maintain timesheets and submit invoices of the work done by them to their companies/clients. Depending on the contract terms, they need to submit an invoice every week, every month or every calendar month.

Example 4: Continuing with the above example, the CNC programmer will be required to maintain a timesheet and calculate the number of hours. Based on the number of hours, he will have to submit invoices every week. So in a week, if the programmer has worked for 30 hours at a rate of £14 per hour, he will be required to submit an invoice of £420 every week. He will be paid for the services only upon submission of an invoice; this is not expected from a full-time or permanent employee.

Pay National Insurance and tax independently:

Contractors have to pay National Insurance and tax on their own. So if a client is paying £420 per week to a contractor, this pay will be without any deductions for national insurance and income taxes. The contractor has to manage their own accounts and finances (although most contractors use the services of a professional accounting firm or Umbrella Company).

Work defined by a contract:

The contractor has to enter into a 'contract for services' or consultancy agreement with their client. This contract will include the terms of the contract, the rate per hour/day, specific tasks and assurances etc. This is different from an employment contract.

Conclusion

As you can see, the demand for contractors is increasing in all fields, and it's not too surprising because companies have many reasons to hire contractors. For those of you who are transitioning towards becoming full-time or part-time contractors, you should keep in mind that being a contractor is very different from being a permanent employee. One of the key differences is that you need to manage your invoicing and accounts independently, whereas in full-time employment you may have an in-house payroll and accounts team for your assistance.

Our site has many free tools for new contractors, which can be useful for activities like managing timesheets and creation of weekly or daily invoices. For those who are interested in hiring a professional accounting firm, Accounts Direct has solutions for all the accounting needs of contractors.