Contracting - What's it all about?

Legal Definition of a Contractor

Contract OF Service V's Contract FOR Service.

Everyone in permanent employment should have a contract of employment or a contract of service. You are entitled to one if you work for an employer for more than eight hours a week. This contract is a contract of service. It gives the employee the benefit of protective legislation, including the Holiday's Act 1973, the Unfair Dismissal Acts 1977 and 1993, the Minimum Notice and Terms of Employment Act 1973 and several others. An employee also pays PAYE and PRSI and contributions are made by the employer in respect of the employee's PRSI. As a contractor you are an independent business person, and the contract you work under is a contract for services. Once you accept a contract for services you are not protected under the employment legislation mentioned above. Therefore terms of any contract for services you sign are very important.

SETTING UP AS A CONTRACTOR

The are a number of decisions you must make when you decide to set up as a contractor.

  • 1. Limited Company
  • 2.Register for VAT

Limited Company

A limited company must be set up and registered with Companies Registration Office. It must have at least two directors and shareholders and the cost of setting up the company is about €450.00

A limited company must prepare annual accounts and a summary of these accounts must be lodged with the Companies Registration Office.

Corporation tax is charged on the company's profits at 20 per cent. Preliminary tax is due six months after the company's year end and its return of profits form CT1 must be submitted to the Inspector of Taxes within nine months of the company's year end.

From a personal point of view the director would no longer have a large income tax bill every year. He/She can decide the level of salary he/she wishes to take and PAYE and PRSI will be deducted from this amount on a monthly or weekly basis as suits him/her. The company will obtain a deduction from its profits for this salary. In the case of directors with a shareholding of more than 15 per cent in a company, employer's PRSI is not an issue.

From a pension point of view the company can contribute - without restriction to a pension for a director - and can obtain a deduction from profits for this amount. The director is not liable to account for any income tax on these payments made. on his/her behalf

If a director has his/her own motor vehicle he/she can claim a mileage allowance for any business miles he/she travels on behalf of the company. The mileage rate depends on the car and on the annual business miles travelled.

The company can obtain a deduction from its profits for these payments and the director is not taxed on them. However, where mileage is claimed the director must pay his/her own car insurance, motor tax and petrol costs.

A company can have any yearend it chooses and no commencement or cessation provisions apply.

If a company is late filing its returns of profits from CT1 a surcharge of 10 per cent arises. A director of any company must also submit a tax return for each year and failure to do this will result in 10 per cent surcharges arising on his income tax. bill for that year

As a company is a separate entity from its directors, no director can be held personally liable for the debts of the company, unless a personal guarantee is given in any case.

Advantages of setting up as a Limited Company.

Limited Liability: A limited company provides an amount of security to a contractor in that most cases any liabilities or losses are limited to the company. With recent legislation, if there is evidence of fraud, company directors may become liable for company actions.

Tax Planning: Trading through a limited company can provide better tax planning opportunities for contractors, e.g. restrictions of pension payments.

Disadvantages of setting up as a Limited Company

Costs: A limited company costs in the region of 450.00 + VAT.

Red Tape: Incorporation of a limited company involves an amount of legal documentation being prepared and kept up-to-date on an ongoing basis.

VAT Having decided to trade as a limited company the contractor must consider VAT. In many cases the contractor may not have the option as to whether or not to register for VAT as all contractors with sales excess of €25,000 must register for VAT.

The implications of VAT registration are as follow:

  • VAT must be charged on all invoices issued, at 21 per cent.
  • VAT on business expenses (other than entertainment and motor) can be reclaimed.
  • Payments of VAT liabilities are made to the Revenue Commissioners every four months.
  • Proper books and records relating to VAT must be kept

Income Tax
All contractors must make annual returns. These returns refer to the contractor's profits for the year and taxes are calculated based on this. Most Contractors use accountants to prepare these returns for them.

CHOOSING BETWEEN CONTRACTING AND PERMANENT WORK


The biggest mistake for a potential contractor to make is not to weigh up the pros and cons of contracting from a marketing and business perspective.

ADVANTAGES OF CONTRACTING

Money: Usually, contractors strike a better rate than would be achieved by permanent employees

Tax-Efficient: Contract work can be more tax efficient than salaried employment assuming organized tax planning through the contractor's business.

Self-Training:
Contractors can chose their own form of training (tax-deductible), and hence can keep abreast with leading technology

Flexibility:
Contractors regularly move to varying companies

Experience:
Contractors are exposed to a variety of systems and organizations and this broadens their knowledge base

Social:
Contractors regularly meet new people through different assignments

Politics:
Contractors are usually not involved

Independence
: A contractor in his/her own boss

Holidays:
Not being fixed to set annual holidays. This means extended holidays may be taken in between contracts

Travel:
Experienced contractors can market themselves in most countries in the world

DISADVANTAGES OF CONTRACTING


Paperwork:
Contractors must keep records of all transactions so they can prepare income tax and VAT returns

Tax: The contractor is responsible for all tax payments, hence he/she must pay on time or face interest and penalties

Training: There is usually no in-house training provided to contractors

Involvement
: A contractor is not usually involved in management decisions

Adaptable: Contractors will work in continuously changing environments and must be very adaptable to this Insecurity: Contracts are for specific periods of time and tend to range from 3 months to 1 year only

Social Welfare: Contractors do not receive pay-related social insurance payments such as sick pay or unemployment benefits Accountants: In most cases, an accountant will need to be appointed.

Cashflow: Contractors must be conscious of cash situation at all times so they can pay tax when it falls due

Holiday/sick pay: holiday or sick pay when absent from work.