Can I contract as a sole trader?

Operating as a sole trader is the simplest form of contracting. There is no separate legal entity and you can start trading straight away. You don't even have to open a separate bank account, though it is advisable to do so. 

Operating as a sole trader was, at one time, the most popular way of contracting, writes Graham Jenner, co-founder of contractor accountancy firm Jenner & Co.   

Let the game of cat and mouse begin…

Yet HMRC became concerned that significant tax savings could be achieved by workers who, perhaps, worked in a similar way to an employee of the client -- BUT provided their services on a sole trader basis.

HMRC started clamping down. Clients became concerned that they could be liable for tax, national insurance and penalties for failing to operate PAYE and so started looking for a solution that tackled that concern.

So, contractors were advised to provide their services

…through their own limited company (a Personal Service Company). 

Since the contract was between the client and the limited company, not the individual, there was no risk of the individual being considered the client’s employee.  This became very popular.

Yet HMRC became concerned that significant tax savings could be achieved by workers who, perhaps, worked in a similar way to an employee of the client -- BUT operated through their own limited company. 

IR35

This led to the introduction of the so- called IR35 legislation.

Introduced in 2000, the Intermediaries legislation seeks to tax an individual working through their own limited company on the same basis as if they were an employee of the end-client, where their relationship is actually a master-servant one, akin to employment. So IR35 only applies where the individual would be an employee of the end-client, but for the insertion of the limited company in the supply chain. While not particularly successful for HMRC, the IR35 rules did discourage the use of PSCs.

So, contractors were advised to provide their services

…on a self-employed basis to the end-client through an intermediary. 

This worked because, the end-client was protected from the threat that the contractor was really their employee, because the client didn’t have a contract with the contractor.  The intermediary was similarly protected because they did not ‘control’ the contractor (a pre-requisite of employment).

Yet HMRC became concerned that significant tax savings could be achieved by workers who, perhaps, worked in a similar way to an employee of the client -- BUT provided their services via an intermediary.

False Self-Employment Legislation

This led to the introduction of the ‘employment intermediaries: false self-employment’ legislation in 2014. Where a contractor provides their services on a self-employed basis, via an intermediary, and they are subject to supervision, direction or control, they are taxed like an employee.

Intermediaries, who typically are the party that would have to tax the contractor in the above circumstances, didn’t particularly want to operate payroll for contractors who weren’t employees. 

They already had a model for taxing contractors, which was the ‘umbrella model’ (i.e. the contractor is employed by the umbrella company and with tax and national insurance accounted for). Contractors were, therefore, encouraged into the umbrella model.

However, with this resulting in higher tax and national insurance, PSCs came back into fashion.

So, contractors were advised to provide their services

…through their own limited company (or PSC).

Yet HMRC became concerned that significant tax savings could be achieved by workers who, perhaps, worked in a similar way to an employee of the client -- BUT operated through their own limited company. 

Off-Payroll Working (OPW) rules

HMRC’s previous lack of success with IR35, led to the introduction of amendments to IR35 introduced first on April 6th 2017 in the public sector and then on April 6th 2021 in the private sector, whereby the end-client must determine the IR35 status of the contractor -- and can be liable for tax, national insurance and penalties if they incorrectly determine the contract as ‘outside IR35’ i.e. not caught by IR35.

Many end-clients weren’t prepared to run that risk, and so didn’t (and still won’t) allow the use of limited companies, which resulted in more contractors working through umbrella companies.

So, where does the above leave the sole trader option?

Contracts with recruitment agencies...

Sole trader is not popular with recruitment agencies – because agencies are an intermediary and the ‘employment intermediaries: False Self-employment legislation’ applies to them.

Direct contracts with end-clients...

While end clients should be cautious, and make sure they take proper advice on the contract and working terms, there are definitely situations where a contractor could provide their services direct to the end-client on a sole trader basis, with little or no risk to the client.

We are starting to see end-clients agreeing to self-employed contracts direct with the contractors even where they are introduced by an agency. The agency might be paid an ongoing introducer’s fee, instead of making a margin.

Contracts through an intermediary... 

Where there is no supervision, direction or control of the contractor, a contractor could provide their services on a sole trader basis. 

The risk lies with the intermediary, and so they would want to be certain that there genuinely was no supervision, direction or control, and this may make this scenario of limited application.

So, ultimately, can I contract as sole trader?

It is possible to obtain contract work as a sole trader. 

The structure is simple to operate, with no limited company to run. You do need to prepare some bookkeeping records and you will need to set money aside for your tax and national insurance, but an accountant can advise you in these.

Why not ask the question of sole trader usage when considering your next contract because, yes, being an unincorporated business is indeed feasible as a contract worker.