Everything you need to know about IT contracting

Whether you’re thinking of making the switch from employee to self-employed, or a seasoned contractor looking for information to run your business, this guide is for you.

While contracting can be lucrative and offer flexibility that employment doesn’t always, it also comes with plenty to think about other than the day-to-day job in itself. Read on to find out what else you’ll need to think about when being your own boss.

So, before you take the leap, think about...

Earning potential

One of the biggest perceived upsides of contracting is the potential to earn more.

However, it’s worth doing some research before taking the plunge. As with salaries in general, contracting rates vary hugely depending on a number of factors, from your unique skill set, to experience, the industries you’ll work with, supply and demand - and even the wider economic environment.

IT Jobs Watch collects real-time data on UK IT contractor roles and their daily rates in the UK.

Choosing a business structure

While many contractors go the route of limited company, there’s also the option of joining an umbrella company.

What's an umbrella company, you may ask? An umbrella company acts as an employer in a sense. It takes care of your administrative duties, such as taxes. This makes you eligible for employee benefits such as statutory sick pay, statutory parental pay and holiday pay that you otherwise wouldn't be able to get as a self-employed professional. Some umbrella companies will even take care of your insurance. However, bear in mind that they will charge you a fee for their services.

Getting business insurance

Business insurance is something that all self-employed professionals should at least consider, as they will not automatically be covered by clients’ policies which will typically only cover liabilities relating to their employees.

Deciding on which insurance you need as a contractor is dependent on the risks your business faces, but we've listed some popular covers for IT contractors below.

Professional indemnity insurance

Often required by clients, professional indemnity insurance, is designed to protect your business against a range of risks, such as mistakes in your work, compensation claims, contract disputes and intellectual property disputes.

Public liability insurance

Public liability insurance protects you if you cause injury or property damage to a third party, either at your home office, co-working space, at a client’s offices, or when out and about. You may think that this isn’t relevant to you, if you’re mainly office based, but if you spend a lot of time going to events and visiting clients, this will increase your risk exposure.

Business contents and equipment cover

If you’re using your own equipment to carry out work (e.g. laptops, tablets or phones), you may want to consider contents and equipment insurance. Be sure to check exactly what's covered and what isn't as policies may have specific requirements around the maximum value of each item, where they are stored and whether any security measurements are needed.

Cyber insurance

If your equipment contains important data or client information, you may want to consider cyber insurance. Cyber liability insurance can protect you for a breach of data protection laws (where insurable by law) and your liability for handling data, as well as cover for extortion, system rectification costs, plus PR expenses and financial loss due to system downtime.

Legal protection insurance

Designed to give you access to the same expert legal support that larger companies may have in-house, in the areas of IR35 and tax enquiries, legal advice and compensation awards, legal protection insurance is a popular choice for small businesses.

Sorting out financial admin

Accounting related tasks are a downside for many self-employed professionals. With the Government’s roll-out of Making Tax Digital, using digital accounting software throughout the year will make your life easier come tax season. We’ve done the research for you and put together a list of the best accounting software for small businesses.

Setting up a business bank account

Business bank accounts make it far easier to separate your business and personal finances. Not only that, but many include features that make it easier to link up things like accounting and payroll software, which can make your admin simpler to keep track of. We’ve put together a list of some of the best business bank accounts available to help get you started.

IR35

IR35 (Inland Revenue press release issue no. 35) is a big topic for contractors.

In summary, it's an anti tax-avoidance legislation that exists to ensure that contractors acting as employees are treated by clients as employees rather than contractors.

This can lead to tax issues if, for example, it’s discovered that a contract you carried out was ‘inside IR35’, as opposed to ‘outside IR35’ and therefore you should have been treated as an employee by the client - and paid taxes accordingly. For more information on IR35, check out our guide to IR35 for contractors.

Common challenges faced by IT contractors

Job (in)security

If you value the stability that employment can offer, contracting may not be for you. Unlike employees, contractors always need to be thinking about their next gig - and how to find it. That said, once you’re established and have a network of satisfied clients, you may find that opportunities come to you easily, making gaps in work less of an issue.

Finding work

As with finding employment, there isn't just one way to find contracting work.

A well established contractor will typically find new gigs directly with clients, but until you’ve built up a network of satisfied clients, it can help to find clients through the traditional route - specialist recruitment agencies that have relationships with large employers.

A knowledgeable and well-connected recruiter will then send your CV to any relevant openings and offer you the pick of the available jobs at any one time. They can also take away the headache of negotiations, by having these discussions on your behalf. However, the downside is that they will charge a fee, which will impact your rate.

Growing your visibility as a subject matter expert can be helpful for generating more work organically, whether this is online, through a blog or social media platforms such as Twitter and LinkedIn or at networking events and conferences in your area of expertise.

Cashflow

Cash flow is a common concern of self-employed professionals who earn a variable income. Proving that you’re able to pay rent or getting a mortgage as a self-employed professional is more difficult without a stable monthly income. However, it’s not impossible - you may just need to jump through a few more hoops.

Getting paid on time

Some things you can do to put yourself in the best position to get paid on time are:

Keep a written record of all communications. Firstly, for clarity on what’s been agreed and secondly, so you have credible evidence if you need to take action later on. Even if it's something that's been agreed in conversation, get it in writing.
Find out what the established process is around paying contractors. If there isn’t a process, make sure you set one out with HR/finance so that you know when you can expect to be paid.
Send out invoices as quickly as possible and make sure it includes everything that’s needed. We’ve put together a downloadable invoice template.
Consider asking for a deposit upfront. This isn’t something that will necessarily work for all clients, but may be something you want to consider if you’d like to work for a client but have consistently let down by them in the past.

Remember: All companies have the right to charge interest on a late payment under the Late Payment Debts(Interest) Act 1998 and more recently the EU Late Payment Directive 2013.

While this isn’t advisable for every client who pays a few days late, it’s an option where late payment is persistently occurring, as a means of covering your costs and inconvenience.

IT contractor FAQs

Can a contractor work for multiple clients?

In short yes - but it’s important to ensure that none of your contractual obligations conflict.

How long can a contractor work for a client?

While there is no maximum time limit as to how long a contractor can work for a single client, it’s important to ensure that as a contractor you’re not working as an employee in all but name.

What’s the difference between contractor and employee?

What does it actually mean to be a contractor as opposed to an employee? In terms of practical differences, it’s much the same as being self-employed vs an employee. Therefore it can be split into two categories: administrative responsibilities an employer has for its employees and benefits that employees typically receive as part of their employment contract.

Administrative responsibilities

Insurance
Tax

Benefits

Holiday
Sick pay
Parental leave

Other differences which are more subjective are income security and stability, which can impact things like your ability to secure credit cards or loans. Check out our article ‘Contract vs permanent work - which is best?’ to help you weigh things up if you need more information.

What’s the difference between contractor and consultant?

A consultant is a type of contractor. As a consultant you would typically work shorter contracts involving advisory work rather than carrying out the brunt of the work itself.

Can I get a mortgage as an IT contractor?

The good news is that yes, it is possible to get a mortgage as a self-employed person. However, it’s likely to involve more admin and stricter terms than for an employee.

Do contractors need public liability insurance?

As a contractor, you are either self-employed or working under an umbrella company. A client’s public liability insurance is likely to only cover its employees, therefore you’ll need to have your own public liability insurance.

The 5 biggest risks facing app and software developers As two of the most dynamic and innovative industries of the moment, app and software development roles are increasingly sought-after amongst IT contractors. Research by AppAnnie found that worldwide app downloads were up 15% year-on-year in 2016, while the revenue paid to developers increased by a staggering 40%. If you’ve got the skills, there is no better time to be working on app or software development projects, with plenty of demand from clients keen to deliver new customer experiences. Just make sure you’re aware of the possible risks involved, and how you can cover your back: Breach of contract: Software and app development can be notoriously unpredictable. You’re never sure how long a project is going to take, or what obstacles you’re going to come across during the process. But, if you’ve agreed something in a client contract that you’re not able to deliver on, or they’re not happy with the final product, as a contractor you could be held responsible for any financial losses that result. Your best strategy is to make sure you have a watertight contract, drawn up by a specialist lawyer, while also investing in professional indemnity insurance (PI), to cover any legal costs, fines and financial losses, if you do face a claim. Intellectual Property (IP) or copyright infringement: There are two sides to this issue; protecting your own IP -or that of your client - while also making sure you don’t infringe on somebody else’s. Everything from source codes to designs, name, logo and any written content, can be covered by IP. Clients are likely to ask you to sign an NDA (non-disclosure agreement) before starting work to ensure their sensitive information and ideas don’t get out – and give them recourse to take action if they do. It is also likely that they have trademarked, copyrighted or patented their IP to protect it by law. When using the IP of others as part of your work, make sure you or your client has licenses to do so, or you could be facing a claim. Again, PI will cover your back if you do miss anything as part of your work. Data breach: If you build an app or software that collects user data, such as names, email addresses, dates of birth, or telephone numbers, then you could be held responsible if it turns out to have security failings. That means it must comply with data protection laws, both in the UK and any other market where the app will be available, and your client could face fines of up to £500,000 for non-compliance. You can find out more about the General Data Protection Regulation at the Information Commissioners Office. You should also consider cyber liability insurance, which will cover your legal fees, fines (where insurable by law) and any other expenses, in the event of a data disaster. Defamation: This is the act of damaging an individual or company’s reputation through libel or slander. While your own work is unlikely to do this (although make sure it doesn’t!), you could be stung if your app or software allows user-added content, in which case you could be liable for any defamatory, infringing or unlawful content that is posted by others. You – and your clients - have three options in this situation: you can leave all content unmoderated; you can moderate the content before it appears; or you can moderate it after it appears. The majority of businesses go for the latter option as it means you’re not liable for anything defamatory. But whichever you choose, you need to have a takedown policy in place, and again, professional indemnity can ensure you’re protected for any oversights. Cyber attacks: Cyber criminals are becoming more commonplace and sophisticated all the time. Not only are your own systems, files and data at risk, but you also have a responsibility to ensure your work is as secure as possible and doesn’t inadvertently introduce any bugs or viruses into a client’s systems. It goes without saying to have up-to-date anti-virus, anti-malware and firewalls in place, but don’t forget to get your processes up to speed as well, to reduce the chances of human error. Check out our ultimate guide on cyber security and remember your last line of defence is cyber liability insurance, which will cover for extortion, system rectification costs, PR expenses and financial loss due to system downtime. Contracting can have its ups and downs and you need to stay motivated and switched on to make a success of it. Getting the right insurance gives you peace of mind and head space to focus on what you’re really good at -and what you get paid for – knowing that you’re protected, whatever happens.

(#_ftnref1)Exploring the UK Freelance Workforce in2015 by IPSE