Setting up as a contractor is an attractive career move for many individuals to make. However, the plethora of complicated tax legislations that surround contracting can dissuade many potential contractors from committing to this chosen path. Here is a brief guide detailing some of the most common tax concerns that are likely to affect those in the world of contracting.

HMRC Tax Penalties

The UK HMRC tax authority can impose a range of penalties upon contractors who fail to produce accurate or prompt tax paperwork. Most contractors are observed to fall foul of the Self Assessment or Corporation Tax Return rulings, although VAT and Pay As You Earn Schemes (PAYE) can also prove to be problematic for some. Whilst carelessness can sometimes be excused by HMRC, and penalties can be duly suspended, repeat offences are rarely looked upon with such leniency, and such contractors will typically be filed as ‘high risk’ targets for future tax investigations.


Value Added Tax (VAT) registration can save contractors operating through a limited company a substantial amount of money. In certain cases VAT registration is compulsory; as in the instance of a contractor limited company that experiences a gross annual income of more than £77,000. Sometimes VAT can create problems for contractors, such as in circumstances where the direct client of a contractor is not VAT registered themselves. This situation would lead to a contractor being unable to claim back any VAT on their invoices. VAT inspections are also to be expected, and VAT that is claimed for unnecessary purposes can lead to the recall of up to 6 years previously claimed VAT.


IR35 is one of the single largest concerns for all those who earn their living through contracting. Since April 2000, this tax legislation has meant that some contractors can be taxed as though they are directly employed by their clients; resulting in a significantly higher tax rate that can drain monthly wages by as much as 20%. The legislation has been controversial, but it was introduced to combat ‘disguised employees’. Specifically, these are one person businesses that were being treated as self- employed when they should have actually been bound to a company’s payroll. Whether or not a contractor is caught by the IR35 legislation is not a cut and dry question, and because of this it is always best to seek professional advice relating to your IR35 status.

Specialist Advice

Most financial decisions that are encountered by a contractor, whether they are operating as a sole trader, a limited company or as part of an umbrella company, are best taken in conjunction with expert advice. Here at ICS we understand exactly what it takes to function in the world of contracting, and are able to lend our accountancy and administrative assistance to a comprehensive range of contractors. Wading through paperwork is a taxing endeavour, and our experienced providers will ensure that your contracting business is operating in full compliance with all of the necessary rules and regulations. Contact us now for further information.