Financially speaking, what drew you to contracting? This was the question put to independent workers by Qdos recently, and with nearly 1200 responses, the answers could well have conclusively dispelled one of the most damaging myths to have plagued contracting for years.
The survey reveals the vast majority of contractors – often unfairly perceived to be tax dodgers by revenue hungry Governments – do not work independently for the limited tax advantages that come with operating through a personal service company.
The few chances to pay yourself tax efficiently when contracting sit bottom of the pile and are least important to independent workers, 94% of whom also revealed they feel stereotyped as being driven by the prospect of paying less tax.
Contractors are clearly motivated by something different, and not, as HMRC would have you believe, to avoid or flat out evade tax. As you might know, the Government has made its thoughts on contractors clear when rolling out IR35 reform to the public sector last year and now by announcing in the latest Budget that further changes will be enforced in the private
sector in 2020.
Qdos research suggests the freedom that comes with contracting is more of a financial incentive to work this way than the opportunity to operate through a personal service company and outside the scope of IR35.
According to the data, unlimited earning potential is the biggest pull to contracting, with 29% (the largest proportion of the survey respondents) viewing the power to set their own day rate as the main attraction.
By their very nature, contractors are enterprising individuals and a quarter were driven to go self-employed for the freedom it gives them to run more than one business at a time – something permanent staff are often prevented from doing by their employer.
You might argue that this a clear sign contractors view themselves as business owners in their own right. If these statistics are anything to go by, independent workers don’t use their limited company status to fleece the taxman when it comes to IR35, nor try to make the most of tax breaks, which are now few and far between.
This is a feeling echoed by Alison Parfitt, a Commercial Consultant and author of The Happy Contractor, who said:
“Being self-employed is a way of maximising the financial return on my skill-set, in return for accepting a different risk package to salaried employees. To make a financial success out of being self-employed, you need to search out and line up work, keep your clients happy and invest time in running your business properly. This isn’t always easy, but it is rewarding.”
Without doubt, there are many financial reasons for going it alone. Some see contracting as the first step towards building a bigger business, while others, including Alison, view it as the best way to get paid on ability.
There are plenty of contractors who do it to be in total control of their financial destiny – and with true job security in permanent employment perhaps a thing of the past, you can only admire this initiative and contractors’ desire to take full responsibility for their earnings.
Together, these ‘other’ financial reasons for contracting account for 26% of survey respondents, compared to the 20% who were motivated by the opportunity to pay themselves tax efficiently.
This is assuming that the decision to become a contractor is a financial one at all. It’s worth bearing in mind that in a previous Qdos survey, almost half (48%) of contractors revealed they started working for themselves for the freedom and independence it offers, compared to the 31% who started contracting for financial reasons.
The cliché that contractors work independently for tax reasons is understandably something
they would like to shake off, as Alison Parfitt pointed out with feeling.
“For me, the primary motivation was, and always will be, freedom. Freedom to be my own boss and run my own business, to decide which clients to work with and how and when to work. I really enjoy this. Being better off financially is not a given, it depends on whether you can make a success out of it or not. As all self-employed people know, if you don’t work, you don’t get paid.”
Contractors will want the Government to listen to this message. Following changes to the IR35 legislation, the Chancellor has made it clear he believes contractors are trying to outwit HMRC. This is evidenced further by The Treasury’s claim that 90% of the contractors who should be working inside IR35, currently sit outside the rules.
The powers that be must rethink their stance, because contractors need the Government on side. These individuals go into business on their own for other reasons – even different financial reasons. But that isn’t to say they don’t need a tax system that works for them and not against them, and one that allows them to balance out the risks of self-employment. Far from it…