As a starting point, becoming a sole trader is a straightforward route towards working for yourself. However, for many contractors, being a sole trader, in the long-term, is not a workable, practical solution.
“Whereas being a sole trader should offer you freedom, there are certain critical issues for agencies and other potential hirers.”
Sole Traders and Legal Status
Sole traders are not viewed as a separate entity by UK law, so if their business gets into debt they are personally liable as the business owner.
“You could lose personal assets and, crucially, be at risk from litigious clients. From a hiring perspective, clients can be wary that sole traders will be seen by law as employees.”
Along with the issue of employee rights for employers, when it comes to agencies there are questions around debt transfer and legislation that requires workers to be paid via PAYE.
What Works for Agencies?
Agencies and other UK recruiters have to comply with large amounts of regulation.
The law requires that agency workers have their income tax and National Insurance contributions deducted at source, and that these workers cannot therefore be sole traders.
There is also managed services legislation, which can make agencies liable for the unpaid tax liabilities of contractors who have ceased trading, if they owe money to HMRC.
“The bottom line is that if you’re a contractor looking for agency work, you can’t simply remain a sole trader”
What Works for Clients?
Some contractors do work for their clients directly as sole traders. However, this is fairly unusual, for various reasons.
“For clients, the risk is that sole traders could claim employment rights from them. What the client is looking for is a degree of separation.”
There is also the issue where large organisations looking to hire contractors will have preferred or exclusive arrangements with recruitment agencies.
This is likely to lock the sole trader out of any potential opportunities, being unable to either compete directly against the agency for work with the client; or to sign up to the agency themselves.
What are the alternatives available to contractors who are sole traders, if they do not want to limit their opportunities
Alternatives for Contractors
“A sole trader could, for example, set up as a limited company. This does bring with it added responsibilities as a company director, including filing yearly annual returns and completing annual accounts.”
Another option is to operate through an umbrella company.
“Umbrella companies offer a clear structure to contractors while easing their administrative burden, becoming, effectively, employees of the umbrella company, into which their salary is paid”
For contractors, the imperative is to ensure their services are marketable and that they are employable for their chosen market.
“Either way, making the step forwards from sole trader needn’t be too difficult, with the right kind of support, such as an umbrella company, or professional, limited company accounting services.”
For an additional read, please visit Which Business Structure Offers Contractors Reassurance?