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Contracting is a fantastic way to run your own business, to get the most from your income, and in a lot of cases, enjoy the flexibility and independence that contracting brings.

Sole trader contracting is rarely an option even though it might seem the quickest and easiest way to set up your new business and to start out as a contract worker. Most people assume that you can simply set up as a sole trader contractor in the beginning to see how things go and move on from there. The main realistic options for a new contract worker are to become a member of an Umbrella Company or to set up as a new Limited Company which is the longer term solution.

Is it practical to set-up as a Sole Trader Contractor?

In some cases, an agency may reject working with a sole trader contractor because of the risks involved from an employment law perspective, as from a legal perspective, the individual may be viewed as an employee.

UK regulations that surround agency recruitment and any other employee organisation means that it can be restrictive when working with sole trader contractors. The current law in the UK states that self-employed individuals (e.g. sole trader contractors) are not allowed to be involved with agency work, plus National Insurance Contributions and income tax must be deducted at source.

It is also a risky strategy for recruitment agencies to work with sole trader contractors because of the strong possibility of being left with a tax liability if the individual ceases trading. Under the Managed Services Legislation of the debt management provisions, it will be left to the agency to repay any unpaid tax to the HMRC on behalf of the sole trader contractor.

Clients and sole trader contractors

There have been instances in the past where an individual has worked directly for a client of a business or organisation as a sole trader contractor, even though it has to be said that this is extremely rare due to legal and financial risks.

The greatest risk to the business or organisation is that the sole trader contractor could claim certain rights as an employee from the client. ndustries such as construction would be a major example where we see a higher level of employment tribunals due to the nature of work.

There is also a strong risk that due to the fact that the sole trader contractor is classified as not being a legal entity (e.g. Umbrella Company or Limited Company), then they become a high risk for removing the client. Due to the fact that the sole trader contractor works more closely with the client, it can be a risky strategy for a business.

Preferred supplier agreements or exclusive agency contracts

In some cases, especially in larger organisations or in the public sector and private sector, there will generally be a preferred supplier or exclusivity agreement with a single agency or a panel of agencies.

A sole trader contractor can attempt to take on the role within the larger organisation, however, the preferred supplier agreement could generally prevent this from happening.

If you decide to go down the route of applying for the work through an agency, then they may require you to incorporate rather than allowing you to work as a sole trader contractor.

Sole trader contractor risks for the individual

Sole trader contracting also comes with some risks to the individual which can be financial as well as possible legal risks. From a legal perspective, HMRC does not consider the sole trader contractor to be a separate legal entity from the director and shareholder behind them.

From a potential financial risks perspective, there can be an extremely high risk for the sole trader contractor for their personal assets being lumped into any legal claim for compensation. This can obviously include things such as their homes and other assets which under normal circumstances would be protected.

If you want help to set up your new contractor business or to discuss how and why sole trader contractor would work for you then contact one of our team of Gorilla Accounting experts today.