How Long Can a Contractor Work for the Same Company?

One of the big benefits of contracting is that you can choose which work you take on and work for several different people from month to month.

However, when things work out well with a client – or there’s a particularly large job – some contractors may end up working for a particular business for a long time. Likewise, a business may decide to keep using a contractor if they know the quality of work is high and the delivery time is quick.

However, that can leave both parties wondering how long a contractor can work for the same company. Read on as we take a closer look.

What is a contractor?

For some people, the first hurdle is figuring out where you stand. Are you a contractor or something else? In simple terms, a contractor is anyone who sells their services to another party. While they’ll always need clients, they are technically self-employed. According to Gov.uk, this means they ‘run their business for themselves and take responsibility for its success or failure.’

Contractors carry out their work under special contract agreements and invoice the other party for their services. They are not a permanent employee for the company, which is important for tax purposes. And as they are not employed, they are not entitled to the same benefits that permanent employees get.

Contractors who have their own limited company or work as a sole trader are also responsible for their own taxes which employees are not. Employees are paid through the PAYE (Pay As You Earn) system, which deducts tax and national insurance contributions from their pay before it’s sent.

Is there a time limit to how long contractors can work?

The question of how long a contractor can work for the same company has a surprisingly simple answer. There is no maximum time limit. If a contractor and a company are both happy to continue working with each other then that’s perfectly fine.

However, you may want to renegotiate your contract after a while as you build up more experience. After a year of working with a company, for instance, you will have much more value for them – not least because you’re familiar with their business. With that in mind, you may want to use a shorter contract and renew it, rather than immediately signing up for several years.

All that said, the time on its own has no implication for tax or any other legislation. Problems occur, however, when it is not clear what the work relationship is and whether the person providing work is a genuine contractor. If the person providing services is an employee in all but name, this can cause complications and potentially serious consequences. To prevent this type of sham contracting, HMRC devised a set of laws to tackle this and separate fake contractors from real. These laws are known as IR35.

What is the issue with IR35?

Also known as the ‘intermediaries legislation’, IR35 refers to a set of tax laws that came into effect in the early 2000s and are part of the Finance Act. It was designed to stop people claiming to be legitimate contractors while working in the same way as employees.

Because employees typically pay a higher amount of tax and insurance than contractors, people were essentially trying to fool HMRC before IR35 was introduced. They would not pay the right income tax and national insurance in accordance with how they worked.

Similarly, companies using them were not providing them with the statutory benefits that employees get and were not paying the correct National Insurance contributions. HMRC refers to these people as ‘deemed employees’ or ‘disguised employees’. It’s worth noting that in 2020, the responsibility of IR35 will be passed to the company hiring you, including recruitment agencies – as is already the case in the public sector.

How does it work?

IR35 tries to determine if a contractor is legitimately paying a reduced tax rate by examining several factors, including:

  • Whether you choose how, when and where you work
  • Whether you buy equipment necessary for the job or the company does
  • Whether you expect to receive constant work like an employee would
  • Whether you can choose the amount of work that you do
  • Whether you can say yes or no to work which an employee cannot do

Although there isn’t a definitive way to determining genuine contractors from employees, these questions are a good way of making the process easier. While this doesn’t include how long you’re doing the work, ‘disguised employees’ will typically work longer ‘contracts’ as they are essentially full time employees.

How can an umbrella company help?

An umbrella company is a way of enabling contractors to work without worrying about IR35 or the administration of invoices and calculating taxes. Umbrella companies act as an ‘employer’ for their contractor ‘employees’. This means that contractors have the correct amount of tax taken from their pay by the umbrella company. The umbrella company also takes a small fee from the total pay for the cost of using its services.

By using an umbrella company, contractors are paid using the PAYE system just like standard employees. IR35 is no longer relevant to them, as they are just an employee rather than being ‘deemed’ or ‘disguised’.

Make your long contracts easier

Working with the same company can make contracting a lot easier as you no longer need to negotiate new contracts and spend time marketing your services. However, you still need to complete those burdensome tax returns and keep money set aside for unexpected sickness or an annual holiday.

Want to get rid of the hassle altogether? That’s where Umbrella Supermarket can help. Using our umbrella comparison tool, you can compare a selection of leading providers in just a few minutes. Enter your details and get multiple quotes based on your income, then choose the best fit for you.

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