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Contractor doctor: can I take my first contract at the company i'm planned on leaving?

Dear Contractor Doctor

I've decided to go contracting and handed in my notice at my current permanent employer. However, they asked if I would consider staying on for 3 months as a contractor.

What are your thoughts?

[Name supplied]

Contractor Doctor says:

When a permanent employee decides to become a contractor, and has a good relationship with the manager, and the manager knows their employee wants to become a contractor and so offers a contract to hold onto them, be warned. It is of course a tempting offer. You know the work, the people and the workplace, and you could suddenly be earning a lot more money for doing the same work you did before.

But, it is generally not advisable to for contractors to start their first contract with the company they work with a a full time employee.

Reasons you are leaving

You are leaving for many reasons, including quality of work reasons, and not just because you want to perhaps earn more money. Hanging around on a different pay structure won't change the work that you do there or how you are treated.

Will you be treated differently?

You will still be treated like a permanent member of staff still. You cannot blame them. You won't thus benefit from the advantages of contracting, in terms of lack of politics, etc.

IR35 - you will almost certainly be caught

You will most likely fall foul of IR35, or be at significant risk of it, meaning your take home pay could be considerably less compared to working elsewhere where you are not caught by IR35.

IR35 is a term you will become very familiar with as a contractor, because it makes such a difference to how much you can potentially earn as take home pay, after tax.

HMRC will almost certainly assume that if you move from being a permanent employee one week, to doing exactly the same job for the same firm the next, only this time as a contractor, you are really an employee disguised as a contractor.

That means that you will have to pay PAYE, income tax and National Insurance Contributions (NICs) on your contracting fee, and that will considerably reduce what you would earn if you were contracting ‘outside’ IR35, even through your own limited company. You can try to claim you are ‘outside’ IR35, but the taxman won’t believe you.

It is possible for a contractor to remain outside of IR35 when contracting for a former employer, but you have to work that much harder to prove you are not a deemed employee. Not only do you have to avoid falling foul of the standard tests of employment that HMRC will apply if it investigates you, but you also have to clearly identify and demonstrate how your relationship with your former boss and working practices from when you were an employee have changed since changing status from employee to contractor.

The safest route

Often the best for your future CV and career development – is to move on. Explain why you are doing so, because you never know when you might come across your manager again. Then move on to another company – now called a ‘client’ of course – where you will be able to benefit fully from your new contracting lifestyle and increased earnings.

And also remember you decided to leave your last employer for a reason that is unlikely to have gone away simply because you have changed status – old habits die hard; especially ex-bosses’ old habits!

Perhaps you are just getting cold feet and worried about getting a contract. Natural of course, but don't worry too much. You'll be fine.

Good luck with it all.

Contractor Doctor

Updated: 17 April 2018

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