IT Contracting in London: the good, the bad, the ugly

As I'm nearing the end of my fist contract I figured I'd write a short non-technical article about what I learned in those first 6 months as a contractor. This might be particularly interesting to developers that live in the UK (or plan to move there) that might consider this way of working.

What is contracting

First of all, for those of you that are not familiar with the concept, contracting is a way of working that is quite popular in the UK (and possibly other places) that allows better tax-efficiency at the cost of job security. It differs from the "normal" way of being employed (which is usually referred to as a permanent role or permie) by virtue of the fact that you have to open a Limited Company and then sign a fixed-term contract between your company and the client company that states which work needs to be done. Contracts usually run from 3 to 6 months, but there are exceptions to that rule.

It also differs from being a freelancer by virtue of the fact that the work is usually (though not always) performed at the client's site instead of remotely.

You will be generally required to supply and maintain your own hardware and software, although on occasion some clients (usually banks) will insist on you using their own laptops for security reasons.

Payment is usually done at a daily rate and the contract can be terminated (by either side) with little notice - usually 2 weeks (compare that to up to 3 months for my last permanent positions). You will have to handle all the complexities of starting and managing a Limited Company and finding contracts, but in exchange you get better pay and more flexibility with your job.

Getting a contract

Obviously, your success as a contractor greatly depends on your ability to find clients and convincing them that you can do the work they need doing. The good news is that there is a shortage of developers in London, particularly on the Android front, so if you pick a reasonable day rate for your skill level you shouldn't have a problem.

Finding a contract is not so different to finding a permanent position. You would generally create a CV that showcases your skills and experience and publish it on the internet stating that you are interested in contracting work. Then you should expect to be contacted by a lot of recruiters that have positions available.

One difference here is that potential clients will usually not be inclined to wait more than a week or so for you to become available. Contracting work is generally urgent work and the clients generally expect you to be available as soon as possible.

A word of caution here... unlike permanent positions, recruitment agencies for contracting work generally get a percentage of all the money you get paid, hence you are worth a lot more to them. They will go to great lengths to make sure you go with them and they do have a ton of time to spend on chasing you. Expect to spend several hours a day talking on the phone and exchanging emails with recruiters while searching for a contract.

Once the recruiters call and you agree on a potential contract you will be put in contact with the potential client. You then have to convince him of your skills through a series of interviews and/or tests to be completed at home. Expect these tests and interviews to take several hours each and the whole process to take several days.

The paycheck (the good)

So... what is the verdict you ask? Is it more lucrative than being a permie? For me it is, although due to the complications with taxes, deductions etc it's hard to say by how much. It does feel to me like I'm getting about double the money, even after taking plenty of vacation days during my contract.

Your mileage may vary though as it depends on your spending habits. If you do spend a lot on hardware and gadgets that help you in your work (read: can be justified as a business expense) you can get more. If not, then you get less. A good accountant can help here.

Caveats (the bad)

In case you were wondering why isn't everybody employed as a contractor, here is a list of a few of the caveats you need to watch out for:

1. You do not have any paid vacation or sick days. Yes, that's right, you don't get paid if you don't show up, as simple as that.
2. You need to find new contracts on a regular basis (every 3 to 6 months). This may be stressful to some people and don't forget any downtime between contracts is not paid either.
3. No benefits. Since you're not an employee, you don't get any of the benefits your clients might offer their permanent staff. No access to the gym. No medical insurance. No free T-shirt. No training. No Christmas party.
4. You need to keep yourself up to date with the technologies you're working in, probably by doing stuff in your own spare time or during the downtime between projects. Contractors are generally expected to be very well prepared and hit the ground running. You don't have the luxury of saying I don't know this, but I'll learn it at an interview.
5. Permanent staff will sometimes treat you as an outsider. You might also have to report to... less competent permanent staff (though I was lucky so far in that respect). You need to be able to leave your ego at home, put your head down and do the job.
6. There are no real avenues of promotion after a certain level of seniority. The short notice period means there are very few positions as lead and even fewer as manager for contractors.
7. Keeping in touch with people is obviously more important than when being a perm simply because you need to find contracts much more often than permies need to find new jobs. Needless to say, the network helps a lot with that.

Starting and managing a Limited Company (the ugly)

In the UK, starting and managing a Limited Company (LTD) is quite painless, however if you do make any mistake you are liable to pay serious fines, hence my strong suggestion is to get an accounting company to do it for you. There are plenty of accountants and some of them even specialize in contracting. Their services aren't exactly cheap, but considering the fact that they can offer advice on how to operate more tax-efficiently they might end up saving you money.

Choosing the right accountant is a complicated topic... and as many things related to accounting, not particularly interesting one :) I will say I ended up going with Gorilla Accounting because they are using the 3rd party cloud service called FreeAgent to keep track of your finances and also they seem to offer better prices than the competition.

Even with an accountant, there are several things you need to do on a regular basis:

1. Keep receipts for business expenses, scan them and record them into the accountancy software. This is the greatest pain for me, but forgoing the expenses means a big hit to your tax bill.
2. Issue and submit regular time-sheets and invoices. Some (like me) do this on a weekly basis. Others on monthly basis. The more often you do it, the more often you get paid, but the more time you spend doing the paperwork.
3. Pay taxes and bills and record those in the accountancy software.
4. Move money between your accounts and keep track of how much you are taking out.

IR35 (the even uglier)

If you get two Brits together, they start talking about the weather. Odds are, if you get two contractors together they will start talking about IR35. That's the name of an HMRC regulation that aims to prevent tax evasion from people that act as employees but are registered as contractors. Should the HMRC deem you to fall into that category you are liable to pay heavy fines that will probably negate whatever advantage you had by working as a contractor.

You must be ever vigilant to not put yourself into situations that might endanger your IR35 status, such as taking advantage of benefits or working for too many months for the same employer. You must also make sure that the contracts you sign are IR35 compliant, which is not always easy. You can of course deffer this task to specialized firms, but that will cost you some more money.

Conclusion

The bottom line is that contracting isn't for everybody. Getting contracts is hard and moving from place-to-place even harder. The demands are high and the paperwork never-ending. But if you are willing to put up with it you can end up with a much bigger paycheck than otherwise possible.

If you have any questions, feel free to post in the comments section and I'll do my best to answer.