When working as an IT contractor, providing services to a company, there are two main routes that you can take. The first is to set up your own independent limited company. In that case you would be self-employed person who is providing services to the IT company and invoicing for payment for those services directly. The other option is to use an Umbrella Company.
An Umbrella Company is a specialist accounting company which will handle all of the invoicing, VAT returns, tax administration and bookkeeping associated with your contracting role for a monthly fee. The contractor is usually set up as an employee or the Umbrella Company for the duration of the contract. Examples of companies that provide this service in Ireland include: Icon Accounting (www.iconaccounting.ie), Prima (www.prima.ie), Contracting Plus (www.contractingplus.com) and Accounting Pro (https://www.accounting-pro.ie).
If you are intending to take on a single contract assignment, if your contract rate is on the low side, or if this is your first time working as a contractor, this may be the best option for you as it eliminates the expense and administration of setting up your own company.
If you are planning on being a regular IT contractor you are probably better off to set up your own limited company and managing it yourself.
Setting up your own limited company
Many long term IT contractors choose to set up their own Limited Company. A Limited Company needs two have at least two Directors and shareholders and be registered with the Companies Registration Office (CRO). At least one of the directors must be resident in the EEA. The company must prepare annual accounts and lodge a with the CRO. You can set up a company using the services of an accountant, solicitor or company registration agency, choosing your own name. You should allow for at least two weeks for registration to be processed. It is also possible to purchase already registered 'off-the-shelf' companies which you can tailor to your own needs. This is usually a more expensive option but is quicker.
In a Limited Company, the directors cannot be held personally liable for the company's debts. Pension contributions for directors and mileage allowance for a personal vehicle used for company business can be deducted from profits without paying tax on the payments. Where mileage allowance is claimed this can only be in the case of the director using his personal vehicle for which he has paid the car insurance, motor tax and fuel costs.
The following forms need to be completed:
- Form B10 - Appointment of Director and Secretary
- Form B2 - Notification of Registered Office
- Form A1 - Issue of Shares
- Form TR2 - Application for registration for Corporation Tax, VAT and PAYE/PRSI.
- Form 12A - Application for a certificate of tax-free allowances.
The following documents will be provided:
- Certificate of Incorporation: A certificate setting out where and when the company was incorporated, and its registered number
- Memorandum and Articles of Association: The constitution of the company setting out the reasons for which the company was formed and any restrictions on the conduct of its day-to-day business
Value Added Tax (VAT)
Having decided to trade as a limited company the contractor must consider VAT. In many cases the contractor may not have the option as to whether or not to register for VAT as all contractors with sales in excess of €37,500 must register for VAT. The implications of VAT registration are as follows: VAT must be charged on all invoices issued, at 23%. VAT on business expenses (other than entertainment and motor) can be reclaimed. Payments of VAT liabilities are made to the Revenue Commissioners every two months. Proper books and records relating to VAT must be kept.
A very important aspect of setting up as a contractor is to get a good accountant. A good accountant will setup the company for you (if you choose to take the limited company option), will request a VAT number on your behalf and most also offer help setting up a pension and Permanent Health Insurance schemes. A good Accountant is an invaluable source of information and will prepare the books and any submission to the Companies Registrations Office.
The Pros and Cons of Contracting - if you're not sure if IT contracting is for you or what is involved, this article gives an overview of the pros and the cons of working as an IT contractor
"More tax, less benefits: Is working as a contractor right for you?" - an Irish Times article from April 2019