As a contractor you may only work for one or two customers. Quite often the nature of the working relationship will be almost as employer and employee but there are substantial tax savings to using a company (on both sides) to working as a contractor.
The advantage for the ‘employer’ is the avoidance of PAYE costs, holiday pay and the risks of employment legislation. The advantages to the contractor are less tax, more flexibility and probably a higher rate of pay than being an employee.
As a contractor, you need to make sure you pay the company taxes which could be PAYE, VAT and Corporation tax. Failure to pay these and getting into arrears may mean liquidation.
It is worth setting a budget for these costs, so you know how much needs to be put aside every month. If you get into arrears for whatever reason, then it is worth taking some insolvency advice early on to make sure it is safe to continue to trade. You do not want to end up liable for the company debts and that can happen if you just continue to allow the financial position to get worse. This is known as wrongful trading.
In addition, HM Revenue and Customs have special powers (but rarely used) to make you liable for the company tax due.
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