dsmith

Considering making the move to contracting. (I have been in talks regarding the contract so its not a leap in the dark, hoping to find a contract).

Obviously the rate would have to beneficial. Been reading all I can about IR35 and the implications. I'm 99% sure there would be little way round it. This is particlulalry frustrating as I currently work for a small consultnacy - contracted to the customer on a full-time basis. and it would seem to me that I fail all the "tests" even now - let alone as a personal contractor. e.g.

Subsitution - My current Employer (the consultancy) couldn't just replace me - without the customers consent.
Work-Place - I need to work on the customers premises to have access to the Network (whcih I'm designing)
Time-Sheets - I currently have to complete both my employers and customers time-sheets.

To my simple little mind the only difference in me carrying on my current employment via the consultancy or as a personal contractor is which directors pocket the difference in my salary versus my daily charge rate. (I'd rather I was that fortunate director...)

As anyone successfully defended their contracts against IR35 even with "normal" time based contracts....

Deano

MarkO

Work place isn't a worry - you can work onsite and still avoid IR35. Same goes for time-sheets, although the issue here is whether you have any fixed working hours in your contract.

Most important issues for IR35 are:

- working direct. Most service companies would be unlikely to be employed via an agent (particularly one listed as a recruitment agent). If your company has a direct business relationship with the client, it's far less likely to be investigated.

- a right to substitution (i.e., can you be replaced with somebody similarly qualified? If not, then it's you they're employing, not your company, hence you fall within IR35.

- notice periods. I have a clause which allows my client to terminate the contract without any notice. This puts a massive amount of the financial risk onto my company (since I could be without a contract tomorrow). Financial risk is a major point of IR35. Note, however, that I still have to give x weeks' notice before terminating the contract with the client.

- Working hours. I have no fixed working hours. Effectively, I can come and go as I please. In reality I usually work during most of my client's normal office hours. However, their hours are 8-6, I usually work 7-5, because it's more convenient to me. But specifically the contract allows me to b*gger off whenever I like. Clearly a disguised employee (covered by IR35) wouldn't have this luxury.

- Liability insurance - I am required by my client to have Professional Indemnity insurance and public liability insurance. Obviously an employee wouldn't have these things.

- Salary - I pay myself a very realistic salary. Obviously, it makes a dent in the financial advantage of staying outside IR35, but it's simply not plausible to claim you're a real business and take a £7k salary and the rest in dividends.

- Extra-curriculum work - I have other business concerns going on, for example I sell software from my website, and have done work for other friends/aquaintences. All of this (when properly invoiced, etc) goes to show that you're not simply working for a single client day-in, day-out.

Basically, that's all the stuff I've been told. Disclaimer: whilst I've not been questioned or investigated for placing myself outside of IR35, there's no guarantee that it won't happen. I am (and my accountant is) fairly sure that I have the correct business model to fall outside the IR35 legislation, but you just never know what those cheeky chappies at the IR will come up with next.

Ken E

Deano

Try looking on www.shout99.com for info about IR35.

I know someone who sent their contract to the Inland Revenue for assessment and they queried the right to substitution because it said the client could refuse a substitute on reasonable grounds. The client had to confirm what reasonable grounds were, after which the result was outside IR35. The grounds were things like the substitute was not qualified, didn't have relevant experience etc.

There is a difference between the relationship between the consultancy you work for and their client, and the relationship you would have with a client if you were a contractor. That is, the director of the consultancy charges you out to the client, not himself, whereas you would be the director and you would be charging yourself out to the client. They refer to this as personal service, and this is more likely to be inside IR35 than if you set up a company and employed someone else and charged them out to a client as the consultancy does with you. You would probably find that the consultancy would be outside IR35 because of this.

The things you have mentioned about work place and timesheets are not that important, I don't think they qualify as deciding factors. From what I can remember, the most important are right to substitution, mutuality of obligation, being in business on your own account, control, being able to benefit from sound management, risk of financial loss.

This is not the only thing to consider when thinking about becoming a contractor. The IT market is not the best right now and there are a lot of contractors out of work. There have been better times to make the move into contracting than now.
How long is the contract you have been offered ? Will there be further work afterwards ? What would happen if you were there for a week and you were given notice ? Can you get other work elsewhere ? Are you prepared to travel for work or be out of work for a few months ? Are you financially secure enough to manage for a few months without work ? What would you do about pension, health insurance and such things - this has to come out of your rate. Is it financially worthwhile if you were inside of IR35 ?

I'm not trying to put you off or anything, and you may well have considered all these factors, the market's just not very good at the moment. There's always a risk involved in making the move but I think it's a lot higher right now due to the market.

Hope this helps

Ken

dsmith

Mark/Ken - Ta - Very useful info.

It would be "direct". I work pretty much as I please now - subject to an average minimum number of hours. I can forsee the removal of a "minimum" but that wouldn't be a problem (chance of working just the minimum would be a nice dream).

Have you found clients happy with the "substitution" clause?

Do you still bill by the hour ?

As regards some of the other factors. I have limited benefits now i.e. No pension contributions, very limited sick pay etc. So some of the risks are only slightly greater. There are obviously things to be considered such as the likelihood of the contract being terminated etc. And its many of these aspects which are the main sticking points for me personally. In particular can I contractually dump my current employer and work direct (going through my small print now). Do I want to burn my bridges with the current employer to that extent.

Obviously rates would have to be negotiated but its fair to say If I could get 70% of what my employer charges me out at, as a personal rate, and even if I'm 100% within IR35 then I would still double my Net Earnings. If I could avoid the temptation to go and buy an STi the first day, then I could gain myself the financial security to survive a "lean" patch quite quickly.

Deano


[Edited by dsmith - 7/22/2002 5:18:15 PM]

roadrunner

Deano

I hope your contract has a minimum of 12months. Otherwise you are a brave man. I know several good Cisco contractors who now travel miles to a contract that pays peanuts!

I would definitely check to see if there is a clause with your consultancy which prevents you going direct with them?

With the current state on Market I would recommend applying for other contract positions to gauge the response. That way you have some idea on how your full back plan works out.

Payment - you either negotiate an hourly rate or daily rate. My last contract (while ago now ) was an hourly rate working ad-hoc from home All I will say is I am glad I have left contracting!

kryten

now really isn't the best time to be jumping into the contracting market (few jobs and rates are low), but its really no worse than working for someone else.

lots of companies are making permie people redundant at the moment.

the key to ir35 is being a real business. if you do everything to a single client, acting very much like an employee then you're pretty much stuffed.

if you can show non-employee type behaviour as well as multiple income streams then you stand a good chance of being outside.

dsmith

Thanks for all the info.

I would only go if I could negotiate the first contract as a starting point. There is obviuosly a risk that this would not continue long enough until a) the market picks up. b) I have enough stashed away to survive on lower rate contracts. I have recieved another permie job offer recently from an ex-manager which was left as an open offer should I wish to re-consider so I do have other fall-back options. Its a risk which I'm still evaluating. I will say that I too have seen lots of contractors go, but many of those were fankly over-paid for their jobs by any stretch of the imagination. All the "good" contractors I know are still being kept on. I know some rates and some who have gone were over paid, some are worth their money, some are undervalued. Much like most permanent staff as far as I can see .

My own situation is a fairly tangled web but my consultancy contracts me to 1 part of a large group, which then in turn contracts me to another part. That last part is paying a substantial fee (inlcuding my conulstancy rate + mark-up), and offered me the chance to go "direct". I could easily save them a considerable amount whilt still making myself some money.

As I understood it, IR35 is evaluated on each contract an individual service company has, so that (comparativley) minor alternative income streams would not affect the IR35/no-IR35 decision on any given contract ?

There are opputtunities to join forces with one or two others and offer some fixed price services which as I understand it, would almost certainly negate IR35 at the expense of a hugely more complicated relationship both between ourselves and the client.

Hey ho. decisions.

Thanks for all the imput.

Deano

MarkO

Couple of things...

1. Definitely don't buy the STI until you've got a few thou stashed in the bank for a 'rainy day'. When I started contracting I blew all the cash as I earnt it (still do ) and I've never really built up a reserve. However, that was 7 years ago, and so the market was rife with contracts. These days, nothing's definite.

2. Get rid of the 'minimum hours' clause - that's a big no-no, and should be unnecessary (since, as you mention, a 'max' number of hours would usually be more helpful and appropriate!).

3. I bill by the hour. It's easier, and means if you want to take an extended lunch (4-5 hours) the client can't whine, since you're not billing for it. It also makes those emergency late-night overtime sessions more bearable, 'cos you know you're making extra cash for it.

4. Ignore the people who talk about contracting being 'risky' right now, and permie people being made redundant. It makes no odds really - if you're good enough you'll find work, and if you're going to be made redundant it won't matter either way. For example, my client (Fuji Bank) merged back in March to become Mizuho Corporate bank. Far more permie staff were slashed than contractors . In fact, my team (15 people, 4 of whom are permie) was left totally unscathed.

5. Re: the substitution clause, the client should be happy as long as they can vito the substitution on reasonable grounds (e.g., the person is not qualified to take over etc). Might be worth getting a contract lawyer to fine-tune the smallprint though. If you want I can give you a copy of my contract as an example (mail me).

6. Contract length - some mentioned getting a minimum contract of 12 months. To a certain extent, it's irrelevant, particularly if you're on zero notice. However, the longer the better is a good maxim. Don't take anything for less than 3 months, and aim for at least 6.

7. Accountants - get yerself a decent one. I use Trafalgar which I know a few other people here do too. Tell 'em I sent you and they'll look after you very well.

If you want any more advice, drop me a line....

father_jack

Something no-one's mentioned is that you will have an existing contract even though you are permie - this may well stop you going direct with the client.

dsmith

- Apart from that bit...

The fact I actually end up working through intermediarys to deliver skills to the end-cutomer may in this case be the saving grace. I wouldn't actually be contracting to the same company my current employer deals with. so that *may* negate the issue. Its something I'm very aware of and attempting to clarify - without asking people directly

Deano

MarkO

Depends on how the contract is worded.

If you're currently permanent, and considering contracting to the client, that's between you and the client. If you're considering contracting via an intermediate to the client you're currently with, then that'll almost certainly be a no-no. You may be 'allowed' to do it, but the intermediate probably won't be allowed to directly subcontract previously permanent employees of the client.

I got around this because of a convoluted set of circumstances - I was contracted through an agency to a company called Infinity, who sub-contracted me to Fuji-Bank:

Me -> Agent -> Infinity -> Fuji

Hence I was able to work direct with Fuji because I had no direct business association with them, only with Infinity via the agent. We cut out the two middle sections, and split their percentages, meaning I got an 20% rate rise, and Fuji got me for 20% less than they were previously paying!

If I'd originally worked directly for Infinity it wouldn't have been possible.

It's very complicated though, and can be a minefield.

[Edited by MarkO - 7/23/2002 10:41:13 AM]

dsmith

Mark - Its similair for me

Me -> Current Employer (Consultancy) -> Company A -> Company B
would become (at the request of Company B who dont like paying Consultancy Fees + Company A mark-up.)
Me -> Company B

So as I *may* be ok as my new contract would not be with the company that the consultancy contract is with - but I'm clarifying that at the moment. As you say there is a degree of splitting the difference to the benift of both of us.

MarkO

Sounds like a winner. And if all goes well, in 6 months ask for a decent rate rise again. After all, they'll still be paying loads less than they would have if you'd stayed as you are now - before you factor in inflation.

Jodster

If you're going contracting for the first time then I recommend using a company like http://www.prosperity4.com to manage your income.

There are also others around who will invest your earnings in off shore accounts and currency markets to help reduce your overall payments to the tax man.

As for me, I've been contracting for ten years and like having my own limited company. Unfortunately I do fall under IR35 though so I'm losing a lot of money unfairly, imo. If I can resist the temptation to go perm, I think i'll be shelving my company and using one of these money management companies. I still know some contractors earning 100k and are taking home 83k on these schemes.

My current contract expires at the end of the year and I am quite anxious about how the market will be at this time. Luckily I do have a "rainy day" stash but that will only last a couple of months, then I'll have to start selling stuff and the Impreza will be the first thing to go unfortunately.

MarkO

TBH, it's the people who are earning 100k and taking home 83k who got the IR onto our cases in the first place, FFS. If people had been a little less greedy, none of this sh*te would have happened.

The main reason I contract is because of the flexibility and the fact that my gross rate is far more than double what I could ever earn as a permie....

roadrunner

no offence mark - but if you had a contract paying £500 a day I am pretty sure you wouldn't turn it down because it goes over 100K. Anyway in today's market you are paid for what you are worth.

[Edited by roadrunner - 7/23/2002 6:20:11 PM]

dsmith

RR, I think Mark's point is people arranging their tax affairs to pay a marginal rate of 83% on earnings around £100K was what caused the IR to crack down. If people were content with realistic marginal rates i.e. Realistic salaries vs monthly dividends, not paying wives, partners etc huge salaries to stay on lower rate tax. then (maybe) Labour would have left well alone.

Deano

father_jack

If you can get a direct contract for a decent period and you know the client well, then do it. Even if the IR get arsey - its still better to get taxed on loadsamoney than less money.

MarkO

No offence, RoadRunner, but if I was offered a contract paying £500 a day I would definitely turn it down. There's no way I'd consider taking such a significant rate cut...

But Deano's right - my point wasn't about how much people earn, it was about people taking the p*ss with their tax situation.

Basically, the contractors' way of taking 85% dividends, 5% salary and 10% tax was a loophole, and the govt closed it. But if people hadn't gone quite as mad, the gravy train might have continued for a good deal longer.

Jodster

But is it wrong for people to look for the best deal for them?

Five years ago I was insightful enough to know the contracting gravy train wouldn't go on for ever so I invested in my property. A lot of contractors have been living the high life and now have had the rug pulled out from under them. That was their decision and they have to live with it. When IR35 came in I think a lot of contractors thought "well, it was fun while it lasted" and accepted the situation, like me.

But we are being treated unfairly by IR35. NIC contributions, set to rise in April 03, reduced dedutables like training and requipment, it all sucks. For that reason, I'm starting to think about fighting back against the revenue. I've played their games, taken their irrational arguments and been the dutiful tax player. Now I want to fight back.

MarkO

Tax avoidance is, as you say, not only legal but practically compulsory. So no, I don't blame the people who did it. It's just a shame the system always gets abused, as with a little less greed we could have continued it for a longer time.

I'd be interested to know exactly how you plan to fight the revenue though, since the PCG's already had a pop (and lost, bigtime).

roadrunner

Mark - I misread your post

Jodster

Agree with the sentiment that if it wasn't abused we still may be raking it in but it's easy to say that with hindsight. Looking back at the good times, I can remember a time going to partys at friends houses where the street looked like a prestige car showroom. Not so these days.

MarkO, I just intend on using the current loopholes Up until now I haven't ever taken the micky. I didn't pay my partner wages, have company cars, new home furniture for my office, etc.

PCG didn't completely fail. Ok, IR35 wasn't thrown out but they did get some important points recognised as flawed. Whether they'll ever be corrected is another thing. I'm still keeping the receipts of all my costs since IR35 just in case

Crispin

I remember those times as well , when I did my placement year I got to know the SAP contractors where I was, and they "clued me up" regarding contracting - they were making circa £200k.....that was then......

Now I see positions asking for twice the skillset that I have (VB / SQL Server e.t.c e.t.c) for half the rate that I get

One thing I look at each month (almost with despair) is the thickness of Computing magazine, it's like a leaflet these days, back then it was more like Yellow Pages with the amount of jobs in it......

Anyway - my 2p Deano, don't do it unless you're sure you'll get at least 12 months work out of it IMHumbleO, it's like a ghost town out there right now.....

MarkO

Erm, that's got nowt to do with it actually. Most of the job ads in the back of Computing 2 years ago (the 50 or so pages of 'em) weren't real jobs anyway - they were just teasers to make you phone the agents. All those people with fixed ads (Progressive, Apex, etc) just stuck a list of old or imaginary contracts in to make their ads look good. The way jobs were moving back then there's no way they could have type-set them fast enough!

The reason the Computing ad pages have trimmed down is a direct result of the move to online recruitment. Agents (and companies) know that nobody looks through those ads when they can do a full-text search of monster.co.uk or jobserve or whatever....

It's all down to the web, and nothing to do with the market state!