Author Topic: IT Contracting  (Read 6620 times)

chris

  • (aka chris)
IT Contracting
« on: 07 April, 2008, 06:16:13 pm »
As some of you probably know, I was recently made redundant. I have been taking some time out, and I am currently on holiday in Scotland, and I have scrounged this dial-up connection to post this.

One of the jobs I applied for was in Scotland, and I had a telephone interview last week. The company then called me back and asked me to come to an interview in Scotland. As we drove up to Scotland I discussed the pros and cons of relocating with Mrs Chris and the three little Chris'. The outcome of the discussions was that we wanted to move to  Scotland, but due to private reasons the time was not right. This morning, I called the company and told them that I would not be coming to the interview. A couple of hours later the MD of the company called me and aked me if I would be interested in working from home for them short term as a contractor.

I know very little about IT contracting (apart from them getting £800 per day in the late 90s), and as I have no broadband up here, can not easily reasearch the subject. Can anyone please help me by letting me know how it all works, viz -

  • Do I have to set up a company? If so, do I become a director, do I need other directors, how much does it cost?
  • Can I sign on for the periods I am not working?
  • What is the typical daily rate? I know this depends on my skills, but the bottom line is that I have stong Firebird and InterBase SQL skills, and they are desperate for someone with these skills.
  • Obviously we need to agree tems. Is there a standard contract, or do I need a lawyer to draw up a contract?

Any help or hints greatly recieved.

Thanks

Chris.

Re: IT Contracting
« Reply #1 on: 07 April, 2008, 06:28:15 pm »
As some of you probably know, I was recently made redundant. I have been taking some time out, and I am currently on holiday in Scotland, and I have scrounged this dial-up connection to post this.

One of the jobs I applied for was in Scotland, and I had a telephone interview last week. The company then called me back and asked me to come to an interview in Scotland. As we drove up to Scotland I discussed the pros and cons of relocating with Mrs Chris and the three little Chris'. The outcome of the discussions was that we wanted to move to  Scotland, but due to private reasons the time was not right. This morning, I called the company and told them that I would not be coming to the interview. A couple of hours later the MD of the company called me and aked me if I would be interested in working from home for them short term as a contractor.

I know very little about IT contracting (apart from them getting £800 per day in the late 90s), and as I have no broadband up here, can not easily reasearch the subject. Can anyone please help me by letting me know how it all works, viz -

  • Do I have to set up a company? If so, do I become a director, do I need other directors, how much does it cost?
  • Can I sign on for the periods I am not working?
  • What is the typical daily rate? I know this depends on my skills, but the bottom line is that I have stong Firebird and InterBase SQL skills, and they are desperate for someone with these skills.
  • Obviously we need to agree tems. Is there a standard contract, or do I need a lawyer to draw up a contract?

Any help or hints greatly recieved.

Thanks

Chris.

You can either run yourself through an umbrella company like Giant or Parasol, or set yourself up as a company.  The latter is financially better for you , expecially if you intend to stay contracting.   I did mine the second way.   You become the director.  It pays to have Mrs Chris as co. secretary and to give her a share or two.  This way you both can benefit tax-wise from teh profits of the company.  GO limited, it's safer for you.

You cannot sign on if you're self-employed.

I don't really have the time to go thorugh everything now but if you get an accountant, tell him what you want he'll set everything up for you.   It is not difficult.   He should be able to set you up so you pay yourself a minimum monthly thsu avoiding NI and IC but the government pay your IC because of your 'wage'.  Then the rest is taken in dividend chunks to maximise tax advantage.   It opened my eyes going self-employed.   Your personal tax position and that of Mrs Chris will determine the best way to issue shares but issue the mimimum necessary, don't be tempted to issue 100.  I did mine 4 for me and 1 for mrs PB because of our relative tax positions.

Most contracts are standard.  Just make sure you are exempt from IR35.   Ask him if he has a 'usual' IT supplier.  They can provide you through them, then you don't have to worry about the detail of the contract.   Alternatively, get yourself a contract from him and then take it to a lawyer.   If he's in Scotland it woudl be best perhaps to go to a lawyer north of the border.     

You'll need insurance.  Look at the PCG website and join them I'd say.

Rates:  Hmm, I'd take a look at Jobserve to check that out.  Market is too specialised and diverse but don't expect £800 per day.   Half that is probably more realistic.   That isn't bad though considering how little tax you'll pay on the income.   

Re: IT Contracting
« Reply #2 on: 07 April, 2008, 06:28:59 pm »
Oh, if you'd like a longer chat about it PM me and I'll give you a phone number to call me on.

border-rider

Re: IT Contracting
« Reply #3 on: 07 April, 2008, 06:34:22 pm »
Setting up a company is easy - you don't need an accountant.  It may be that you don't have to - you could operate a a sole trader - but it looks more professional if you are going to go after multiple clients.  There's also as PB says the benefit of being able to pay yourself through dividends

It's worth registering for VAT - again it's more professional, but you can also make money on it - there are unified (lower) rates for small businesses so you can charge the client 17.5% and pay say 10 or 11% to the Govt.

I set up my own company this way last year, and so far have managed to avoid having to go near an accountant.  Let me know if you need more info.

Re: IT Contracting
« Reply #4 on: 07 April, 2008, 06:38:15 pm »
Indeed.  VAT had slipped my mind.




Fi

Re: IT Contracting
« Reply #5 on: 07 April, 2008, 09:06:00 pm »
Ware IR35 if you have a relationship with someone that, according to the revenue, would be an employee/employer relationship. If you do, a corporate vehicle will be more or less ignored for tax purposes; so will a self employment contract.  You need to take specific advice based on your own circumstances, what you're doing and who you're contracting for and on what basis.

The revenue's view on IR35 can be found at:

   http://www.hmrc.gov.uk/ir35/

Also ware handing shares to Mrs C and paying her divis if she makes little contribution again in the tax man's terms - there's new legislation in the budget "income splitting" that, depending on circumstances, may mean her dividend income is taxed on you. I haven't read it yet having had to concentrate on other things, but it's likely to be nasty.

If your turnover  (not profit) is more than in the region of around the £65K mark per annum, but easily checked, you have no choice but to register for VAT, although you can do so if you earn less and, from your point of view, it makes sense to do so.


aglet

Re: IT Contracting
« Reply #6 on: 08 April, 2008, 09:20:45 am »
Give Chris at Trafalgar a call.  Trafalgar organised my accounts and gave me some very useful advice over a period of several years, both as part of an umbrella and as a stand-alone limited company.  Tell them Aglet Ltd sent you

Re: IT Contracting
« Reply #7 on: 08 April, 2008, 11:39:47 am »
You can't really be exempt from IR35 anymore.

I used Contractors Umbrella www.contractorumbrella.com, found them very good to deal with. The fees are tiny compared to employing an accountant, and they take care of all paperwork.

You will almost certainly need broadband if working from home as an IT contractor. It is pretty much assumed that you have it nowadays.

I've worked from home quite a bit; there are advantages and pitfalls. pm me if you want some detailed info.
<i>Marmite slave</i>

iakobski

Re: IT Contracting
« Reply #8 on: 08 April, 2008, 01:05:04 pm »
Quote
    * Do I have to set up a company? If so, do I become a director, do I need other directors, how much does it cost?
    * Can I sign on for the periods I am not working?
    * What is the typical daily rate? I know this depends on my skills, but the bottom line is that I have stong Firebird and InterBase SQL skills, and they are desperate for someone with these skills.
    * Obviously we need to agree tems. Is there a standard contract, or do I need a lawyer to draw up a contract?

You don't *need* a ltd co if you are direct to the client (ie without an agency) but it can be more straightforward. No agency will deal with you unless you incorporate.

You can do it yourself with a little research: you download the forms and articles from companies house website, make yourself director and normally add spouse as company secretary and co-director. Issue a share capital of 100 £1 shares and buy one each. You pay £20 to companies house. If you can't be bothered you can buy a ready-formed company ("off the shelf") for around £100 and change the name to one you like.

You *can* sign on for periods out of work because you are not self-employed you are employed by your company. It is a difficult thing to get across to the benefits agency, but if you are put on "short time" by your company as there is no work, you are available for work and can claim. It's not something I've ever done, but know some contractors who did when they were without work for long periods.

Typical day rate varies hugely with location, skillset, experience, sector, time of month, etc. Have a look at http://www.jobstats.co.uk/jobstats.d/Rates.html for your skills and the median rates. The 25% rates will be for financial sectors and 10% rates for special combinations of skills/market knowlege. Scotland is generally lower rates, though your skill may be specialist enough to not make a difference.

Contracts: DON'T accept a contract given to you by the other party ESPECIALLY if that party is an agent. If you go direct, join the PCG and use their draft contracts (free and legally vetted). If you don't go direct, join the PCG and get one of their legal suppliers to vet/modify the contract in your favour. Remember you are not an employee and the law expects your company to look after itself, and you. Either way, you should join the PCG to get tax investigation insurance, it's not expensive.


Quote
You can't really be exempt from IR35 anymore.

You certainly can if your working conditions are correct. Chris's description of remote working, specialist subject, etc, definitely sounds more like freelance than employee to me.

Quote
there's new legislation in the budget "income splitting"

That was postponed because the revenue made a pigs ear of it, so was dropped from the budget.

Quote
The revenue's view on IR35 can be found at:

Do not take the revenue's view at face value. It is heavily biased. Take specialist advice or read around the subject. Do not beleive what an accountant tells you - take advice from a tax specialist (eg through the PCG)

VAT: you need to register for VAT if you turn over more than a set amount per year or expect to. The threshold is in the £50k region. It currently takes around 3 months to get registered. Flat rate VAT is normally a good idea but you don't save all the amount indicated above because you can't reclaim VAT on things you pay for, and as a start-up you will need to pay for things. You normally end up slightly better off on the flat rate.

Quote
considering how little tax you'll pay on the income.   

You pay about the same tax as anybody else. The company's profits are subject to corporation tax and your pay will be taxed. If you take a proportion out as dividends, you still pay tax but save national insurance. If you take the umbrella route, you will pay MORE tax + NICs on the day rate because you have to pay employer's NICs as well as employee's NICs plus a percentage to the brolly.

Finally: contracting is highly recommended: you are in control of your own career, you are your boss, the expert consultant, etc. Go for it.

border-rider

Re: IT Contracting
« Reply #9 on: 08 April, 2008, 01:13:41 pm »
If you take a proportion out as dividends, you still pay tax but save national insurance.

If you don't pay any NI at all HMRC are likely to get uppity.  Plus you'll jeopardise your state pension etc.  So you need to pay yourself say 5k per year and take the rest as a dividend.

If you stay below the 40% rate then you don't pay any further tax on the dividend (the company has already paid 20% or so) - but beware that the tax liability is the dividend plus 10%, so you'd need to make sure that you consider that if you are trying to stay below 40%

If you go over 40% then you pay the difference between the nominal tax rate included in the dividend (10% even though you don't actually pay it) and the 40% that you are liable for ie 30%.  Given that the company has already paid 20% on this, it's actually effectively taxed at more than 40%, but both you and the company save the NI.

You need to make sure that you issue yourself with dividend certificates etc to make it all legal and above board or HMRC may view it as deferred salary and try to extract NI from you

It's a lot less complicated than I just made it sound actually :)

iakobski

Re: IT Contracting
« Reply #10 on: 08 April, 2008, 01:20:42 pm »
Oh yes, and just in case anyone reading didn't realise: rates of £800/day are as good as apocryphal, and were even in 1999.

It is possible to get up to that level if you have most of the following:
1st from Oxbridge/Imperial
PhD in physics
10 years + experience in quantitative analysis at a top investment bank
In-depth knowlege of exotic financial instruments
Guru level in at least 6 programming languages
willing to work 10-12 hours a day
willing to be screamed at by coked-up traders
etc.

iakobski

Re: IT Contracting
« Reply #11 on: 08 April, 2008, 01:37:25 pm »
If you take a proportion out as dividends, you still pay tax but save national insurance.

If you don't pay any NI at all HMRC are likely to get uppity.  Plus you'll jeopardise your state pension etc.  So you need to pay yourself say 5k per year and take the rest as a dividend.


Without wishing to confuse things for the OP, that's why I said "a proportion" - most contractors use a mixture of salary and dividends: salary  for what you think your co can sustain all year, then dividends if there is more profit available.

On your example at £5k a year, this is below the Primary Earnings Threshold so you won't in fact pay any NI at all... also, as it is above the Lower Earnings Limit, you will get NI stamps for free and not jeopardise your state pension.

[/pendant]

However, this is not really helpful to chris: the best advice (as per Polar Bear) is join the PCG, read their Guide To Freelancing, and everything else will fall into place as you go along.

Re: IT Contracting
« Reply #12 on: 08 April, 2008, 01:43:24 pm »
Last year I paid myself £400 per month to ensure that my NI was paid by the govt but at no extra to me.   No income tax either.

Re: IT Contracting
« Reply #13 on: 08 April, 2008, 01:44:33 pm »
It is a very rare contract that means you aren't deemed to be an 'employee' of the company you are doing work for.

The following is from HMRC. Note the bits in bold. I strongly recommend Chris goes via an umbrella company. Yes, he will lose out a bit on tax.

As a general guide as to whether a worker is an employee or self-employed; if the answer is 'Yes' to all of the following questions, then the worker is probably an employee:

    * Do they have to do the work themselves?
    * Can someone tell them at any time what to do, where to carry out the work or when and how to do it?
    * Can they work a set amount of hours?
    * Can someone move them from task to task?
    * Are they paid by the hour, week, or month?
    * Can they get overtime pay or bonus payment?

If the answer is 'Yes' to all of the following questions, it will usually mean that the worker is self-employed:

    * Can they hire someone to do the work or engage helpers at their own expense?
    * Do they risk their own money?
    * Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves?
    * Do they agree to do a job for a fixed price regardless of how long the job may take?
    * Can they decide what work to do, how and when to do the work and where to provide the services?
    * Do they regularly work for a number of different people?
    * Do they have to correct unsatisfactory work in their own time and at their own expense?
<i>Marmite slave</i>

Re: IT Contracting
« Reply #14 on: 08 April, 2008, 02:01:53 pm »
Contractors charge a fee, not a salary.  Their own company / umbrella company pays their salary and if appropriate, dividends.   No overtime pay, no bonus payments.

Contractors tend to do the work to get the job done.  We often sit on site awaiting the client to direct us, and even do things not requested to add value. where appropriate.

All of the second set of questions has / does apply to me.

Re: IT Contracting
« Reply #15 on: 08 April, 2008, 02:16:43 pm »
Could you hire someone else to do the work for you? If so, yeah, sure, you aren't an 'employee' of the client.

From Chris's description, he is personally being hired to do work; ergo, he is an 'employee' of the client.

Last time I was IT contracting, I managed to pull one contract that was direct and avoided the PAYE/IR35 issue. I used Contractor Umbrella for the other contracts, and it was fine to switch about between being paid via Contractor Umbrella and being paid directly by a client.
<i>Marmite slave</i>

Re: IT Contracting
« Reply #16 on: 08 April, 2008, 02:25:00 pm »
I'm struggling with your analogy.  I personally hire a sparks to rewire my house.  It is a direct relationship, supplier to customer.   Am I now his employer?  I think I will remain his customer.

Re: IT Contracting
« Reply #17 on: 08 April, 2008, 02:37:03 pm »
Its HMRC's definition, not mine. In theory, the sparky you hire can hire a helper to do much of the work.

HRMC say:

If the answer is 'Yes' to all of the following questions, it will usually mean that the worker is self-employed:

    * Can they hire someone to do the work or engage helpers at their own expense?


This is the first question on the list.

I dunno what sort of work you do, or the wording on contracts between you and your clients. I found it hard (as an IT contractor), to convince clients to work contracts so that I didn't need to go through an umbrella company. YMMV
<i>Marmite slave</i>

iakobski

Re: IT Contracting
« Reply #18 on: 08 April, 2008, 03:28:28 pm »
Yes, indeed, they are HMRCs definitions and are not supported by case law.

You should also note that it says "if the answer is yes to all of the following ..."

Just because you are the person the client would like, does not make you an employee of the client. If you take on a particular barrister, for example, you would be pretty miffed if he sent a substitute to court, but he would not be your employee.

I suppose the main point of being freelance is the way you see yourself and the way you operate your business. You are obviously happy being a temporary employee, and there's nothing wrong with that. Those of us who operate as freelance in the sector are quite free to go on doing so, whatever it says on HMRC website, as the law is on our side. Check out the front page of PCG website where it says:

Quote
Tax investigations completed by PCG's approved suppliers as at 28 November 2007:

IR35 and s660a

PCG
1,449   

TAXMAN
5

BTW, MMdoesV, I've had no problem bringing "helpers" in to complete time-sensitive projects where necessary, though in all cases I supervised so that the work was always up to my company's exacting standard.

Re: IT Contracting
« Reply #19 on: 08 April, 2008, 03:33:17 pm »
Yes, indeed, they are HMRCs definitions and are not supported by case law.

If you have the resources to fight a legal battle against HMRC, I take my hat off to you!

btw, the 'all' questions bit works *against* you and in favour of HMRC. If you can answer 'yes' to all the questions, then you may be self-employed. Answer 'no' to any of them, and HMRC will be after their pound of flesh.
<i>Marmite slave</i>

Re: IT Contracting
« Reply #20 on: 08 April, 2008, 03:37:02 pm »
Its HMRC's definition, not mine. In theory, the sparky you hire can hire a helper to do much of the work.

HRMC say:

If the answer is 'Yes' to all of the following questions, it will usually mean that the worker is self-employed:

    * Can they hire someone to do the work or engage helpers at their own expense?


This is the first question on the list.

I dunno what sort of work you do, or the wording on contracts between you and your clients. I found it hard (as an IT contractor), to convince clients to work contracts so that I didn't need to go through an umbrella company. YMMV

Indeed he can if he wishes.  But I won't be paying extra for his hired help.   

I am a project manager.  I work mainly but not exclusively in IT.   I often sub-contract.  My contracts with clients are for my company to provide the service, not for me specifically.  For example, if I need some systems analysis or programming done I can't do it myself so I get the appropriate bod in to do as such.

If you join PGC they will fight on your behalf.  It is n the interest of all their members for them to do so.   HMRC very rarely wins but keeps trying so as to try and establish precedents.   

I see their words in the same way as I see the threats I get from the TV Licensing people from time to time.  Buy one now and we'll forget about it.  Why should I?  I don't have any receiving equipment.   Just words designed to scare.

iakobski

Re: IT Contracting
« Reply #21 on: 08 April, 2008, 03:39:45 pm »
Yes, indeed, they are HMRCs definitions and are not supported by case law.

If you have the resources to fight a legal battle against HMRC, I take my hat off to you!

Yes, of course I do. I have tax investigation insurance through the PCG. It will pay for specialist tax lawyers to act on my behalf from day one of an investigation, through to the high court if necessary.

See the stats I quoted above.

Re: IT Contracting
« Reply #22 on: 08 April, 2008, 03:50:17 pm »
I've not come across PCG before. Looks like a good organisation. I doubt it would have helped much in my line of work, which is typically via agencies and for specific one-person jobs.  Might help Chris out though.
<i>Marmite slave</i>

chris

  • (aka chris)
Re: IT Contracting
« Reply #23 on: 11 April, 2008, 06:24:35 pm »
Thanks for all the helpful advice. I went to see the company yesterday, and I have agreed to work for them full time, from home, as an employee.

Re: IT Contracting
« Reply #24 on: 12 April, 2008, 09:48:31 am »
Thanks for all the helpful advice. I went to see the company yesterday, and I have agreed to work for them full time, from home, as an employee.

Well, that's all settled then.  Nice one and well done.