Reply to: Working on long (12 month) contract directly for a friends company

[LisaContractorUmbrella]

I take people's points, that its not for them to suggest what rate I should take - that its down to me to negotiate and dependant on a lot of factors.

Cut me a little slack though - I'm just wanted a rough answer based on the numbers alone. Maybe I am asking the wrong question? What I really mean is what rate would get me the same take home pay as 65K?

So assuming I'm inside the IR35, I want 6 weeks holiday/sickness, 5% pension.

What other costs do I need to consider? Paying all of the NI? Umbrella fees? anything else?

That's almost impossible to answer because you don't know, as a contractor, that you will have 46 weeks work during the course of a year, you don't know if you will be sick or how often, you don't know if the contracts will be inside or outside IR35, you don't know if you will have another contract to go to when you finish the first one, you don't know if the client will like you and whether you'll get an extension and therefore whether you may be able to negotiate a rate increase. Contracting is pretty much about uncertainty

All you can do is list your assumptions and work from there. If you assume you are inside IR35 then you will pay income tax, employee's national insurance and employer's national insurance (allowances and percentages available on HMRC website), you will have to fund your own holiday and sickness so assume 8 weeks out, you will have to fund your own pension. You will also need to make sure that you have enough money to be able to put some aside to build up a war chest so you'll have some money when you are between contracts. You should also consider that you will be running a business and therefore you will have to consider the possibility that you may not get paid for some work that you do, you may get paid late because your client doesn't stick to their payment terms etc.

To be honest, if you are new to all this, try an umbrella company for a few months until you have got your head round everything and decided that contracting is definitely for you.

[boshdmg]

I take people's points, that its not for them to suggest what rate I should take - that its down to me to negotiate and dependant on a lot of factors.

Cut me a little slack though - I'm just wanted a rough answer based on the numbers alone. Maybe I am asking the wrong question? What I really mean is what rate would get me the same take home pay as 65K?

So assuming I'm inside the IR35, I want 6 weeks holiday/sickness, 5% pension.

What other costs do I need to consider? Paying all of the NI? Umbrella fees? anything else?

[TheFaQQer]

LisaContractorUmbrella and TheFaQQer are suggesting circa £325.

FWIW, that's not what I said at all.

What I said was to determine the rate you want, determine what the role pays, and negotiate. It's not for me to suggest your daily rate for an IR35-inside contract working as a permietractor.

[BlasterBates]

Remember to take into account travelling costs. In the current market it is very difficult to find something on your doorstep, so a daily rate of 350 200 miles from home wouldn´t be much use because the extra would be spent on hotels and travelling. I don´t see many contracts on a daily rate above 350.

I don´t see why you can´t arrange this contract to be any less outside IR35 than any other contract. In my view most contracts are inside IR35 as the key clause on substitution is clearly a fake, and most contractors are bums on seat that do what they´re told. The fact that you work for a friend means you can probably get a well defined piece of work that you can do in your own office and should the inspector come sniffing he´d be more likely to say the right things than a PM who couldn´t care less about your taxes.

It sounds like your friend though is taking you on as a temp. In this case there´s no need for an Umbrella co, as your friend´s company will employ you. Anything else wouldn´t make sense.

My calculations suggest a contract of 350 per day away from home wouldn´t be worth it, even if you´re outside IR35 and inside IR35 for your temp salary (remember your friend pays half NI on top of your salary).

Use jobserve to find out what rates are on offer and where and then use the calculators on the web to compare yourself, taking into account travelling expenses, and make sure you know what the contract is from your friend. If it isn´t a temporary employment contract (i.e. he contributes to your NI) then it´s a contract like any other.

[jamesbrown]

Lots of people say that, though they can't offer an alternative formula. You are right that it is definitely skewed by a myriad of other factors but the way to level this is to ask how much someone in your position would realistically get offered and accept to work under the same conditions as a permie for that same employer (same commute, working conditions, job satisfaction etc, etc) and calculate your day rate from that.

Compared to permies at the places I have worked my hourly rate is usually pretty much their salary/1000 or thereabouts.... Just out of interest, how does your current hourly rate sit compared to your reasonably expected permie salary / 1000?

I agree, any reasonable number needs to consider the market (ratios of perm/contract rates), not some fairly arbitrary numerical extrapolation, but that also requires actual research, so defeats the purpose of a back-of-the-envelope calculation to begin with (i.e. there is no simple formula). To answer your specific question, about 70% and 110% of the implied hourly rate based on that calculation for my last two gigs, but the latter was fixed price and I don't work in IT, plus I work 100% from home. Like I say, too many factors for salary/1000 to be useful in practice IMHO and, in my experience, that calculation is heavily biased (but, since you need to know your market anyway, I don't really see the purpose of it).

[Wanderer]

I would dispute there being any good comparison for an individual case TBH as it depends on too many factors. It should be "significantly" higher than the perm salary, and then it just comes down to how much higher the client will accept, given the market and the individual. The OP is basically in the situation of being a permie-tractor on a long-term gig (likely with low bench time), so common back-of-the-envelope calculations are even less relevant (and that salary/1000 calculation has never struck me as being a realistic one to begin with).

Lots of people say that, though they can't offer an alternative formula. You are right that it is definitely skewed by a myriad of other factors but the way to level this is to ask how much someone in your position would realistically get offered and accept to work under the same conditions as a permie for that same employer (same commute, working conditions, job satisfaction etc, etc) and calculate your day rate from that.

Compared to permies at the places I have worked my hourly rate is usually pretty much their salary/1000 or thereabouts.... Just out of interest, how does your current hourly rate sit compared to your reasonably expected permie salary / 1000?

[jamesbrown]

what happens if the contract says:

Contractor must give 1 month's notice but client can terminate without notice and for any reason...
And all the other stuff we know so well.

Inside or outside IR35?

There's no answer, because it doesn't really matter. The contract is more of a prerequisite (a hurdle to be resolved by review and with due regard to the inherent risk of any conflict with the upper contract in an agency scenario). Everything after that, i.e. the important stuff, comes down to working practices.

[jamesbrown]

Permie rights/perks/annual leave/sick pay/maternity leave/pension/bonus/job security/business expenses.

£285 is way too low. For a £65k equivalent contracting you would want £65/hour which is £520 per day. See #13 in my list of Noobie Contractor Mistakes.

Have a go with this calculator and don't forget that accountancy or umbrella fees alone will cost you about £1200 per year.

Also make sure you use a contract (eg, PCG one) and make sure your working arrangement is outside IR35 or you will get caned for tax.

I would dispute there being any good comparison for an individual case TBH as it depends on too many factors. It should be "significantly" higher than the perm salary, and then it just comes down to how much higher the client will accept, given the market and the individual. The OP is basically in the situation of being a permie-tractor on a long-term gig (likely with low bench time), so common back-of-the-envelope calculations are even less relevant (and that salary/1000 calculation has never struck me as being a realistic one to begin with).

[jamesbrown]

Wanderer is suggesting £520 per day (Perm Salary/1000 = hourly rate), where as LisaContractorUmbrella and TheFaQQer are suggesting circa £325.

Can any one help me fill in the gap?

(325+520)/2=422.5 Seriously though, there's no "correct" answer for you. It's a negotiation. Go in realistically high (by realistically, I mean aligned with the market for what you do and with your importance to the client, not arbitrarily high) and then negotiate.

[boshdmg]

Thanks again for your help guys.

My thinking is that I am well inside the IR35 and that I should be using an umbrella company, this seems like the honest, simple and correct approach.

Given this I really need to get my head straight on what is an appropriate rate to ask for considering the additional costs and risk. Wanderer is suggesting £520 per day (Perm Salary/1000 = hourly rate), where as LisaContractorUmbrella and TheFaQQer are suggesting circa £325.

Can any one help me fill in the gap?

[Wanderer]

If the role was permanent the package would be 65k + 25 days holiday and no pension. What would be equivalent daily rate for contracting be? 65000/ (365-104-8-25) = £285. Which seems a bit low? Is there anything else I should be considering?

Permie rights/perks/annual leave/sick pay/maternity leave/pension/bonus/job security/business expenses.

£285 is way too low. For a £65k equivalent contracting you would want £65/hour which is £520 per day. See #13 in my list of Noobie Contractor Mistakes.

Have a go with this calculator and don't forget that accountancy or umbrella fees alone will cost you about £1200 per year.

Also make sure you use a contract (eg, PCG one) and make sure your working arrangement is outside IR35 or you will get caned for tax.

[Old Greg]

Negotiation won't do this though. It doesn't matter what the OP perceives or wants or even what the paperwork says. It is educating the client that is key here and getting him to change his thinking of the future relationship. You can negotiate and play the game until you are blue in the face. If the client sees the OP as a permie you are utterly screwed. What must happen in this instance is the client changes his view on the position and the true relationship of the OP, not the game, or the words on paper. Until that happens all the contracts and negotiation in the world will still end in the reality the OP is filling a perm position with an agreed finance fudge. Even then you are relying on the client not shafting him in an investigation. Until this is firmly in place then he is technically inside IR35. Doing a mate a favour to make it look outside won't really wash.

To be fair though it does sound like he has the relationship in this case that all other contractors don't have. I can't see many situations where we can convince a large corporate client a position needs a contract not a permie. It appears he maybe able to do that in this case but he must make absolutely sure that the client has it right, not playing a game to suit him.

and finally at the end of the day the chances of him getting investigated are so slim why bother with all this, but that is the OP's choice.

All that said and done it is pretty clear that this whole situation is nothing more than a fudge and with all the will in the world we know that is all it will ever be. Play the game but the reality is it's a fudge.

It's often a fudge. If the real test of IR35 is what happens in an investigation (PCG case history), how many people are - when it comes to the crunch - actually in IR35. IR35 is IMO at heart a fear tactic to get people to declare themselves inside IR35, not a real tool that can catch people in an investigation where the contractor is properly investigated. It's fine to say, the client sees it as a permie role etc. etc., but what happens if the contract says:

Contractor must give 1 month's notice but client can terminate without notice and for any reason...
And all the other stuff we know so well.

Inside or outside IR35?

[northernladuk]

So you negotiate with them until they don't see it as a permanent role. And then look at the PCG stats.

Negotiation won't do this though. It doesn't matter what the OP perceives or wants or even what the paperwork says. It is educating the client that is key here and getting him to change his thinking of the future relationship. You can negotiate and play the game until you are blue in the face. If the client sees the OP as a permie you are utterly screwed. What must happen in this instance is the client changes his view on the position and the true relationship of the OP, not the game, or the words on paper. Until that happens all the contracts and negotiation in the world will still end in the reality the OP is filling a perm position with an agreed finance fudge. Even then you are relying on the client not shafting him in an investigation. Until this is firmly in place then he is technically inside IR35. Doing a mate a favour to make it look outside won't really wash.

To be fair though it does sound like he has the relationship in this case that all other contractors don't have. I can't see many situations where we can convince a large corporate client a position needs a contract not a permie. It appears he maybe able to do that in this case but he must make absolutely sure that the client has it right, not playing a game to suit him.

and finally at the end of the day the chances of him getting investigated are so slim why bother with all this, but that is the OP's choice.

All that said and done it is pretty clear that this whole situation is nothing more than a fudge and with all the will in the world we know that is all it will ever be. Play the game but the reality is it's a fudge.

[Old Greg]

I don't see anything grey in the OPs area, though:



The "client" sees this as a permanent role, so if there was an investigation, there can't be a reasonable defence. Knowing this going into the contract means that you are then looking at more penalties because it's going to be classed as evasion.

So, the OP has two choices. Knowing that they are IR35 caught, either pay up from the start and be safe, or pay nothing and risk a lot. Of the two, I know which one I'd be taking.

So you negotiate with them until they don't see it as a permanent role. And then look at the PCG stats.

[LisaContractorUmbrella]

WTFS I can't see that there is anyway the OP would be outside IR35