Reply to: Switching From Perm To Contractor/Supplier For Current Employer

[Wanderer]

Out of curiousity... where did you get the number 1000 from?

We made it up because noobies kept coming on here asking about contractor vs permie rates.

However, it is a pretty good rule of thumb but of course everyone is going to be different.

[chrysalis]

Your (effective) hourly rate should be your annual salary / 1000 so if you were on £50,000 then you are wanting £50/hour or £400/day. Don't undersell yourself.

Out of curiousity... where did you get the number 1000 from?

[Wanderer]

Some top advice from TykeMerc. Don't be dazzled by the "payrise" of going permie to contractor. Remember that you need to charge a lot of money to cover loss of job security/pension/sick/holiday/unemployment as well as running costs. Also if you are going into partnership with someone else, make sure that you have professional legal advice and a rock solid company structure (what if the partner wants out, stops working, pisses you off etc).

Your (effective) hourly rate should be your annual salary / 1000 so if you were on £50,000 then you are wanting £50/hour or £400/day. Don't undersell yourself.

[xchaotic]

3/ Fixed price contracts per project are good.

From the IR35 POV maybe so, but we are all so worried about what HMRC _might_ think that we are shooting ourselves in the foot with contracts like that.

The truth is IT is complex and is horribly difficult to estimate the amount of work, that's why the only sensible measure is a daily/hourly rate, unless you can really skew things on your side and do very little for loads of money.

In all other case hourly rates are better for covering your ass, so that you don't have to work overtime or if you do it is at least paid extra.

[b0redom]

Regarding the redundancy etc, I am not concerned by the whole thing. It has been acknowledged that I am the highly skilled and highly productive member of the team and am involved in helping them back fill some positions with support programmers.

This may come back and bite you in the ass. As a contractor, you need to take everything and anything the customer says with a wheelbarrow full of salt.

As I said, it may all be fine, but you should plan and negotiate for the worst. Sounds like the client is buttering you up, and if they love you that much they'd want to keep you and just offer you a pay rise rather than risk you leaving for a higher paying contract in 3,6,12 months.

[Taxless]

[QUOTE=chrysalis;1344713]It is this that makes me a prime target for IR35, so to play safe - should I declare this from the start, then when we get another client, future contracts will not be IR35? [QUOTE]

If you were doing exactly the same work as before you might be closer to IR35 but from what you say you will be doing a whole lot more and the presence of a second person in the company should also help, particularly if they can undertake some of the project work.

I wouldn't be inclined to cave in on IR35 just yet, it will all come down to the actual working practices and terms of any contract.

It doesn't matter how many contracts you have, they could all potentially be in or out of IR35, again depending on the unique circumstances surrounding each contract.

It would be well worth paying for some input into this if the result were to ensure that you did not fall foul of IR35.

[TykeMerc]

IR35 requires that you pay yourself in salary (subject to all Income Tax, employee NI and employer NI) and not a low salary plus dividends. There are also some expenses implications which I can't remember the specifics of sorry.
In essence your tax efficiency will be relatively poor so any financial benefits of contracting will be heavily moderated.
Please don't forget that as a contractor rather than perm you will not be paid for:-
Holidays
Sick days
Bank holidays
Pension
Training
Company insurances
Redundancy rights
Pay if the projects are delayed or cancelled
These are all factors that have a bearing on how much you need to charge to make contracting worth while.

You mention fixed price work in your original post, that can be a minefield which is typically countered in one (if not both) of two approaches.
1. Price is HIGH to compensate for unexpected changes, delays or dependencies
2. Scope and definition of work is very precise with a clear and mutually understood change control and exception process with a clear understanding that additional charges will apply.
Fixed rate work is decidedly risky unless you're very switched on, have a cool commercial head and are very good at negotiations.

Qdos are known to be good at IR35 reviews of contracts, but you should be up front with anyone who reviews the contract that you're going contract from perm at the same firm.

[northernladuk]

When I have the contract wording I would obviously like a legal opinion on whether I am an IR35 candidate. I'd love to hear recommendations on who I could get to review this.

If you puy your PI/PL insurance through QDOS they will do a number of free IR35 checks a year. I believe a company called Baur and Cotterll (can't remember spelling) also check them for a cost.

[chrysalis]

When I have the contract wording I would obviously like a legal opinion on whether I am an IR35 candidate. I'd love to hear recommendations on who I could get to review this.

[chrysalis]

Regarding the redundancy etc, I am not concerned by the whole thing. It has been acknowledged that I am the highly skilled and highly productive member of the team and am involved in helping them back fill some positions with support programmers. The intention is that we take ownership of the most important project they have and continue to push it forward as the other members of the team are not as skilled and some have decided to move on. As part of the take over we can scale up and then back down when budget/timescales are available.

The PO will definitely come upfront. I wont be handing my notice in until I see that PO and the overall contract. Some of these details are yet to be worked out, mostly around the timing.

Sounds pretty good so far but what is the benefit to your employer (soon to be client) in all this? He isn't going to give in and have it cost him more if there was no benefit to him

The benefit comes in quick scalability and controlling cost. They have a massive problem with some contractors they are currently using that they can't really see where the spend is going, they know that I deliver what I say I will and when I say I will - that in its self, whether it costs them slightly more or not, is valuable to them as they dont get it from other staff. They have a strategic project that needs to be completed and I have presented a solution to their problem that they like. They are also quite entrepreneurial so like to hear offers/ideas like this.

Can I ask whether the new role that you will be taking on will be very different from what you undertook as a permanent employee?

Yes, mostly. I will be doing more in the new LTD Co role than I can at the moment.

IR35 was set up to target people who leave permie jobs to instantly return doing the same (or broadly the same) work as contractors

It is this that makes me a prime target for IR35, so to play safe - should I declare this from the start, then when we get another client, future contracts will not be IR35? As there are 2 of us in the LTD Co, how should I think about paying myself with the IR35 in mind? The agreement we are looking at is PO upfront to begin the project (say 15% of overall value), then PO/payment per agreed deliverable with a final PO on handover/signoff.

[TykeMerc]

Am I the only one who is thinking that the employer could be about to say, "Right, so you're now a LTD company and have resigned. We'll call you when we've got some work. Bye."

It might be all above board, but I'd want a PO up front or some contractual guarantee at least. Sounds like a cheap way to make someone redundant IMO.

Nope and I'm sure I won't be the last it occurs to either. The risk that it's an easy way to bin the OP to avoid redundancy is high, it's entirely likely that the management see a finite end to the need for anyone for this work.

IR35 was set up to target people who leave permie jobs to instantly return doing the same (or broadly the same) work as contractors. Unless the contracted work is dramatically different I think there's a real risk an IR35 investigation could cause massive problems. If there's guaranteed work then the MOO test for IR35 purposes would be a big fail too.
I'm quite concerned about the whole scenario to be honest.

[northernladuk]

Am I the only one who is thinking that the employer could be about to say, "Right, so you're now a LTD company and have resigned. We'll call you when we've got some work. Bye."

It might be all above board, but I'd want a PO up front or some contractual guarantee at least. Sounds like a cheap way to make someone redundant IMO.

Nope I said it as well

Sounds pretty good so far but what is the benefit to your employer (soon to be client) in all this? He isn't going to give in and have it cost him more if there was no benefit to him. Are you sure he won't use this as a reason to bin you off without having to pay redundancy? Plan on putting some penalties in to make sure you work harder for your dollar than you do now?

[b0redom]

Am I the only one who is thinking that the employer could be about to say, "Right, so you're now a LTD company and have resigned. We'll call you when we've got some work. Bye."

It might be all above board, but I'd want a PO up front or some contractual guarantee at least. Sounds like a cheap way to make someone redundant IMO.

[Wanderer]

We are still in the process of working out the legal/contract side of things so would appreciate any advice on where I am going wrong. So far these are the ideas;

1/ Myself plus another form a LTD company
2/ We have a contract between current employer and our company to provide a service.
3/ We enter into fixed price contracts on a per project basis.
4/ Payments are scheduled based on deliverables.
5/ A PO *could* be raised at the begining of each project.
6/ I use my own equipment.
7/ They do not dictate my working hours.
8/ The working location is flexible, so early stages of projects will require on-site presence, where as later stages when developing software will be done off site etc.

How does this sound so far? What else should I be considering?

You are correct that this is normally a red rag to HMRC but as long as the reality of the situation is that you are genuinely going into business then you might have a good case. Positive pointers are:

1/ Subcontracting the work (right of substitution rather than just a contract for your services personally)
3/ Fixed price contracts per project are good. PCG have some templates you can use. Watch out for ownership of the intellectual property/code that you produce. You need to aim to own the copyright yourself and give the company a perpetual licence to use the code or something like that. Get some legal advice on this because it's important.
5/ a good pointer is if you can make a profit/loss by finishing the project early/late and you are responsible for fixing cockups on your own time.
6/ and 7/ are good

It would help immensely if you have other clients on the go at the same time as you would be more of a business than a disguised employee.

[LisaContractorUmbrella]

I am currently in the fortunate situation where I have the opportunity to switch from a permanent employee to self employed but working for my current employer on the basis that my company can provide a scalable software development service. I am aware that this makes me a strong candidate for IR35, but feel that I could possibly avoid it legitimately.

We are still in the process of working out the legal/contract side of things so would appreciate any advice on where I am going wrong. So far these are the ideas;

1/ Myself plus another form a LTD company
2/ We have a contract between current employer and our company to provide a service.
3/ We enter into fixed price contracts on a per project basis.
4/ Payments are scheduled based on deliverables.
5/ A PO *could* be raised at the begining of each project.
6/ I use my own equipment.
7/ They do not dictate my working hours.
8/ The working location is flexible, so early stages of projects will require on-site presence, where as later stages when developing software will be done off site etc.

How does this sound so far? What else should I be considering? Over time we hope to be able to engage with other clients and thus invoice other clients.

All help and advice is appreciated.

Thank you.

Can I ask whether the new role that you will be taking on will be very different from what you undertook as a permanent employee?