Churchill Knight Blog

The Reed Group last week lost a first tier tribunal against HMRC. HMRC decided to revoke an expenses dispensation for Reed’s temps after eight years.

The bill for stands at £158 million. Unsurprisingly Reed have asked for a judicial review of the decision.

As a potted history of the case: In 1998 Reed decided to make a number of its temps who were working within several of its staffing agency subsidiaries into full time employees. At the time Reed were advised by Robson Rhodes, a partnership of chartered accountants who were bought out by Grant Thornton in 2007, that they may be able to benefit from a relaxation in the rules on travel and subsistence expenses which would allow them to offer a salary sacrifice scheme to the employees.

Reed employees were given the option of joining the Reed travel allowance scheme where they would receive a lower level of gross pay, but would gain through a tax-free scale payment based on where they worked and how they got there.

The crux of the case is the definition of a temporary worker in relation to a temporary assignment. From HMRC’s point of view, although the temp workers were only employed for the duration of each assignment, the workplaces amounted to permanent workplaces for the duration of each assignment. This means that ordinary commuting costs were not deductible.

It is also worth noting that Reed benefitted through this in terms of income tax and National Insurance Contributions.

One of the key reasons for the decision by the tribunal to side with HMRC was that the employees hardly received any of the benefits of the scheme, whilst Reed made large savings through it.

The judges stated that:

 

“Far from providing a benefit to the employed temp, [Reed] appropriated a significant part of the saving to itself; and the supposed sacrifice, however it was presented, was no more than an arithmetical adjustment whose purpose was to ensure that Reed secured the intended share of the benefit. It was not, in our view, a sacrifice in the true sense of that word.”

 

A further deciding factor was the consideration of the status of the workplaces – were they temporary or permanent?

They found that Reed had a contract of employment with its agency staff, but the judges believed that the contracts did not extend to periods when particular assignments had ended.

The judges stated that Reed were under an obligation to find opportunities to work for the staff, which temps could decline. However, they found that Reed exercised no control over the temps when they were between assignments and the contracts lacked specific and necessary detail.

 

 

“While we accept that there was a contract of some sort when the employed temp was not on an assignment, it was not a contract of employment,” they concluded.

Now the case will go for judicial review following Reed’s expressed dissatisfaction with the decision by the tribunal.

As a freelancer/contractor your individual personality is in effect your brand. With the Internet increasingly being used by potential agencies and employers to vet potential recruits and team members it is more important than ever to be in control of how one comes across.

It is not just out of fear that we should be taking care of what we do and say; perhaps it is a route to better and stronger relationships and greater success as an individual in both business and personal relationships.

During the economic crisis it is nerve wracking for many individuals who have lost their jobs as they find themselves in situations where they are effectively starting again from scratch.

What happens if you have spent you career focusing on building strong relationships with everyone around you, regardless of their status? If you always contribute effectively and concisely in meetings, if you always add value to the people who are stakeholders in the projects that you do, however small, if you listen carefully and empathise with others and support them, then; you will find that there are always opportunities for you to move in a new direction. 

Many freelancers and contractors will understand this well because they have all taken the leap of faith setting out on our own path. They know the feelings of fear that are accompany thoughts of what will happen if they cannot find a contract for a number of months.

So how does one counteract this potential risk? By building a personal brand.

Developing a personal brand is about making sure that you understand your personal strengths and focus on using them to create awareness and respect for you amongst your employers, employees, colleagues, clients and acquaintances.

Individuals who stand out as driving real value for those that they work for have a strong personal brand. They will know that they can always follow their heart professionally rather than making compromises.

Branding is often misunderstood; it is sometimes seen as a trick, a mirage that sits in front of the reality. However, branding is really about understanding your individual strengths and growing them and communicating them effectively. This is true whether you are a company or an individual.

Prior to the Internet there was a lot of branding and marketing that was about communicating something aspirational, that may not have been strictly true. However, nowadays brands are being called into check as any unmet promises are quickly made public and can be incredibly damaging.

This is the same for individuals; you cannot try to be something that you are not and expect to be successful in the long run. If you do not truly enjoy what you are doing then now is the time to quit and start again as otherwise you are going to experience a slow decline.

Instead, one must find what they love doing and put every effort into adding value to the stakeholders around us every day. It sounds hard, and sometimes it will be challenging, but surely that is a good thing; easy is boring.

Here is a blog post by Tom Peters entitled “Brand You” (http://www.fastcompany.com/magazine/10/brandyou.html) from 15 years ago on personal branding; it is a blog post that could make a serious impact on the way you think about yourself and your business.

Unless you have been involved in winding up a business in the past it is unlikely that you will have heard of ESC C16.

ESC C16 has been a contractor friendly tax concession for many years that allows those closing down a business to release the company’s assets (e.g. cash) to the shareholders and for those assets to be taxed as a capital gain, rather than a dividend. The particularly good thing about it is that there has been a tax-free allowance of £10,600 per shareholder and the balance can be taxed at 10%, instead of the dividend tax rate of between 20-25%. Until now, taxpayers needed the permission of HMRC to do this but it was almost always given.

HM Revenue & Customs has now been forced by European law to remove concessions and put tax law on a fixed statutory basis.

A major point of this legislation that contractors should take note of is that there is now a £25k cap on what can be withdrawn as a capital gain.

If you have more that you need to withdraw from the company then everything above £25k will be treated as a dividend and taxed at around 25%. If you have less than £25,000 then nothing will change for you.

These changes will come into effect on 1^st March 2012 to which any distributions made in February 2012 will still count under the old rules.

So let’s have a look at a few scenarios:

I will assume that firstly there is a sole shareholder and secondly that there are 2, as most contractors will be covered by these:

Single Shareholder with £60k cash:

Prior to 29^th Feb 2012

-      £10,600 at 0%

-      £49,400 at 10%

Total tax = £4,940

Post 29^th Feb 2012

-      £10,600 at 0%

-      £14,400 at 10%

-      £35,000 at 25%

Total tax = £1,440 + £8,750 = £10,190

That’s a £5,250 variance.

Two Shareholders with £60k total cash:

Prior to 29^th Feb 2012

-      £21,200 at 0%

-      £38,800 at 10%

Total tax = £3,880

Post 29^th Feb 2012

-      £21,200 at 0%

-      £3,800 at 10%

-      £35,000 at 25%

Total tax = £380 + £8,750 = £9,130

That’s a £4,190 variance.

So, not a bad little earner for HMRC.

For those of you who are currently in the process of winding up your business it is worth noting that any distributions made to shareholders over £25,000 after 29^th February 2012 will be taxed as dividends, even if you apply for ESC C16 treatment prior to that date.

Additionally, the Chartered Institute of Taxation asked HMRC what would happen in the case where some distributions occurred before 29^th February and some from March 1^st onwards.

It was found that the distributions before the 29^th Feb would be eligible for treatment as capital gains, whereas anything distributed after March 1^st (over £25,000) would be taxed as a dividend.

So, using the above example, if £35,000 were distributed prior to 29^th February then the remaining £25,000, which is distributed after March 1^st, would be taxed as a capital gain. However, there will still be the tax-free allowance.

We have all had days when it feels that the world (or more specifically, clients) have conspired to deliver us a multitude of problems that all need immediate fixes.

It is very similar to the old analogy of waiting for buses; problems and issues are never spaced out conveniently so that they can be dealt with methodically in a stress free frame of mind.

The worst problems usually present themselves in the form of clients calling with an accusatory tinged tone of voice or an aggressive email. It may be that software or products have suddenly stopped working or that they are not functioning as they should.

It is particularly hard to cope with when you are concentrating on your next project/contract and then receive a call from an angry client that expects an instant solution. This may mean travelling to the client site immediately or spending an extended phone call to discuss the situation to try and find a solution.

So, when contractors have problems firing on them from all angles, what is the best course of action?

Organise your thoughts

 

Try to stay calm, although emotions do come into play never respond out of emotion.

As a simple rule, never respond immediately to a confrontational email. Go for a quick walk or have a chat with someone that makes you laugh, just do something else for a few minutes to give yourself some perspective before you respond.

If you are on the phone then the pressure is greater but at least you have the opportunity to solve the problem more quickly.

Challenge yourself to diffuse the situation as nothing positive can come out of being defensive or even worse inflammatory. How we deal with crisis is a true measure of professionalism.

Go over the problem at hand methodically; write down all of the possible causes ranked by likelihood and then work with your client to agree a strategy for checking all of these things as quickly as possible.

Questions to ask the client

 

It will often feel that a client has a lack of trust in a contractor if they are telling them about a problem that they think the contractor was instrumental in causing. However, this is often not the case, if the contractor can be central to the solution then there is a real opportunity to build a stronger relationship with the client.

1)    Ask the client to explain exactly what has happened, what specific problems it is causing and what they think the root of the problem is likely to be. There is a good possibility that they picked up the phone to you before fully investigating so they may find the solution for themselves during your call.

2)    Go through your list of possible causes asking the client if anything has been changed relating to these. If you are on the phone then this will require some quick thinking. Look at linked products, configurations, data use etc.

If you get to this point where you have exhausted your initial ideas and your clients but still do not have a solution then decide the best way to solve it as quickly as possible with your client. This could be:

• A visit to the client’s site to go through everything with their team.
• Asking the client to write a brief report on the issue which you can them go through step by step with the client identifying other possible causes and solutions. Always make it as easy as possible to follow your thinking and instructions.

 

Having the client write a short report on the issue gives you some breathing space to put your other project/s temporarily on hold to concentrate on this issue.

It would be great to hear some specific examples from contractors detailing how they solved problems and managed relationships with clients under pressure. Please let us know your experiences in through the comments section below.

I am a regular user of Quora (http://www.quora.com/) – a social network that allows users to get answers from subject matter experts free of charge, and saw this question:

“Is it considered acceptable for a developer to bid on a job that requires a certain skill set (e.g. Ruby) and then charge the client for the time spent learning how to use it?”

I thought that it was an interesting and relevant question for Churchill Knight & Associates contractor clients so I decided to cover it here.

There were 3 responses from users as follows:

Geordie Guy, Computer systems architect

“The developer is charging to solve a problem. That solution may involve deploying existing skills, learning a new skill or combinations of the two, or even engaging other people as well. What the solution involves is immaterial; all that matters is that the person paying the bill is happy with the quality of the solution and the price they paid.

 

The only ethically awkward part of this is the auctioning of development work.”

 

Nick Hortovanyi, I don’t know what I do

 

“It’s a matter of degree of learning. Every project will have an element of learning involved as technology changes at a rapid rate.

 

In a lot of cases it may be better to ask for a fixed priced quote instead of an hourly rate.”

Konstantinos Konstantinides, Video technologist, patent agent, and…

“During the bid evaluation, the client should make sure that the developer has the required skills. The client should be able to look at the developer’s past work, call other clients for references, etc.

 

If the client did not do due diligence, then they deserve the developer they picked!”

So how do you feel about this matter?

I believe that Nick has a good point here. On many projects/contracts there will be an element of learning, for example, learning about the specific peculiarities of the business problem that you are working to solve and often learning about how to use software to solve these specific issues.

As a limited company contractor or freelancer you are hired to solve a problem within an agreed time frame and to an agreed standard of quality for a certain cost. If those terms are all met then there is little chance that this would become an issue.

However, if the contractor takes on work that they are not really qualified to undertake and then things go wrong; relationships and reputations can be badly affected. Their skills are undoubtedly going to be called into question.

Perhaps the most important thing as a contractor is to leave behind happy clients as this supports future success. As a contractor you should seek to stretch yourself professionally but you should not enter a new job without an idea of how success will be achieved.

The economy has been going through an extended rocky period, which to some extent has had an impact on almost everyone in the country.

Many UK contractors and freelancers have seen fluctuations in the rates offered for contracts. If you are an IT contractor in financial services then there is a strong possibility that you will have been affected by rate cuts. Goldman Sachs, HSBC, Bank of America, Merrill Lynch, Barclays, BNP Paribas, Deutsche Bank, Lloyds, Nomura, RBS and UBS are all reported to have reduced rates for their contractors. Most cuts have been significant varying between 10-15%.

So how have contractors reacted?

Alessandro Ferro, principal consultant IT into banking, at the JM Group commented “We haven’t encountered a single candidate who has handed in their resignation because of the rate cuts,” he went on to add “Most have accepted them, some have tried to fight the cuts but have largely been unsuccessful.”

Ben Cowan, Director of the contract desk at Astbury Marsden says walls are being put up at other financial institutions which are restricting contractors abilities to take the option of leaving their jobs when rates are cut. “Before investment banking clients make an offer to a candidate, they’re demanding to see a copy of their latest contract to ensure that they don’t pay more than their current rate,” he believes that this is mainly because “The rate cuts are more or less universal, most banks are keen to avoid starting a bidding war.”

In any market or any job it is difficult to be faced with a significantly lower pay rate in comparison to the previous year or two. It is common for limited company contractors and freelancers to avoid contracts that they do not feel pay them enough.

Although we all have expectations of how much we should be paid for our services based on past experiences and living expenses; pay rates for contractors are open to pressure from market forces.

The fact is, when large sectors of the economy join forces to push fees down there is little that an individual can do but accept the new status quo, at least in the short term.

Diverse and transferrable skills are an advantage because if your skills are tied to a particular sector or business type, there is a risk of problems occurring should that sector see a decline.

This is a difficult pill to swallow as it means more effort on the part of the contractors. We all need specialist skills to get a high rate of pay in the first place but with that specialism come vulnerability should large-scale changes occur. Should contractors always stay abreast with additional skills that can be easily transferred to another sector? Perhaps alternating between two roles so that if one area temporarily or permanently dries up they are not left high and dry?

It is also important not to react emotionally to pay cuts. Try and keep as many options open as possible by avoiding expressing displeasure publicly and loudly. Instead, take a good look at your options over a week or so and then make a more informed your decision.

As a contractor it is important to maintain relationships with your business network.  This will help not only to win new clients but also to develop important relationships that will strengthen your position as an expert in your field.

This can have the effect of allowing you to charge a higher daily rate, being able to pick and choose your jobs and generally not feeling the potential loneliness of working on your own.

For many contractors, business networking will have moved to the online space where it is much less intimidating to approach an individual and strike up a conversation.

This is great and it is necessary but it is often through meeting people face to face that gives the opportunity for a great relationship to really blossom as online you are always open to distractions.

Thankfully the same basic principles apply to both offline and online networking:

1)    View networking events as an opportunity to meet a lot of interesting people and not a chance to secure a job or sale. Showing a genuine interest in the different people you meet goes a long way in helping to build a great first impression. Part of making a good impression is to be a great listener, allow people to talk excitedly about their interests. This will enable you to build rapport.

2)    If you are going to a smaller networking event then research the major players who will be there. Check their LinkedIn profile to find out their professional experience and then see what they are talking about on Facebook/Twitter/Quora or wherever they are. Try to understand their frustrations through their postings and aim to have some ideas for them.

3)    Become a fan of the people that you want to connect with online first; comment on their blog posts, re-tweet their tweets and interact with them in a supportive and complimentary way.

4)    Be prepared to sell yourself when it is asked for; as I said above you should not go to networking events with the selling mind set switched on. However, you do need to be able to clearly explain how and why you are great at what you do when it is asked for.

5)    It is obvious to all of us when a relationship reaches a stable point. Both of you just know that a bond has been formed and something clicks, sounds pretty cheesy, but it is true. When this happens and you feel comfortable with each other then you can push the relationship a step further with a call/email or another meet up.

It has always been a vital part of business to socialise and to establish one as a respected and trustworthy individual in the community. Follow these simple steps and you will be on your way to building lasting business relationships.

Many contractors are brought in to either organise or manage a team, or to be part of a team working towards achieving a goal within a defined budget and timeframe.

Whether you are running things or are collaborating as a team member it is vital that the project is managed well.

Project management is down to great organisation, people management and risk/problem management. Here are some tips to help run a successful project:

1) The entire project must be fully visualised and understood by everyone involved. Instructions and descriptions of the project parts should be clear and specific and all participants should have a good idea of what is happening with the other team members.

2) Project managers have to balance 3 opposing dimensions of success. The project has to be delivered on time and on budget to a satisfactory level of quality as judged by the key stakeholders. It is important to spot potential delays before they happen and to take care of them. This can come through team members who are not fully on board with their role in the project or just through problems that crop up along the way.

3) Priorities need to be agreed and managed throughout an organisation. If team members are on multiple projects and the CEO is telling them to do one thing and their Head of department another then things can become stressful and messy.

4) It is always worth using project management software to keep things clear and focused. Basecamp, Goalkeeper or Huddle are all examples of project management tools.

5) Project Managers need to be great at organising project timings. As I mentioned above, potential hurdles need to be spotted and dealt with quickly. Progress and changes need to be communicated in a timely manner through careful use of email, meetings and project management software. All of the above need to be carefully planned to make best use of everyone’s time.

6) The Manager/s of a project need to be given the authority to carry out their responsibilities. They should have the authority to give instructions and set expectations, set priorities and they should also be able to fully manage the resources that are necessary to getting the project done.

7) Great people skills – a good project manager needs to be respected and trusted by the team. This means that one has to be a good listener and fair in order to bring out the best in people. Give compliments when they are due and seek to help others to excel in their work. You need to genuinely empathise with others feelings and have the ability to persuade others to your point of view when necessary.

A good Project Manager will understand the specific strengths and weaknesses of all participants in a project so that the tasks can be divided up effectively. Build effective teams that can bond well together and that can operate effectively with the other teams with which they share dependencies.

The fifth IR35 meeting prior to the launch of the new system in April 2012 was planned for January 18^th. However, due to the large workload involved the meeting was put off.

An HMRC spokesperson told Shout99 that:

“The IR35 Forum meeting was not cancelled, but postponed until February 21, 2012. This was because, following working groups with the external stakeholders, we felt that there was more work to do prior to holding another full Forum meeting.”

 

So where are we with the new revisions to IR35?

 

Prior to the 4^th meeting of the IR35 forum two sub-forum meetings chaired by the PCG for the non-HMRC members of the forum took place to discuss the fact that there is still a lack of a singular and clear interpretation of some aspects of the rules. The aim of the meetings would be to identify these areas of disagreement and to come up with a proposal for HMRC on how this should be tackled.

Following recommendations from these meetings, HMRC stated at the 4^th meeting of the IR35 forum that they intended to start looking at a contractors business in totality rather than simply on a contract-by-contract basis in order to determine candidates for investigation.

Of course the law still remains unchanged and contractors must be compliant on all contracts. HMRC are stating that in order to effectively focus their resources they will consider the bigger picture when identifying whom to investigate before engaging in an investigation.

HMRC also suggested that they might withdraw from investigations into contractors who are classified as low risk to enable them to focus their time on the high-risk cases with a greater probability of success.

However, it is yet to be agreed exactly who is/isn’t low risk.

From everything that we have read on the IR35 forum process, it sounds as though it has been quite thorough and well conducted. The PCG have ensured that contractors’ voices are heard and time has been taken to consider and investigate all opinions.

They will have a busy time until the April update but hopefully following that contractors will be a lot clearer on where they stand and the process of the investigations should be a lot fairer and smoother.

The first year as a contractor is crucial in terms of ones confidence levels, financial situation as well as getting established in the market.

There are a number of things that are critical to ensuring ones survival over the first year that should be considered and planned for:

1. Consider the reasons for starting the business, is it driven by a desire for a change of lifestyle or a real passionate for the work? Freelancing or working as a consultant is tough but rewarding. However, one must love what they do to succeed, as there is no team to hide behind.

2. Avoid distractions – If one is passionate about what they do then this is relatively easy. Effective and efficient time management is a pre-requisite, however, contracting also allows a great deal of flexibility, which can be used to spend more time with family.

3. Be careful with money – a good financial safety net to cover illness, holidays and time between contracts is needed. Most importantly try to ensure that you do not go into debt.

4. Do not try to do too much at once; ensure that everything that you do is done incredibly well and that your clients see that you have gone above and beyond for them. Recommendations are by far the cheapest and easiest way to grow a business.

5. Plan to spend some time giving help and advice for free to build relationships and trust. This needs to be used with care but helping out an individual with some free advice or a small task can bring plenty of rewards down the line. Of course, the focus needs to be on earning a living in the short term too but it is also worth sowing a few seeds.

6. One needs the ability to be flexible, contractors will work with a very varied bunch of people and there will always be different professional demands. Be aware of this and adapt to each situation as needed.

7. Be proactive in looking for work; there may be opportunities that you can spot on jobs that you are on which the business owners have not yet identified.

8. Build up a list of contacts in a small database and touch base with them either via email or social networks on a regular basis.

9. Have fun in your work and relationships; you will be more effective if you take the work seriously but make it fun too. All this really involves is being friendly and having a chat with the people around you.