What is the outlook for interest rates?

UK interest rates were held at a record low for the 25th month in a row last week, which has posed questions to contractors who currently have a mortgage or are thinking of taking one. How long can this last? Should I assume rates will go up and take a 5 year fixed rate, or gamble that they will stay low and take the risk on a variable deal? Sound familiar?

There are some clues if you look at comments made by Mervyn King, Governor of the Bank of England, when he explained his outlook for the UK economy. The answer to the questions posed above is linked to one key word – inflation.

Mr King said the consumer prices index (CPI) measure of inflation would climb closer to 5% in 2011. However, he said, the Bank’s Monetary Policy Committee (MPC) believed inflation will be around target at 2% in two or three years “under the assumption that the bank rate increases in line with market expectations”.

“Interest rate futures are pricing in a first 0.25 percentage point rise by Q4 this year, and another every three months for the next two years or so”, said Philip Rush, economist at Nomura. That would signal a 0.25% increase by the end of 2011, and a further 0.75% by the end of next year.

But what about prospects for the base rate beyond 2012? Most economists have differing views at this point, so I will offer an opinion at this point and nothing more. There is a strong argument that says rates do not necessarily have to go back to pre-recession levels for a booming economy, an argument I agree with. A base rate of circa 3% could be enough to sustain an economy that has put the worst post war economic crisis behind it. Factors affecting inflation in the short term, such as oil and commodity prices as well as austerity measures applied by the current government, should fall away in the short term, allowing for a more realistic appraisal of inflation. That figure, in my opinion, will be between 2 – 3%; easing upward pressure on the base rate.

Being a realist about party politics, I predict the current government will generate a “mini-boom” in 2015 prior to the next general election via fiscal policy; therefore assuring a Conservative led government for another 5 years. The impact on interest rates after that is a topic for another day.

In short, contractors should look at their own affordability requirements when considering their new mortgage. Predicting what to do based upon base rate movement is educated guesswork at best, so factors like potential gaps in contract and available savings should play more of a factor in the decision to fix or not to fix.

For more information on Contractor Mortgages CLICK HERE

Taj Kang
Associate Director
Contractor Mortgages Made Easy

Did you know? – Self Certified Mortgages are no more

Back in 2009 the Financial Services Authority (FSA) put an end to self-certification mortgages in an attempt to ensure that all borrowers prove their ability to repay in advance.

Self-certification mortgages were originally aimed at contractors, the self-employed and freelance/contract workers who had trouble proving their income and in many cases became the mortgage of choice for contractors on irregular income who struggled to secure mortgage borrowing with their bank..

Many contractors reading this may have had a self-cert mortgage in the past or may have been relying on one for a future mortgage.

At Contractor Mortgages Made Easy they are well aware that many contractors are perfectly capable of running a mortgage but may find it difficult to prove their income due to the tax efficient way that operate.

Contractor Mortgages Made Easy have worked effortlessly on behalf of contractors to educate senior underwriters at high street lenders as to why in many cases contractors carry a significantly reduced risk to lending.

As a specialist mortgage broker for Contractors they are able to help contractors secure mortgage borrowing with high street lenders taking the whole of your earnings into consideration.

To find out how much you could borrow based on your contract rate – At CLICK HERE

Taj Kang, Associate Director at Contractor Mortgages Made Easy commented:

“The fact that so many self-cert mortgages were granted to employed workers who could prove their income, and the high level of arrears associated with these types of loans shows that self-certification mortgages were being abused by both individuals and brokers. Contractor Mortgages Made Easy would not advise a professional Contractor or Freelancer to go down the self-certification route; if you approach a specialist contractor mortgage broker then they should be able to secure you a competitive mortgage that is based upon appropriate evidence of income”

It is the opinion of Contractor Mortgages Made Easy that “The FSA are correct to tighten up lending criteria, as any contractor or freelancer that can adequately afford a mortgage should have no need to go down the more expensive self-cert route to secure borrowing”

Another thing to consider for Contractors

Contractor Mortgages Made Easy

As you may or may not be aware on 6th and 9th December 2010, HMRC released Ministerial Statements advising that legislation will be introduced to tackle arrangements involving trusts or other vehicles used to reward employees and that of disguised income.

They also inserted an “anti-forestalling‟ provision to apply from the 9th December 2010 meaning that any payments (loans) or assets provided between 9th December 2010 and 6th April 2011 would be caught within the new legislation as though it happened on or after 6th April 2011.

This means that contractors using Employee related trusts (EBTs) and similar schemes will from the 9th December 2010 be unable to reduce their tax liability using these models and will be forced to look for an alternative solution or switch back to PAYE Umbrella.

Anti-Avoidance: Employment Income and Pensions Contributions
The Government will be taking action to prevent efforts to avoid Tax and National Insurance Contributions (NIC) on earnings provided through the use of trusts and other vehicles.

Employers and employees are entering into arrangements using trusts and other vehicles that seek to avoid, defer or reduce liabilities to Income Tax and NICs on earnings or that seeks to avoid restrictions on pension’s tax relief. Arrangements in some cases seek to rely on the use of complex intermediary structures, some of which may be offshore. The Government is considering options for tackling these arrangements, including those which seek to avoid the restrictions on Tax Relief for pension schemes.

The Draft Legislation
“The legislation inserts a new Part 7A into ITEPA 2003. The legislation ensures that where a third party makes provision for what is in substance a reward or recognition, or a loan, in connection with the employee‟s current, former, or future employment, an income tax charge arises.”

Now the good news……
There are still some products that remain fully compliant with Government rulings. That do not operate Employee related schemes. That uses statutory reliefs, involves no “tax avoidance‟, can be fully disclosed to HMRC, have never been challenged by HMRC in court, and loans are not taxable as “disguised income”.

APS Group is the example of such a product that I have been personally using. They use a product that has been around for nearly 20 years and is fully transparent to HMRC.

A large part of the fee I pay each month goes directly to Legal Council each month to make sure that we always comply with new laws or legislation.

The APS product is an “Intellectual interpretation of the existing statutory provisions and Fiduciary law”. APS Limited is the first company I have seen using this better structure and I have started to use them for myself. If you are interested in doing so too click http://www.contractbusinessanalyst.com/referral or call 0844 5675657 and quote the reference “Contract Business Analyst.com”

To operate as a contractor you will have to have a private limited company, or use an umbrella company or other such scheme to get paid. In this article I aim to outline how to do each and the pros and cons of each choice.

Private Limited Company

The vast majority of Contract Project Managers work through their own Private Limited Company. The term ‘limited’ derives from the fact that the company’s finances are distinct from the personal finances of their owners (unlike sole traders).

PLCs (public limited companies) differ from Private Limited Companies in that they are allowed to offer shares to the public to raise funds (with shares issued to a minimum value of £50,000).

Private Limited Companies cannot offer shares to the public, but may have any number of shareholders. Each Private Limited Company must have at least one director to make management decisions and a company secretary.

Setting up a company is often offered as part of an accountancy service, or by companies who will do all of the application and documentation for you for a small fee. This can be done by you direct with Companies House, but can take longer and for a small fee it is often more cost effective to use the intermediary companies (or your accountant). The following documents will be completed as part of your company:

1) Memorandum of Association – Includes Company Name, Location and Type of Business

2) Articles of Association – Outlines Directors’ powers, shareholder rights, etc.

3) Form 10 – Provides Directors’ and Company Secretary’s Names & Addresses, together with the Registered Company Address.

4) Form 12 – States that the Company complies with the terms of the Companies Act

Steps taken to set up my own private limited company:

Choose a company name and instruct my accountant to set up the company in that name
Complete the required forms to set up the company
Set up a business bank account (as money paid to me from my contract is not mine – it belongs to the business!)
Employ an accountant to look after the business accounts
Pay my accountant for my payroll processing on a quarterly basis (around £100[1])
Pay my accountant for being my company secretary and registered office, mainly so they receive my business post – this is money well spent as I move house a lot! On a yearly basis (around £100)
Keep a copy of what I earn for VAT etc, and fill in my own VAT form every quarter (my accountant helped me with the first one and can do them all for me if required, for around £200 per quarter)
Ensure my accountant does a yearly statement on the company accounts and helps me complete a yearly tax return (around £1000)
Ensure contracts are written between the agency and my company name and as company director I am required to sign these.

Really that is it, it looks like a lot above, but there is very little admin once you are up and running. I keep a spreadsheet of when I am working and how much I am paid and the VAT amount etc, and it takes me 5 minutes a week to update that, then when my VAT form comes I fill it in, my accountant does the rest.

I can honestly say it feels no different to being an employee; you have to remember you are an employee of your own company. The money that goes into your business account is not yours, what belongs to you is the salary you agreed to take from the account – and you have to pay tax on that.

The advantage to using a Private Limited Company is; as long as you are claiming taxable expenses, you should be taking home about 65% of your gross pay. This is not bad, but the disadvantage is there is a bit of administration as above to keep on top of your back office.

Umbrella Company

This is where you, ‘ the contractor’, essentially becomes an employee of the umbrella company, a third party company who is between the contractor and the agency.

In the United Kingdom, an umbrella company acts as an employer to independent contractors who work under temporary contract. Recruitment agencies will only issue contracts to a limited company, however many contractors may work under one umbrella company, which saves them from setting up their own private limited company.

You submit time-sheets to the umbrella company who will invoice the end client (or agency) for the work done by you. You will then be paid as a PAYE employee less the umbrella fee.

An umbrella company is a good choice if you earn less than £25,000 per year, or are on a short contract and don’t intend to stay contracting for long, or prefer not to set up your own private limited company. Working through an umbrella company is simpler than working through your own limited company but it means you will take home less money from your contract.

How working through an Umbrella Company works:

The umbrella company will sign a contract with your recruitment agency

You will sign an employment contract with the umbrella company
You regularly submit both timesheet and expenses information to the umbrella company
The umbrella company will invoice your agent/client for the work you have done
The umbrella will receive funds for you from the agency
You receive your money less tax, NI contributions and the Umbrella services fee and your umbrella company will send you a payslip just as with permanent employment

The advantage to using an Umbrella company to get paid is the lack of hassle – Payroll, tax etc, is all done for you by the Umbrella Company. However the disadvantage is on average you will only take home around 55% of your gross pay.

Other Alternatives

Employee Benefit Trust

There are a number of contractors talking about being paid “offshore”

This usually means they are using an Employee Benefit Trust to receive their pay. This means an umbrella company that holds an account offshore. The contractor pays into this account and takes an interest free loan out every month from this account in the form of wages.

This method can gain more money to the contractor and it means paying less tax. But recently these schemes have been deemed as “tax avoidance” on 6th and 9th December 2010, HMRC released Ministerial Statements advising that legislation will be introduced to tackle arrangements involving trusts or other vehicles used to reward employees and that of disguised income. They also inserted an „anti-forestalling‟ provision to apply from the 9th December 2010 meaning that any payments (loans) or assets provided between 9th December 2010 and 6th April 2011 would be caught within the new legislation as though it happened on or after 6th April 2011.

This means that contractors using Employee related trusts (EBT‟s) and similar schemes will from the 9th December 2010 be unable to reduce their tax liability using these models and will be forced to look for an alternative solution or switch back to PAYE Umbrella.

Remuneration Trust

Another alternative is a remuneration trust. This is a structure which has been used by high net worth individuals and corporate bodies for over 20 years in tax planning. The remuneration trust is a legally recognised entity provided for in both statute and common law.

You become an employee of a consultancy who contracts you out to your agency or client. The employment relationship is covered by an overarching contract of employment. The consultancy is registered as a PAYE employer and pays you a gross salary of £1,008 per calendar month, which will be subject to full income tax and National Insurance.

Once the consultancy has deducted your salary, they will elect to contribute the remaining profits from your assignments to the remuneration trust. The trust will then pay you your agreed % return of this contribution as a deep discounted commercial loan. As with all forms of commercial credit, this payment is not treated as income and therefore not subject to any form of taxation or National Insurance.

You will receive a signed loan agreement from the trust to evidence the existence of the loan. The loan will be rolled over every 10 years such that it exists in perpetuity and after death will be considered written off, as under English law debt cannot be inherited. The debt can actually also be used to offset against any inheritance tax due by your estate. Payments from the trust will be paid the same day as the trust receives the funds.

This does not fall into the statutory definition of tax avoidance as it is by virtue of your commercial

relationship with the trust that you are receiving the finance.

This method:

Involves no ‘tax avoidance’
Full disclosure to HMRC
Has never been challenged by HMRC in court.
Loans are not taxable as ‘disguised income’
Contributions are deductible in computing the profits of the tax payer company
Full employee status
Professional Indemnity Insurance on the whole structure of up to £2 million.
Has been used as sound tax planning for almost 20 years.
High percentage returns

APS Limited is the first company I have seen using this better structure and I have started to use them for myself. If you are interested in doing so too click http://www.contractorprojectmanager.com/referral or call 0844 5675657 and quote the reference “Contractor Project Manager.com”

Pay comparison of options

Below is a table comparing the typical pay with each option:

Table Comparing Contractor Payment Options UK

(Please note. The below figures are for illustration purposes only. The PAYE figures have been calculated using a tax code of 747L with applied £1,200 of taxable expenses)

Conclusion

There are a number of ways to be paid now and it is up to you which one you choose based on how much hassle versus risk versus money you prefer.

In these times of crisis, we are reminded how unsecure our jobs can be. In such a market would you consider contracting?

If the answer is yes, then you may believe that you will not be able to get a role as a contractor, so let me dispel a few of the common myths surrounding this:

“I have to be very experienced before I become a contractor”
No you don’t – think of contractors as mercenaries or extras in a film, or even temps. Businesses need personnel to fill resource gaps at all levels – junior, senior etc…

“When times are hard and permanent staff are getting laid off – the contract market suffers”
Actually this is not true. The reason contractors are so attractive to companies is they can be hired and released at short notice; even though contractors are more expensive they do not come under headcount costs.

“Contracting will ruin my CV”
If you make the decision to become a contractor, 3 month roles and gaps in between roles will not affect your chances of getting a role, if you explain them properly in your CV as well as in interview.

“If I am a Contractor I won’t be able to get back into a permanent role”
This is not necessarily true, in this modern age employers are becoming wiser to different employment practices. Many people now realise that breaks for travelling, sabbaticals, postgraduate study breaks, or contracting for a number of years in-between permanent roles are an acceptable part of people’s careers.

“I have to have Industry Sector Experience to get a role in that Sector”
This is not necessarily true; however the market is set up so that those who are a lower risk and better fit the brief will get the job. This means if you have any experience in the sector you are trying join you are more likely to be considered for a role than someone with none.

“If Demand shifts I will not be able to get a contract – no-body will want me!”
If demand changes for your specialism, you can “shift” to related areas. For example if Investment banking fails, then I can try for retail banking or the financial sector in general.
If this changes your mind, you will need to market yourself with an up to date CV and register with the various job sites. The contractor market and contract Project Manager jobs are advertised on numerous job sites.

Below are my tips on the most efficient process in applying for a Contract Project Manager position:

1. Send CV in response to job advert
2. Take a note of:
   1. When you sent CV
   2. Recruiters contact name
   3. Recruiters contact details
   4. Name of agency
   5. Where you saw the advert
3. Call recruiter to confirm they received your CV
4. Get recruiter to check CV suitability for role
   1. Make a note of whether you were suitable
5. Get recruiter feedback
   1. Make a note of recruiter feedback
6. Chase recruiter daily until – shortlisted or rejected

This gives a quick overview of how to become a contractor project manager, for more details, contact us now and get personalized service.