Professional Contractors Group – Guide to Freelancing: Running a Freelancing Business
ALL ABOUT AGENTS
Why do I need an agent?
You do not have to work through agents if you are able to find work directly for a client by yourself. Agents are basically outsourced buying operations for clients – the better ones also act as an outsourced marketing service for you. At present around 75% of contract work is secured via agencies.
How do I choose an agent?
Primarily, you will need an agent who can use their client base to find you work, offers good contract terms, is prepared to take time to get to know you and your skills and expertise (so they can sell you effectively) and who will pay promptly. Some of the big agents offer extra “perks” such as discounted training schemes but these extras really do not add up to much over the course of a contract. Start by looking at agents offering a work opportunity you may be interested in.
Nowadays, a “good” contract is outside of IR35 and on true business-to-business terms. A “bad” contract contains clauses that restrict your ability to work for clients or place personal liability on you or your family. Typically, this sort of contract will look more like a contract of employment than a business contract. There have been several relevant court cases regarding the status of freelancers (outside of the IR35 issue) e.g. O’Murphy v Hewlett Packard (2001). Because of the uncertainty regarding status and employment rights many clients insist on outsourcing contracts through agencies, while some clients use Preferred Suppliers, which leads to a restriction of choice. However, if you can find direct work it may help your IR35 status and you may be able to negotiate a favourable rate.
Try to find out as much as you can about the contract from the agent before you give permission to send your details to the client. Do not let agents put you forward for a role for which you are not suitable. Agents are required to ask your permission before submitting your details to a client.
Some agents are Associate Members of the PCG. They have access to non-IR35 contracts from the PCG and receive PCG newsletters. They are therefore more likely to understand the issues facing freelancers than non-Associate agents.
You could consider having your own company contract and terms and conditions of supply of service drawn up by a legal expert. Some agents are already willing to accept such contracts. The PCG has a list of recommended legal experts who can help draw up such contracts. Once your company has such a contract it can easily be adapted for direct to client use as well.
How do I find a contract?
Most contracts are still obtained via agents, although increasingly freelancers are relying on the Internet or personal contacts to find work. You should have an updated business profile and CV (or consultant profile) to send out. Most agents use email. Agents may want to register your details on their database but, in reality, most contracts are found on one of the freelancing job websites before the agent ever searches the database.
Something approaching 80% of the agency freelancing market now passes through the Jobserve, Jobsite and Engineers on the Web websites. Freelancers search the online contracts database and, if they find a contract they like the look of, submit details via email to the agent or client who is advertising. If you submit your details to an agent and hear nothing in the next few days, you have not been selected for interview. Apart from Jobserve and other contract websites, PCG members are using the PCG Portal to find work.
What information should I send to an agent?
Once you have selected an agency to represent you then send them your business profile, CV or consultant profile with detailed descriptions of the projects that you have worked on, detailing all of your relevant skills, qualifications and companies that you have worked with. Do whatever you can to make the CV easy to read and be clear on your speciality. It will save you a great deal of time in sifting through phone calls later. Bear in mind that you will have to make regular calls to these agents to update them with your latest projects and whether or not you are currently looking for a new contract. Agencies will also need basic details of your business, such as company and VAT registration numbers. Some clients may require references.
Many agencies have adopted the iProfile as an industry standard method of holding your details. This is a web-based CV that is automatically created for you when you send your CV to an iProfile Compatible agency and, as an industry standard, it can be re-used with other agencies as well. The iProfile is designed to contain a clearer definition of your skills, qualifications, experience and work preferences than a paper CV so that agencies are able to match you faster and more accurately to their clients’ requirements.
How do I make sure I get the right contract at the right rate?
Much of this comes down to your interview and negotiating technique. Remember this is a two-way process and is your only opportunity to find out whether you are committing yourself to six months doing work which is not right for you. Make sure you ask all necessary questions to understand the task you are looking to undertake. This is also your chance to improve your position with the client and the agent. If the client really wants your company’s skills and experience, you can generally get a better deal.
The agent will usually be paid commission as a percentage of your hourly rate, anywhere from 5% to 25% depending upon industry and sector. So the agent only gets paid if you get work. Some clients have agreements with agencies to supply freelancers on a fixed level of commission. In this case, the agent’s margin is usually non-negotiable, so if you want more money it will need to come from the client. You therefore need to push home your advantage during the initial discussion with the clients. Like all sales meetings it helps if you have researched the potential client – it will impress if you clearly understand what they do and their market.
Otherwise, your negotiations with the agent are just as important as those with the client. If the client really wants to hire you, this gives you a stronger hand to take a larger share of the money being paid to the agent.
Contract negotiation is not just about getting more money. You may want to secure a non-IR35 contract, which can reduce your tax and NI liability. You could also consider negotiating the right to work from home, more project control and so on.
A rate will often be slightly higher if you accept payment terms of 30 days rather than 7.
If you are nervous about the thought of going for lots of interviews or negotiating, remember that it is just a normal part of freelancing and gets easier with practice. Don’t take it personally – you are no longer an employee, so this is a straightforward business-to-business negotiation. There are many books you can buy to improve your negotiating skills and some local Chambers of Commerce run negotiating courses.
Does it matter how much commission the agent gets if I’m happy with my rate?
Sometimes it does. Let us say you are getting paid £25 per hour and the client is paying £50 per hour for your services. All clients expect to pay an agency margin but, because some agents have two-sided non- disclosure clauses, the client may, in this case, think you are a £40/hour freelancer. This will have an impact on the level of expertise the client will expect you to have. This, in turn, could have a significant effect on the relationship you have with your client during the contract. So, make sure you use the interview as an opportunity for you and the client to gain an understanding of the relationship between yourselves and the agent.
Do I have to use an agent?
There is no reason why you have to use an agent but many freelancers find that this is the easiest way to secure work.
Can I rely on agents to represent my business?
Some agencies have gained a poor reputation among freelancers. This is mostly due to bad service or giving misleading information about a contract. However, they are certainly not all bad, and perform a useful function for many freelancers. When dealing with an agent, remember that fundamentally they are salespeople. They want to “sell” you a contract and to “sell” you to the client. This is how they get their commission. They are businesses, first and foremost, in a competitive world. Many agencies are experiencing difficulties in the current economic climate, which is leading to increased competition.
PCG members regularly share experiences about agencies and can point you in the direction of good ones. Have a look on the PCG forums.
Most agencies pay on the basis of timesheets signed by a representative of the client. The exception will be fixed-price work, although even here the timesheet may be the recognised indicator of progress. Many clients also have project time sheet systems. Typically a freelancer will raise an invoice on a frequency agreed at contract negotiation time, usually weekly or monthly, which is reconciled with the signed-off timesheets. It is in the interests of all parties that timesheets be filed regularly and accurately as they are the basis for clients’ and agents’ cashflows and ultimately the freelancer’s income.
“Negotiating for Dummies” by Donaldson and Donaldson, or any other introductory book on negotiation.
The PCG Portal: www.pcg.org.uk/portal
Online agency freelancing database: www.jobserve.com
Online guide to getting the most out of your agent: www.ctm.uk.com/freelancing/agencies/index.html
Advertising your skills – the CV or Consultant Profile
A well-thought out CV is as important for a freelancer as for a permanent work-seeker, if not more so. Some freelancers produce glossy company brochures and consultant profiles but clients are generally most comfortable with the traditional CV, which even the large consultancies provide when putting their staff on-site.
The advice on good CV practice is as varied and contradictory as there are recruiters. Core advice would include:
• Keep it short and to the point: 5-7 pages maximum
• Include a ‘skills summary’ at the beginning
• Avoid embellishing the truth
Many agents rework candidates’ CVs to an in-house format and there are attempts at creating industry- standard formats, such as the iProfile (http://www.theskillsmarket.com). Always check if this is likely to happen with your CV and ensure that the resulting document reflects the original faithfully as there is nothing more embarrassing than turning up at a client for an entirely inappropriate role!
Alternative forms of advertising
Many other forms of advertising your business may present themselves. Entries in Yellow Pages or trade directories, such as those produced by the Chambers of Commerce may open up avenues to clients not covered by the traditional agency route. Some freelancers set up web sites highlighting the services their company provides; often these are simply an electronic rendering of the CV and will depend upon the degree of effort you are prepared to put in. Business cards are an important vehicle for raising your profile with people you meet and can be an effective form of advertising.
UMBRELLA and COMPOSITE COMPANIES
My accountant/agent suggests I should work through an umbrella company.
An umbrella company is a company run by someone else. You may still have shares in the company but someone else will be director and company secretary. Basically, you become an employee and the company is run for you.
There are two broad types of umbrella company: the first is where you still hold shares in the company and are paid dividends. These are usually called “composite companies” and they will have several freelancer shareholders each with their own class of shares on which they receive dividends based upon the income they have brought into the company and the expenses and salary they have drawn. You can still get the tax benefits of dividend payment. The other is where you are simply a standard PAYE employee and receive no dividends. This latter type is similar to being employed by a service provider, although the managers of the umbrella may have negotiated more generous expense arrangements with the Inland Revenue.
Umbrella companies come in all shapes and sizes and can be quite complicated. Some offer you lots of benefits; others are no different from standard temporary employment. If you have any doubts, you should seek independent advice from a qualified accountant before signing up.
What’s the difference to working through my own company?
Firstly, the umbrella company agent will naturally wish to be paid for the service. This will generally cost you around £100 + VAT per month, which cost may be offset by the more generous expense arrangements. The benefits of these differences in expenses will depend upon your individual circumstances and may well change over time.
Secondly, if another business is running your company, it is in their interest to minimise their administration costs and maximise their own profit. If you take an interest in running the company yourself, you have more incentive to make sure the company is run efficiently, for your own benefit. The benefits for the freelancer include having someone else handling all the company administration, removing the requirement for the freelancer to do so. This could be a substantial time saving for the individual as well as removing the need to be aware of the legal requirements and risks involved with running a limited company. Some schemes also come with built-in insurance cover for, for example, IR35 investigation.
Will an umbrella company protect me from IR35?
No. Many agents believe working through an umbrella company in itself will protect you from IR35. IR35 status is determined by your working relationship with the agent and client and the contracts these relationships are based upon. Therefore, IR35 applies in the same way to umbrella companies as it does to limited companies
Will an offshore company protect me from IR35?
Some freelancers have been told that they can use an offshore company to avoid IR35. This is not the case. It does not matter where your company is incorporated, as this does not affect how the Inland Revenue determines IR35 status. There are freelancers working in the UK with companies incorporated in countries such as Ireland, the Netherlands and so on. There are reciprocal legal and tax agreements between the UK and these countries. However, some agents and clients are nervous about dealing with foreign companies.
While the PCG cannot comment on specific cases, you should be aware that some of these arrangements could be subject to scrutiny by the Inland Revenue and indeed some of these schemes have already been seen to get into some hot water. Careful investigation should be applied before entering into any of these arrangements.
Do I need to pay myself the minimum wage?
If you are a director of your own company then the minimum wage legislation is unlikely to be applied, unless you have a contract of employment with your company. However if you work through an umbrella arrangement you will have to pay yourself at least the minimum wage.
How should I pay myself?
As a freelancer you have far more control over how and when you are paid. You can pay yourself just enough to stay under the higher rate tax bracket and use your partner’s tax allowance too if they are shareholders or employees of the company.
You can reduce your total tax burden by paying a higher proportion of your income in the form of dividends, which do not bear National Insurance, and the rest as salary. However, some accountants advise that you should pay yourself a “reasonable” salary of, say, at least £20,000 per annum (or some similarly random amount) so as to reduce the likelihood of being caught by IR35 or the threat of an Inland Revenue investigation. However, if you pay yourself a salary of over £4,615 (based on tax year 2002/2003 rates) per year in salary, you will still be part of the National Insurance scheme and be eligible for the State Pension and social security benefits. This salary is the top of the nil band, which means that no National Insurance is paid. NB this nil band is unchanged for 2003/04.
How should I pay myself if I am caught by IR35?
You should continue to use the mechanisms above. There is no requirement under IR35 to pay yourself more salary, nor will paying yourself a salary protect you from IR35. You should make allowances for the extra tax in the company’s accounts but you need only pay the tax annually in April. Whilst failure to draw the net salary component of this in the same tax year will result in this being subject to corporation tax as company profits (dividends can only be declared from post corporation tax profits), retaining the tax component until the year end will increase the interest you can earn on it.
What are the payroll requirements of running a limited company?
Even if you pay yourself mostly through dividends you will probably receive some kind of salary from your limited company. An employee’s salary is subject to certain taxes that must be accounted for by the employer – in this case, your limited company. These are:
• PAYE (Pay As You Earn) Income Tax
• Employee’s National Insurance Contributions (NICs)
• Employer’s National Insurance Contributions (NICs).
The first two are payable by the employee and deducted “at source”. That is, they never even reach your bank account and are shown as items on your payslips. An employee is legally entitled to a payslip showing tax deductions and any tax due is paid directly to the Inland Revenue by your limited company.
Your limited company will need to run a payroll system so it can properly account for PAYE and NICs. It is fairly easy to work it out manually yourself. The Inland Revenue provides guidebooks that show you how to do it. However, if you maintain your own company accounts using simple accountancy software, you can buy an extra payroll module that will calculate the tax and produce payslips for you. Alternatively, you can ask your accountant to manage your payroll.
It is advisable to draw a salary in excess of the NIC nil bands from a limited company to ensure continuity of contributions and therefore the right to social security benefits.
Do I need any kind of insurance?
Yes. You need to look at:
Personal insurance – Are you using a room in your home as an office? Does the company (your employer) own your office equipment? You need to make sure this room and the equipment is still covered by your home contents insurance, or specific business insurance. If you use your car to travel to clients’ sites, make sure you have appropriate cover. Most freelancers require at least “Class 1 Business Use” on their car insurance policy.
Employers Liability Insurance, Public Liability Insurance and Professional Indemnity Insurance
Employers Liability Insurance is a legal requirement of all limited companies. However, directors are usually excluded from claiming on the insurance even though they have to buy it! It insures employees against injuries caused in the workplace.
Public Liability Insurance covers any damage you could do in your line of work, such as dropping a PC box onto a passer-by.
Professional Indemnity Insurance covers you against being sued for malpractice by a client.
Although only the first is a legal requirement (and strangely useless for most freelancers), you are advised to have all three, with clients frequently insisting upon some level of professional indemnity cover.
If the Inland Revenue do decide to investigate your company, you will need the services of your accountant to help you and possibly additional legal advice. PCG members enjoy free tax investigation insurance . For more information, see www.pcg.org.uk/tax_invest_insurance.html.
As a freelancer you no longer have the safety net of a permanent employer to pay for sick leave. It is advisable to investigate Permanent Health Insurance to cover your personal outgoings should you ever be unable to work for long periods.