All Posts by Rachel West

IR35 Supervision, Direction and Control Explained

One of the essential factors that HMRC uses to sniff out false employment via IR35 is the concept of ‘Supervision, Direction and Control.’ This is a concept that has undergone a few changes over the years but the basics are still relevant to every working contractor who has a healthy fear of being caught by IR35. In this article we will look at ‘SDC’ in full, in order to help you navigate all that it entails in your working life.

Understanding ‘Supervision, Direction and Control.

The first thing to do is make sure you fully understand the importance of SDC. Contractors these days all understand why control is such an important factor in staying outside of IR35 and SDC is a crucial part of that concept of control. There are four fundamentals that make up HMRC’s control test and they are

  1. (1) What work is being carried out?
  2. (2) When is it being carried out?
  3. (3) Where is it being carried out?
  4. (4) How is it being done?

When it comes to the concepts of ‘supervision direction and control’ it is number 4 that is relevant – are you, as a contractor, being supervised, directed or controlled in how you go about your work for the client? And how do you answer that question? Luckily, HMRC has provided some guidance on this one:

HMRC Guidance on Supervision

As a contractor, you will be deemed to be subject to some kind of supervision if your work involves another person ‘overseeing’ you as you work. This is considered supervision because the person overseeing you is essentially ensuring that you are doing the work you are supposed to be doing and checking that you do it in the correct way. Additionally, if the person overseeing you is deemed to be helping you so that you can improve your skills and depth of knowledge, this training would count as supervision too.

HMRC Guidance on Direction

As a contractor, you will be deemed to be subject to some kind of direction if there is someone from your client company making you do your contracting work in a certain way. A director would be someone who gives you advice, guidelines or instructions as to how to do the work. They might also coordinate with you as to how the work is done while you are doing it.

HMRC Guidance on Control

As a contractor, you will be therefore deemed to be subject to control if someone is telling you what work you are to be doing and how you are to then go about doing it. Additionally, they would be deemed to be controlling you if they also had the power to transfer you from the job you are doing to another, different job.

for more HMRC guidance visit https://www.gov.uk/government/publications/employment-intermediaries-personal-services-and-supervision-direction-or-control/employment-intermediaries-personal-services-and-supervision-direction-or-control

HMRC Muddies The Water Even Further

If it was just those three definitions then it would be relatively simple but HMRC decided to make the test even more difficult to pass. Firstly, they made clear that any person is able to subject you to supervision, guidance and control, not just the end user for you to end up failing the test. Secondly, they also made clear that anyone can just have the ‘right of’ SDC over you in order for you to fail that test (it needn’t be exercised, just present.) Lastly, only one of the three needs to be present in order for you to fail. Just being supervised, or just being directed would qualify you to fail.

This obviously makes things much harder and has been the cause of much annoyance in the contracting community, particularly when HMRC has been quoted as saying more generally that: “Where there are procedures, methods and instructions which must be followed, it is likely there will be SDC over the manner in which the services are provided.”
Nevertheless, there is some reason to be cheerful. In Staples v Secretary of State for Social Services it was ruled that simply giving a brief to a contract worker was not enough grounds for the provider of the brief to be considered as exerting SDC over that contract worker. Additionally, there are of course steps you can take to prevent supervision direction and control.

Steps That Can Be Taken To Prevent Supervision Direction and Control:

Contractual Steps

If you have never been subject to SDC during your actual contract work then the only place you have to be worried about is the contract itself. Thus the contract becomes more important when it comes to the terms that address the right of control and it is essential that there are no clauses that show any exertion of control. If the contractor handles this himself that’s fine but if it is through an agency the contractor may not see the upper levels of the chain. If that is the case it is essential that the contractor asks the agency to put in a clause in the lower level contract which states clearly that all contractual provisions will be mirrored in the upper contract. If not, the contractor is then entitled to sue.

Empirical Steps

After this contractual step has been taken the contractor then needs to put in place a ‘Supervision Direction and Control’ specific Confirmation of Arrangements document. This will be a strategic document that helps to verify the lack of SDC. It does this by making clear that the common features of SDC are not and will not be present in this working arrangement and confirms this by getting the end client, agency and contractor to all sign it.
Additionally, it is worth keeping hold of emails between yourself as contractor and the end client in which you discuss any services requested of you by the client that are not defined in the contract and which have to be done quickly without a chance to clearly define them in another contract. Your input on these emails will be essential in order to show that you cannot be simply moved around jobs at the whim of your client. You should also keep any documents in which the end-client’s requirements are outlined and you have responded with your own requirements and suggestions. Get into the habit of doing this for all of your contracts.

Precautionary Steps – IR35 Insurance.

One thing to bear in mind is that it is possible these days to actually purchase IR35 insurance. Start by checking your current business insurance but it is unlikely that this will cover you. However, if you are concerned about getting caught up in IR35 it is worth looking into one of the many policies out there which will cover your current and future contracts (and sometimes will even cover your past ones too) against the costs of any investigations and demands for tax.

Research The Case Law

Lastly, if you need more information and reference points it doesn’t hurt to read up a bit on the past case law for IR35 infringements. There are a number of prominent cases that have already been before the courts which illustrate that contractors are not always controlled via SDC in the way that HMRC likes to paint them as being.

For example, in ‘Morren v Swinton & Pendlebury Council’, the judge was swayed by the argument that when assessing a highly skilled professional contractor, supervision and control was not really a suitable method for that assessment. And in ‘Marlen Ltd’ a contractor at JCB known as Mr Hughes had been briefed as to what was to be built by a project manager. The engineering manager at JCB said that as a contractor he would be under the control of a number of project leaders. Actually, in reality all that really happened was that they oversaw the project and occasionally checked on the project’s progress. He had to report to senior designers on a daily basis and took occasional instructions but that was all and he was only a small part of a much bigger project, hence the need for this contact. The court accepted that such direction was reasonable in order to make the project run smoothly and this was not therefore a case of SDC and IR35. The court’s argument was essentially that the degree of control has to be judged in context with what is being worked on and produced. Lastly, in the case of ‘Primary Path Ltd’ it was again made clear that the issue of control is more difficult to adjudge when the person has been contracted for their highly specialist skills. When a contractor, Mr Winfield was brought into a team for his very specialist skills to help with one particular project, there was some supervision and direction for that project but when it came to the management of the project as a whole he was given free rein to work how he wanted. The court ruled that the level of control exercised did not go beyond anything you would expect from engaging an independent contractor.

Capped Rate Mortgages for Contractors

Capped rate mortgages are tied to the standard base rate of interest but which cannot go ever upwards and which are capped so they will not go over a pre-set level of interest and repayment. As such capped mortgages offer borrowers more security as they know their payments will never get too high and out of control, putting their home at risk. If then, you are someone who is looking for an added level of security when it comes to your mortgage – that your monthly mortgage interest repayments will never go beyond a certain level even when interest rates are very high – then a capped rate mortgage is perfect for contractors.

How Do Capped Rate Mortgages Work?

Capped rate mortgages are based on the same model as most variable rate mortgages, by which your interest payments each month will vary according to the movement of the standard variable rate of interest set by your mortgage lender or contractor mortgage broker, itself being based on the standard base rate of the Bank of England. However, the difference between standard variable rate mortgages and capped rate mortgages is that with a capped rate mortgage your interest will be capped at a certain pre-agreed amount, ensuring that the borrower never pays anything above that amount. The interest rates will fall or rise and the borrower will continue to pay the amount that their mortgage is capped at, until the rate (and amount) drops back below that level.

Capped Mortgage Rates

The capped rates that are on offer depend on each individual mortgage lender and what products they have at anytime. The capped rate that a borrower gets from their lender will frequently be at a higher level than the lender’s fixed rate or variable rate products simply because there are so many other benefits associated with a capped rate mortgage. Capped rate mortgages normally also have a well-defined minimum level to which the interest rate is allowed to fall, sometimes referred to as the ‘collar rate.’ Although capped rates do permit the borrower to save money in a lot of scenarios, any lender taking advantage of one might still potentially find themselves out of pocket if interest rates end up plummeting below this agreed collar rate.

Capped rate mortgages terms are usually set at an introductory period of between 2 and 5 years. Thereafter , the mortgage will most often revert back onto the lender’s regular variable rate for the remainder of the term of the mortgage.

The Advantages of A Capped Rate Mortgage

Capped rate mortgages will be of most benefit to people in times of high interest rates and are therefore advantageous when looking for security against the future and any potential rainy days. Get a capped rate mortgage and you will know that you cannot end up with massive mortgage payments that you were not expecting. This is a real advantage and not one that is offered by most other

Tracker Mortgages for Contractors

Tracker mortgages are mortgages in which the interest rate on the mortgage is set at an agreed level above the standard base rate. The mortgage then tracks that base rate religiously. Doing so means that such mortgages are often much cheaper than standard variable rate mortgages or fixed rate mortgages. Of course, with the tracker mortgage’s interest rate being linked to the Bank of England base rate, if that base rate changes then your mortgage rate will of course change too.

As an example, say the base rate is set at 0.5% (as it is currently) and you decided to take out a tracker mortgage with an agreed rate of 2% above that base rate, then you would end up paying interest at a rate of 2.5%. Should the Bank of England then decide to put the base rate up by .5% to 1%, your own mortgage interest rate would rise to 3%. What would that mean in real terms?  If you had a £200,000 mortgage, your repayments would increase by £50 per month.

Tracker mortgages come with various term lengths in the same way that fixed rate mortgages do. The standard tracker mortgage will be for a period somewhere between two and five years and if you want to exit that mortgage within that time frame you will end up paying significant penalties. There are also term trackers or lifetime trackers which are free of any penalties and which you can exit at any point. These are a great option if you don’t want to be tied to one product and like to chop and change.

The Advantages of Tracker Mortgages

One of the main advantages of tracker mortgages is that they are nearly always cheaper than fixed-rate mortgages. As well as that they are simple and do what they say on the tin- although they are a form of variable rate mortgage, if you know that you are paying a set amount over the base rate then you always know what you will be paying. And as with all forms of variable rate, you know you will not be stuck in a fixed rate if the base rate drops. When interest rates are low, so are your payments.

The Disadvantages of Tracker Mortgages.

Conversely, as with all forms of variable rate you also know that the rate that you sign on to may not be the one you end up paying if interest rates rise sharply. Tracker mortgages offer little of the security of fixed rates and if you are on a tight budget you need to be aware of just how much your payments could potentially rise and then work out if you could afford it if they do.

Variable Rate Mortgages for Contractors

When sitting down to try and work out what type of contractor mortgage will suit you it is important to ensure you know the ins and outs of all the different products you will encounter. Variable rate mortgages are very common and consequently it is essential that you understand what they do, how they work and what they will mean for your long-term financial plans.

Variable rate mortgages are mortgages in which the interest rate can change at anytime throughout the duration of the loan. When national interest rates set by the Bank of England rise and fall the interest rate of your lenders products will also rise and fall and in turn, so will your mortgage. Additionally, there are a number of different types of variable rate mortgage to choose from (all of which are discussed in more detail elsewhere on this site) including Tracker Rate Mortgages (which are set at a level just above the standard base rate and then track that base rate), Discounted Rate Mortgages (which are similar to fixed rates and which agree to a certain period at a discounted rate from the standard variable rate), and Capped Rates which also stick to the standard variable rate but which have a cap on how high that rate can go for a year or two).

The Advantages

Why would someone opt for a standard variable rate mortgage over a fixed rate? Firstly because a lot of people wouldn’t want to tie themselves to a fixed rate if rates were high. Secondly because when rates are high lenders will often choose to swallow rate rises into the cost of the mortgage repayment. Thirdly because variable rate mortgages are cheaper to set up and fourthly, because variable rate mortgages leave you free to overpay, make early repayments and do not charge you if you wish to change lender.

The Disadvantages of Standard Variable Rate Mortgages

There are of course some disadvantages too. Firstly, a variable rate mortgage does not offer any of the security of a fixed rate mortgage. If you sign up for a variable rate and then interest rates shoot up you will find your repayments rising significantly. This could lead to financial problems for you at a later stage. Also, your lender may choose to add their own increases on top of the base rate if they want to increase their own profits.

Variable rate mortgages are worth considering then if rates are high and you don’t want to fix in to repayments at that level or if you want a cheaper mortgage and / or know you will be making early repayments.

Discount Rate Mortgages for Contractors

As if all the different types of mortgage products for contractors weren’t confusing enough, people who decide to opt for a contractor variable rate mortgage then have a number of further choices to make as to what type of variable rate they want. As we have seen elsewhere on the site, variable rate mortgages are products wherein the rate of interest can go up or down at any time during the lifetime of the loan. Once the Bank of England base rate goes up you can be assured that your lender will follow, often adding a bit themselves too. On the other hand, if interest rates drop, being in a variable rate mortgage is much more beneficial than being tied into a higher, fixed rate.

Choosing which sort of variable rate mortgage is the right one for you can be a bit of a minefield though. As well as standard variable rate mortgages there are tracker rate mortgages, capped rate mortgages and discounted rate mortgages. All of these are discussed elsewhere on this site, whilst here in this article we will be looking at discounted rate mortgages.

What are discounted rate mortgages

A good way of thinking about them is to consider them like a standard variable rate mortgage but with a special offer that is designed to draw you in. They operate at a level that is cheaper than your lender’s standard variable rate whilst also being linked to it. As an example, suppose your lender has their standard variable rate set at 5% but the discounted being offered is 2% then your mortgage rate would be 3%. That discounted rate will normally be offered for a set introductory period, which can be anything between 2 and 5 years. As soon as that introductory offer ends you will be switched back to the standard variable rate.

The advantages of a discount rate mortgage.

Firstly, the main advantage of discount rate mortgages is that they are much cheaper when you start out. For people on a tight budget and trying to get on the housing ladder this can be a godsend and those first few years of lower mortgage repayments the difference between getting a house or not. Moreover, should your lender decide to cut their standard variable rate then people on discounted rate mortgages will see their repayments drop even further. Thirdly, if the base rate set by the Bank of England goes down you should also see a drop (though this is never guaranteed). Finally, they offer all the same advantages of standard variable rate mortgages – not being fixed in to higher rates, flexibility etc

The disadvantages

Firstly, some lenders who offer discounted rate mortgages will take away some of the benefits associated with standard variable rate mortgages, such as being a cheap option to set up and costing nothing to make early repayments. Instead, many will charge you early repayment charges if you decide to leave before the end of the tie in period and many will even charge you for two or three years after the discounted period. Secondly the advantages of the variable rate also become disadvantages sometimes; if the lender changes their standard variable rate for the worse then your discounted rate will follow suit and you might suddenly find yourself with increased (and unaffordable) mortgage repayments. The same applies if the Bank of England increases their base rate.

To summarise, discounted rate mortgages are best suited to those people who want to pay much less for the first few years of their mortgage but who are aware that rates can rise in the future. One way of preparing is to look at the standard rate when making plans and then consider the discounted rate as a ‘bonus.’

 

Offset Mortgages for Contractors

With savers struggling to find anywhere to put their money in the current economic climate, it is unsurprising that offset mortgages have been rising in popularity over the last couple of years. Offset mortgages were first launched back in 1994 in the UK but for a long time were very unpopular. However, as savers have begun to look around for the best place to make some money on their savings, contractors getting offset mortgages have seen a surge in demand thanks to the benefits they offer regarding thevsavings. Though the rates on offer from offset mortgages tend to appear less advantageous when compared to mainstream mortgages, in the longer term they can be very impressive, simply because they are able to cut years off of mortgage payments and allow savers’ money to work harder for them.

How do they work? In a nutshell, offset mortgages are simply mortgages in which you set your personal savings up against your outstanding mortgage debts and through giving up the interest you earn on your savings you do not have to pay the equivalent amount of interest on your mortgage debts. Over a number of years this can quickly add up to savings of thousands of pounds. This article will take an in-depth look at offset mortgages to help explain them better:

What is an Offset Mortgage and How Does it Work?

As mentioned above, an offset mortgage is a mortgage that is linked directly to a bank account (or a number of bank accounts). Every month the mortgage lender will then work out the full amount of interest that is owing on the mortgage and then this amount will be reduced by the total amount that is held in in the account (or accounts). As an example, if a borrower takes a mortgage of £200,000 and also has savings in their accounts of £20,000 then they will at that point only end up paying interest on £180,000. And if those savings were to go up or down in the months and years ahead, so will the amount of the mortgage on which the interest is charged also go up or down. For anyone who has savings this of course makes sense, particularly when there are so few savings accounts with decent interest on the market. By setting up an offset mortgage savers avoid any tax on savings interest they might have paid and their money works every day to bring down the costs of their mortgage – the act of paying interest on the difference between the balance and the savings effectively means that every month you are overpaying your mortgage.

Is there any Difference Between Current Account Mortgages and Offset Mortgages?

The difference is a small one, but some offset accounts let you link your current account and your savings accounts to the mortgage whilst others simply use things called a savings pot. Both essentially work in the same way. Offset mortgages keep your deposits and savings in these separate accounts or ‘pots’ but link the two together for the purposes of working out interest, whilst Current Account Mortgages (CAM’s) link the current account directly to the mortgage. With a CAM, borrowers will not see two different accounts but rather a mortgage and bank account combined on one single statement with everything calculated together. Thus, if the mortgage has £100,000 outstanding and there is £3000 in the current account the balance on there CAM account will show an outstanding debt of £97,000. In this CAM account the balance is recalculated every day and interest is paid only on that balance. Apart from that the account operates in exactly the same way as a normal bank account with all the same services and facilities. Additionally, borrowers using Current Account Mortgages can also move their savings into that account in order to bring the debt balance down further and can simultaneously also move any other outstanding debt such as credit cards or personal loans into the account.

What are the Benefits of Taking Out an Offset Mortgage?

 As mentioned above, offset mortgages can mean you pay a lot less in interest every month, which can mean your monthly payments are significantly reduced. Or alternatively you can keep overpaying and clear your mortgage a lot more quickly. As well as this you have more flexibility with you money which you can access at any time and other accounts can be offset in various ways.

What are the Negatives of an Offset Mortgage?

 The main downside is that any savings which you hold within your offset account will not earn you any interest. Moreover, if you don’t actually have many savings then you wont see much advantage in savings on your mortgage and may well be better switching to another mortgage deal.

That’s why offset mortgages are most advantageous for people with larger amounts of unused and stable savings. They can be a tax efficient mortgage for higher rate taxpayers and also useful for people with savings who want to help their family members by putting some of their savings in an offset account and helping to reduce the mortgage burden they are facing.

What are buy to let mortgages for contractors

Buy-To-Let mortgages for people contracting are once again growing in popularity as the economy shows the first signs of recovery and people look to invest their money once again. But with banks and building societies still offering measly returns on savings, people are once again looking to property as a relatively safe (the credit crisis having shown that even property can bring losses too) but profitable places to invest their money. But what exactly is buy-to-let and what are buy-to-let mortgages?

Most people understand that buy to let properties are properties that people purchase in order to let out to tenants and to treat as investment vehicles. Normally, people will buy a property with a mortgage and then rent it out for a number of years in order to pay off the mortgage and eventually either sell it for a profit or keep it as an investment that brings in a continuous income stream. Successful landlords will often buy more than one buy to let property and then keep adding properties as they go along until it becomes a full-time business managing all of their properties and the incomes they produce. A buy-to-let mortgage is a mortgage specifically underwritten for such property investments and designed to operate in a slightly different way to regular high street mortgages for properties that will be lived in as homes.

Criteria for Buy-To-Let Mortgages

That said, to all intents and purposes buy to let mortgages are the same as regular high street mortgages. They are designed to work the same way and built around the same kind of underwriting with the same kind of repayment options and the same kind of rules. Where they differ is the criteria they apply when it comes to eligibility and the amount of money that people can borrow for the mortgage. Buy to let mortgages differ from regular mortgages on criteria such as affordability because they are calculated not on how much an applicant can borrow or afford to pay back on their salary, but rather on what they can bring in as an investment and the viability of the property as an investment. Buy to let mortgages are also more regularly taken out as interest-only mortgages rather than repayment mortgages, thereby allowing the investor to either take the money as income or to repay the capital and then receive surplus rental income.

The Cost of Buy-To-Let Mortgages

Another difference in buy to let mortgages is that they can often cost more than regular mortgages and it is important for people to bare this in mind when calculating their potential profits and income streams. Buy to let mortgages cost more to set up, with both the set-up fees and the rates offered being significantly more expensive.

Loan to Value Ratio

They also require a higher Loan to Value ratio than standard high street mortgages. For a long time after the housing bubble burst and the credit crisis caused banks to tighten their criteria banks were asking for much larger deposits on all mortgages. Now however, the 95% mortgages are once again being offered (though still less often than before) and most people will be able to get a mortgage with a 10% or 15% deposit. Not so when it comes to buy to let. For investment mortgages such as these the banks ask for a minimum of 25% deposit. That means that a £200,000 house will require a minimum deposit of £50,000. This mortgage cap of 75% is often prohibitive for most people, but bearing in mind what happened with the housing bubble it is no bad thing. Putting a significant deposit down on a property normally means the investment has a better chance of working out as the smaller mortgage, the higher the profits will be from the rental income. Often the bank will also offer better rates to people who put larger deposits as their risks are greatly reduced. Finally, it is also worth noting that the government’s help to buy scheme expressly excludes people wanting money for buy to let mortgages.

Different Kinds of Buy-to-Let Mortgages

There are of course different types of buy to let mortgage that people can sign up to. Along with the difference between interest only and repayment mortgages mentioned above there are also the variations in rates that people can choose from, such as Fixed Rates or Tracker Rates. Which type of rate people choose often comes down to whether they want to take a slight gamble or whether they would rather have some security. Those people who favour security will inevitably opt for a fixed rate, (often for five years) so that they know exactly how much they need to pay back every month and they are secure in the knowledge that this will not change for the next few years. The rates may drop and they may lose out but on the other hand they may go up and their decision to fix the rates will then appear prudent. Tracker rates on the other hand are often priced a bit lower at the start, as the lender knows that if costs and rates increase later they will be able to pass on those extras to the borrower, which they cannot do with fixed rates. If the interest rates drop further, tracker mortgages will prove worthwhile. If, however they go up, then they will be more expensive than fixed rates. Mortgage rates are very low at the moment and may well be for the foreseeable future so it is potentially worth fixing them at the moment (though it is important to discuss this decision with a mortgage broker or financial advisor). Lenders are currently taking advantage of the government ‘funding for lending’ scheme that funds those institutions at a low .75% rate and this scheme lasts until mid way through 2015 so for now at least rates should remain low.

Do The Research

In then end, it is always worth doing a serious amount of research before committing to a buy-to-let mortgage and before deciding on which type of mortgage to opt for. This involves shopping around, doing your research in books and on financial forums and sitting down and comparing the various mortgages you come across. Some buy to let mortgages will look great but the small print will show they come with high fees or charge a percentage of the loan amount to set them up. If you have a larger mortgage you might be better with a fixed fee – if you are getting a smaller mortgage the percentage route might be better. Look out for deals on free legal services and free valuations that companies might be offering. Buy to let valuations can often cost significantly more than standard high street ones so deals that offer free valuations are worth considering. However, be cautious if they want to tie you into one legal firm or solicitor as they might in turn have much higher charges. In other words, when weighing all these things up, remember to consider all these factors and weigh up the whole deal, not just the bits on the brochure!

Remember to Talk to Your Accountant

Buying property to let out will of course affect your tax return in a number of ways so it is always worth discussing it with your accountant first. For more information about tax issues around buy to let, have a look at HMRC’s buy to let guide here. (https://www.gov.uk/renting-out-a-property/paying-tax)

Finally, Persevere

If you have been declined, remember there’s many lenders out there that have very different criteria and who may be able to offer you the mortgage you need. So don’t give up!

Fixed Rate Mortgages for Contractors

Introduction

The term ‘Fixed Rate Mortgage’ is self-explanatory – it refers to mortgages in which the interest rate stays fixed throughout an agreed term. They are a way for people to guarantee their mortgage payment remains the same for a specific period of time – anything from a year to 10 years (although most are for 5 years) – before the mortgage reverts to the Standard Variable rate at the end of that period. They are gaining in popularity at the moment (whilst the economy is still precarious and the housing market is starting to rise again) thanks to incredibly low rates of interest meaning there has never been a better time to get a mortgage. People who are desirous of stability and certainty in their mortgage would consider fixed mortgages at the current low-interest levels (some contractor mortgage companies are offering below 4%) to be a good bet. This is reflected in the number of people currently signing up to longer term fixed mortgages (between 5 and 10 years) which were previously not that common. Should everyone sign up to a fixed-term mortgage? Whilst no one can doubt the value and stability they offer (particularly at current rates) there are, as always, a couple of things to bear in mind before signing up:

The Advantages of Fixed Rate Mortgages

As mentioned above, the chief advantage of Fixed Rate Mortgages is stability. With the global economy still volatile and the UK economy still precarious, borrowers who wish to avoid their investments being troubled by the movements of the base rate of the Bank of England should sign up to fixed rates now. By taking out a Fixed Rate Mortgage a borrower is buying themselves interest rate security for the period that the rate is fixed. That security covers not just the knowledge that you will not have to deal with a massive jump in interest rates (and therefore increased monthly mortgage payments) but also the security of being able to make future plans based around a constant and unchanging figure in your personal outgoings column. In fact, fixing your rates often means that the only change you will notice is a positive one – in which your income improves over the years whilst the payment amount stays the same and therefore decreases in percentage terms. In short:

  •  You know precisely what your mortgage payment will be, for a precisely defined period.
  •  You know that if interest rates rise, your mortgage payment will stay the same.
  •  You know that your mortgage is your largest outgoing but you can also budget for that outgoing with certainty.

The Disadvantages of a Mortgage which has Fixed Rate

Obviously there are some potential downsides to fixed rate mortgages otherwise everyone would be using them all the time. The clearest and most common downside is the chance that no matter what rate you fix your mortgage at there will always be the possibility of rates actually dropping below your fixed rate. This would make your fixed rate look expensive and be immensely irritating at the very least. You always have to remember therefore that while you are immune from rises in the Bank of England base rate you also cannot benefit from any reductions. So, in the last couple of years, when the base rate sank to 0.5%, if you had fixed your rate a year or two before that you would have lost out. Secondly, remember that most fixed rates will tie you to that lender for the duration of the fixed period and that if you decide you need to change, for any reason, you would probably be penalised for doing so. Most fixed-term mortgages, particularly those with longer terms, will have heavy early repayment penalties that can be anything up to 7%. What that means is it becomes extremely uneconomical to remortgage in that time. Similarly, should you want to move home there is normally the ability for borrowers to move their mortgage but with fixed term mortgages there can be problems with such porting. Borrowers with these kinds of mortgage will find that porting will be permitted on the basis that the borrower must meet the new criteria put in place at the time the move is to happen. This can cause problems if the criteria have changed in the intervening years or the borrower has had some changes to their credit status. If they cannot meet the new changes they are stuck with the old mortgage and cannot move. With this in mind, many people are simply not prepared to be locked into a mortgage for such a long time. In short:

  1. Higher arrangement fees
  2. Should interest rates drop, your payments stay the same and you could end up paying above the current rate
  3. If you need to repay your mortgage before the end of the fixed term, you will be forced to pay an early repayment charge.
  4. At the end of the term, depending on interest rates at the time, you could face a massive jump in your monthly payments.

In Conclusion

It is possible to mitigate some of these disadvantages listed above – such as the jump at the end of the fixed rate period – by planning ahead and getting another fixed rate mortgage lined up. And as long as you know what you are committing to and are in for the long haul, then fixed rate mortgages make perfect sense. The risk of rates dropping lower is very minimal at the moment as rates are lower than they have been for many years and don’t look like they could go much lower. Indeed getting a mortgage fixed at current rates is probably a good thing for most people, with some mortgage companies offering interest rates below 4%.

How To Find The Best Accountant for Contracting

Talk to anyone who runs their own company and ask them what the biggest downsides are and the answers will always be the same – dealing with paper work and doing their taxes. The same applies to contractors who decide to set up as a limited company. The whole point of contracting is to go it alone, work for yourself and have the freedom to concentrate on working at what you are good at. What’s the point of doing that if you keep getting bogged down in paperwork and admin?

That’s why for every limited company owner, finding a great accountant is so important. This is someone who is going to become an essential strategic partner to your business and who should be able to both save you money and keep you legal! You will be spending a lot of time talking to this person too. So not only do you need them to be competent, reliable and skilled, but you also want them to be a good communicator and preferably likeable too! Moreover, as a contractor, you need them to specialise in contracting taxation and know their way around every single facet of tax legislation. Go online and you’ll see quite a few  accountants vying for your business. The only question is, which one do you choose?

Here are some ways you can help sort the wheat from the chaff:

Are they genuinely contractor specialists?

Clearly if you are looking to hire an accountant to deal with all your contracting issues you should ensure that they specialise in the contracting market. Why? Because contractors have very specific routines and needs and particular ways of handling their finances. Most limited company contractors will operate in much the same way – getting paid either weekly or at the end of the month and with very few outgoings. They will mostly take smaller salaries and then later they will draw down a larger chunk of their income from dividends. Specialist contractor accountants will know and understand this cycle far better than a standard high street accountant. More importantly, contractor accountants will have a long history of dealing with and managing IR35 compliance and appreciate the effect Intermediaries Legislation can have on take home pay if the contractor falls within its scope. A good contractor accountant will look at the individual situation of their client and advise them whether operating as a sole trader, limited company director or umbrella company employee is best for them. In other words, they will be able to work with you on strategic contractor tax planning. When looking for accountants then, look for ones with years of experience in the contracting sector and who now work solely with contractors. If in doubt, ask them the following questions:

  • How long have you been working as an accountant?
  • How long have you been working solely as a contractor accountant?
  • How much experience do you have advising contracting sector clients?
  • What is IR35 and will I be affected by it?
  • What about Managed Service Companies legislation?
  • Will the Companies Act affect my business?
  • What payroll advice do you normally offer limited company contractors?
  • How would you be able to help me develop my contracting business?

Will I Get My Own Dedicated Contractor Accountant?

The next issue to check is whether you will be given your own account manager who you can get to know and who you can deal with every time something comes up. It is important to make sure you get this dedicated accountant as opposed to an ‘account manager’ or ‘support team’ as you will want someone to be able to phone or email or meet (see below) whenever you have an issue to discuss. This allows you to build a relationship and lets the accountant learn all about you and your business and build a picture of your personal goals and strategies.

That being said, it is also important that they do have a larger team of equally competent contractor accountants behind them. This means that should they go on a holiday (or be off longer because they are sick) there will be other people you can trust who could step in and manage your accounts if necessary.

Will They Offer Face To Face Meetings?

Following on from above, it is almost as important that your dedicated accountant will offer face to face meetings as part of their service. This might not be something you ever actually use, but it is essential that it is available. It is also advisable to meet face to face actually – how can you tell of an accountant is right for you if you don’t meet them at least once for an introductory chat? And more importantly, there may well be times when something is extremely complicated or delicate and private. In these instances a face to face meeting would be preferable to using the phone or email.

How Many Other Contractor Clients Will My Accountant Be Responsible For?

There is a fine balance here. You want your dedicated accountant to have a wide ranging group of contractor clients and a long history of dealing with all different aspects of the contracting market but at the same time you also don’t want them dealing with so many other contractors that they don’t have enough time to really manage your account well. Try to find an accountant who works for a medium sized company and who only has between 75 and 100 contractors to manage.

Do Contractor Accountants Offer Any Kind of Service Guarantee?

Many do and it is worth seeking out the ones that do. As an example, look for accountants that guarantee that they will respond to your enquiries within a certain amount of time.

How Much Do They Charge?

An important factor for any contractor will always be how much their accountant actually charges for their services. Don’t assume that the more someone charges the better their service. Most contractor accountants will charge approximately the same sort of fees (usually between £70 and £200 per month) for their services, which would include things such as running your company payroll, completing your annual company accounts and anything to do with dealing with Companies House. Try to get an accountant who will charge fixed fees rather than any kind of percentage linked to your earnings and make sure they don’t hit you for any ‘entry’ or ‘exit’ fees for their services. It is important to bear in mind that getting a good accountant who you are comfortable with and who can competently manage all of your contracting finances is worth its wait in gold. If you find such an accountant it is not worth losing them because you think their fees are slightly more pricey than someone else’s. They will ultimately end up paying for themselves via the tax savings they make on your behalf and by keeping your finances secure, well planned and compliant.

What Accounting Technology Do They Use?

Long gone are the days of shoving all of your financial particulars in an envelope at the end of the month and posting it to your accountants to be processed. Of course, now everything is done online and is (theoretically) much easier. Before you commit to a firm it is worth checking that you are comfortable with their online accounting system. Whereas some companies might ask you to simply upload an Excel spreadsheet, others might offer a service that is fully online on which you can monitor, update and adjust your accounts in real time. This might be via one of many available software packages or might be a bespoke system designed solely for that company. It is important to ensure you are ok using it, so ask for a demo before committing to the company.

However, there is one important thing to remember. No matter what system they use, it is essential to always bear in mind what might happen if you change accountants or if you get into a dispute with them or they go bankrupt? If they run an online system, you want to make sure you do not leave yourself with no records and all your information held centrally online. It is for this reason that no matter which accountant you choose you should always, always ensure you have your own offline copies of all your accounts, expenses, tax forms and any other relevant financial data.

Do They Offer Any Other Services?

As well as the standard services mentioned above – running your company payroll, completing your annual company accounts and anything to do with dealing with Companies House – it is worth comparing what extra services or ‘value added’ services, they are offering too. These might include offering free setup, setting up of a business bank account for you and providing free limited company incorporation. A good contractor accountant would probably include these for free as a part of the service they offer.

How Is Their Reputation?

As with most services in life, the best companies get new clients by word of mouth. So it is for contractor accountancy firms. If you get a recommendation from another contractor then it is worth checking that accountant out. Ask around and get other contractors to tell you about the accountants they have used, good or bad, and you will very quickly build a picture as to who the reputable companies are. As well as this, go online and do your own research, using contractor forums and occasionally comparison websites. Here however it is worth inserting a note of caution. Third party comparison sites have the potential to be influenced by advertising or by web manipulation and are nowhere near as reliable as word of mouth. The same thing applies to any number of meaningless accreditations  and awards companies might list on their website. These should be investigated and checked as to whether they are given by an independent and highly respected trade body or third party as opposed to being handed out by a body set up by that company themselves!

How To Find The Best Umbrella Company

Thanks to the constant stream of legislation out of HMRC relating to the way contractors work there are now only two realistic options open to contractors for managing their income – working via their own limited company or working via an umbrella company. Both have their advantages. Limited company contractors who are directors of their own company have slightly more options when it comes to tax minimisation and expenses claims. They epitomise the ‘go it alone’ ethos of contracting that most people are looking for. However, they also end up facing an awful lot of paperwork and a great many complications when it comes to tax, intermediaries and IR35! Which is why more and more contractors are now turning to umbrella companies which still offer that ‘go it alone’ mentality but provide it under the cover of no paperwork and no hassles from HMRC!

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Indeed, ever since legislation was introduced to crack down on most of the contractor earnings vehicles out there – such as Employee Benefit Trusts and Managed Service Companies – the numbers of contractors opting for umbrella companies has ballooned to the point where they seem to be the default choice. There are now more than 200,000 contractors working via umbrella companies and that figure is growing year on year.

But how should a contractor who is new to the sector go about choosing an umbrella company? Firstly, they should start by doing their research – asking around, looking through forums online, checking industry reviews, talking to contractor accountants and recruitment agencies. Next, they should be prepared to ignore any hype. Most umbrella companies offer the same kinds of service at the same kind of rates. If you see an umbrella company claiming to offer a load of additional services or extra reductions in tax then you should probably steer clear of that one! Under PAYE there is very little wriggle room when it comes to tax liability so they’re either exaggerating or doing something a little bit naughty! The same applies to any claims they may make about contractor expenses. In fact, the rules on expenses are very strict and getting stricter by the year. In the end, the best way to judge them will be whether they seem honourable and truthful, whether they offer good service and how they both charge their contractor fees and get contractors their money. With that in mind, the following are some suggestions as to how to choose one umbrella company over another:

Do They Charge Unusual Fees? What Kinds of Fees

You should make sure you don’t go near any umbrella companies that are charging entry fees to join them, exit fees to leave them or which come with a minimum term that you have to stay with them (and consequently penalise you if you leave early!)

How Do They Charge You For Their Service?

Most of the decent umbrella companies will charge a fixed fee for their service, so you need to avoid any companies that link their fee to your contracting rate. This can end up being very expensive as their fee will go up as you start to earn more. These sorts of umbrella companies have purposely put in place complicated fee structures to tie themselves to your contract values. But why should you end up paying more just because you start to earn more? They are not having to do any more work so they should not be getting any more money!

No Receipts, No Expenses

Don’t listen to any umbrella company that states it is ok for you to make expenses claims without any receipts. If HMRC investigated your tax return and you did not have those receipts, then any claims would be disallowed and you would be liable for the outstanding tax.

Go With Established Companies

It may seem like obvious advice but it is best to go with an umbrella company that has been around for a while. There are a lot of new companies springing up everywhere and they simply don’t have the track record yet. If they get in trouble and fold, they could take some of your money with them!

If Something Doesn’t Smell Right, Walk Away

As mentioned above, there are a lot of claims flying around on a lot of umbrella company websites. It is very difficult to tell if a company is honest or ethical just from their website and a quick chat on the phone. But as a rule of thumb, if they are promising something (be it expenses, less tax or anything else) and you find yourself wondering how they are doing that, then chances are you should walk away. Once again, all umbrella companies are operating under the same rules and regulations as set out by HM Revenue and Customs.

Do You Know If They Are Compliant?

Obviously, you need to find out if they themselves are compliant and if they have been externally audited or reviewed. This is now quite common so it is worth checking. They will naturally tell you they are compliant as they want your business. But it is worth asking them what all their marketing claims are built around and whether they have had any dealings with HMRC. And always keep in mind, if there are any problems down the line it will be you in trouble, not them!

How Is The Service?

Lastly, it’s all about the personal touch. There are, nowadays, a number of fully automated umbrella companies out there and they are definitely cheaper. But that doesn’t mean they’re better. At some point you will almost certainly want to speak to a human being, particularly if you are new to the contracting sector. Before you sign up, call them and test out their service. Try asking them a few questions like – Will I have a dedicated account manager? How big is the support team? Are there service level agreements? See if you get one competent person who can deal with your questions well and who listens to you. If not, move on to another umbrella company!

 

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