This is IR35Calcs’ second interview with Peter Warren, Director of OrangeGenie, an umbrella company for contractors. In this article he discusses the role of umbrella companies in the current market, and the unique service his company has provided over the past year.
Q) Last year you stated that the as rates dropped it was a simple calculation to show that contractors would be better off using an umbrella in purely financial terms. Is this still the case in the current market, which is allegedly rising again?
A) Rates may well be starting to move but the market remains depressed in relative terms. I wish all our business was based around our ‘limited company’ service. Why? Because that way we’d make more money. But we continue to recommend, in over 95% of cases, that contractors trade via our Umbrella. OrangeGenie may not be better off financially - but our clients are, and in the long term this commercial sincerity will pay dividends. The pendulum may be swinging but we’re still some way off the point where rates (and contracts) are sufficiently robust for us to recommend anything other than an Umbrella.
Q) How many new clients have you taken on over the past year and what proportion of those are ex Ltd company clients, or IR35 caught clients, or non-IR35 clients?
A) We deal with around 80 new people a month. I’d say about 30 of those are seasoned contractors who want to switch over from trading via their own Ltd Co to our Umbrella, because they’re caught by IR35.
Another 25 come to us from other Umbrella companies and the rest are new to contracting. Not only do we give each person initial advice as to the best method of trading for them, we also provide continuous, and free, financial 'health-checks' to make sure they’re trading in the most efficient way. If we think they’d pay less tax by setting up their own limited company, we'd tell them - and on their approval make all the necessary arrangements to switch over. This means they don't have to worry about keeping up to speed with present or future employment legislation - which can be complex at the best of times.
Q) What chief motivator do you find clients have for using an umbrella rather than a limited company?
A) The overriding reason is common sense. An Umbrella is simply a mechanism to turn timesheets into cash – the same as a Limited Company. In broad terms, we’re talking about vehicles designed to invoice, collect and pay yourself the money you’ve earnt – nothing more nothing less. With an Umbrella there’s effectively one piece of paper to handle (timesheet), which results in the objective of getting cash into your account. The same end game for a Limited Company will have the contractor processing up to ten times that amount of paperwork for the same outcome.
Q) OrangeGenie prides itself on its customer service. How does it manage to add that personal touch and avoid clients being treated as numbers, like some of the larger production line type accountants?
A)In reality, and all things being equal, apart from price there’s not much to choose between competing companies when things go smoothly, which is the case in 99% of the time. The big difference in organisations comes in that 1% of times when things don’t go according to plan. No, of course we’re not perfect no one is, but if we have any issues they are resolved immediately, to your satisfaction and at our cost. You won’t find us hiding behind any small print or trying to get round our responsibilities. Our philosophy remains “the customer is king”. You speak to any one of our staff and you immediately recognise that we’re here to help – and nothing is too much trouble. Compare that with an inherent attitude of arrogance across the more traditional elements of the industry and it’s not difficult to see why we’ve been so successful. Our company motto sums it up best: ‘Always a pleasure never a chore’.
Q) Do you think it is the end of the Ltd Company for most contractors?
A) No I don’t. Ultimately contracting is a sound business model. Big (as in politically influential) clients encourage it because it allows for a flexible workforce, contractors like it because they earn more cash – so it’s here to stay. Governments, by nature, will force every last drop of tax revenue out of any sector they can, but ultimately the 3 parties know they are inter-dependent. Within this relationship the balance of power will continue to shift from one group to another, it just so happens that the current climate does not favour the contractor. Inevitably there will be a time when roles are reversed, rates will rise and contracts will be written in such a way as to benefit contractors (ie avoid IR35). At that point there will be compelling argument to switch payroll methods.
Meanwhile, and despite current adversity, for many this is still a financially sensible payroll mechanism and there will always be a place for this means of trading within the business model. As long as current legislation continues to be challenged (which is bound to happen within our particularly vocal industry), then there is life in a limited company payroll mechanism.
Q) Do you think IR35 is here to stay?
A) Yes, because it would be politically difficult to reverse. But I do believe the interpretation of the legislation will fundamentally change. As with any market, it’s a case of supply & demand. If IR35 were to ever seriously challenge the contracting model, the first group to shout for change would be the clients – and with such heavy political clout they would get a degree of consideration, from the Treasury, that contractors as a whole could never expect to achieve.
Contracts (the real key to IR35) will begin to be worded in a more favourable light towards the workforce, and agencies & clients will have to accommodate growing expectations of contractors.
Over the next couple of years more & more contractors will find themselves in a position to, once again, benefit from dividend income.
Q) Because of IR35, would contractors be better off by simply going through their agency’s PAYE?
A) Absolutely not. Every contractor who trades as PAYE is just throwing money away. The key benefit to contracting is that you can offset certain costs against your tax liability - this means you can reduce the amount of tax paid. For example: if you earn £400 with costs of £100, we'll calculate your tax on just £300 of income. There are about a dozen different expenses (costs) you're allowed to claim. The main ones are: daily travel between your home & work and an allowance of £10 per day subsistence (lunches etc). Over the course of a contract this amounts to a sizeable saving.
So even if you’re on a low rate you can still take home more pay through an Umbrella or Ltd Co with no increase in your actual rate. IR35 has made life uncomfortable but there are still some breaks for contractors – make sure you’re not missing out on what you’re legally entitled to.