Welcome to the July 2005 edition of the PMMC Freelance eNewsletter. In this special edition, we launch our Summer Promotion aimed at making it easier, cheaper and even more hassle-free to be (or to become) a freelance professional.

First we examine the rationale behind so-called umbrella companies and by comparing and contrasting the plethora of service companies operating in the marketplace today we discover - perhaps not surprisingly - that not all umbrellas are created equal.

We conclude with an essay by Fred Harrison in which he delivers a damning indictment of the Treasury's imprudence in allowing UK households to sink into debt in order to avoid a recession.

If you find the newsletter informative and useful, please feel free to forward it to friends or colleagues by using the link at the bottom of this message. You are also invited to contribute to future editions: if you would like to air your opinion, pass on pertinent information for freelancers or contractors, place an 'advertorial' or simply comment on the newsletter in general, please contact us.

In the UK, as in most advanced economies worldwide, freelancers, contractors and temporary workers have a vital role to play in the vibrant and dynamic kind of workforce needed to sustain economic growth.

Increasingly, many of these 'independent workers' are opting to make use of service companies rather than take the more traditional approach of forming their own sole tradership, partnership or limited company, and with good reason: Choosing to join the ranks of those who 'work for themselves' is a decision - the merits of which we will not go into here - that can have some serious implications for your earning potential and lifestyle. Unfortunately setting up a legal entity to act as a vehicle for your freelance aspirations can be dauntingly complex, time-consuming and expensive, while running such an entity, keeping up with the mountain of paperwork it often generates, remaining compliant with ever-changing regulations and performing all the necessary fiduciary duties can be a full-time occupation.

Service companies provide a managed limited company through which many freelancers simultaneously operate their contracts, thus benefiting from centralised expertise and economies of scale. The company carries out all the administration normally associated with running a limited company, e.g. executing legal contracts, processing timesheets and expense claims, raising invoices, collecting payments from clients/agencies, calculating Tax, N.I. contributions and Net pay as well as dealing with statutory filing and regulatory compliance. By becoming a client of a service company, a freelancer becomes a de facto employee of that company, albeit with a lot more freedom than an employee would normally have - retaining the flexibility to choose clients, assignments, terms & conditions, rates and locations. Obviously, all this administration costs money and the service company charges a fee.

Commonly lumped together under the term 'umbrella company', there is a somewhat bewildering array of service companies vying for the business of the unwary freelancer. At the risk of over-simplifying, these companies fall into one of three distinct categories: Managed Services companies, Composite Services companies and Combined Managed/Composite Services companies.

Managed Companies purely act as invoice vehicle and employer to freelancers, sometimes offering additional benefits (at a price) such as holiday and sick pay. Composite Companies offer these same services but also allow the freelancer to become a shareholder of the Composite Company, making it possible to reduce Tax and NI liability by dividend payments or revenue-share schemes. Combined Companies provide all the features of both Managed and Composite companies, but tailor the service to the needs of the freelancer, acting either as a Managed or Composite Company depending on factors like the nature of working practices, contract stipulations and industry sectors.

For the remainder of this article, we will use the term 'umbrella company' to mean (as in the vernacular) either a Managed or a Composite or a Combined Managed/Composite services company.

-----

There are three elements that warrant careful consideration when choosing an umbrella company to entrust your freelance future to: Services/Benefits on offer, Cost and Legality/Compliance.

A. Services/Benefits on offer
In order to make a like-for-like comparison between umbrella companies, you will need to evaluate their offerings dispassionately:

1. Administration, Billing & Collection, Payroll and Expenses processing
   To be worthy of the name, an umbrella company has to offer at least these basic services. Anything less and you will have to take care of most if not all of the hassle and paperwork yourself, or pay someone else to do it. If this set of basic services is all they have to offer, you will probably outgrow that particular umbrella very quickly, or end up paying more tax than you need to.
   
   
2. Tax Mitigation
   A properly structured umbrella company operating within Inland Revenue guidelines should provide all the tax benefits of your own limited company, including a special dispensation for expenses and a mechanism for dealing with thorny issues like IR35 and Section 660. Unfortunately most umbrella companies seem to avoid the issues (by not allowing shareholding or dividends) rather than helping freelancers to avoid the additional tax liability.
   
   Unless you operate solely inside IR35 and your tax planning requirements are extremely simple and not likely to grow in future, your interest will be best served by a Combined Company that can deal with your specific situation on a contract-by-contract basis.
   
   
3. Insurance
   By law, every employer (and therefore every umbrella company) has to have at least Employer's Liability (EL) and Public Liability (PL) insurance cover, protecting the employer in case of claims arising from employees or members of the public in connection with the company's trade, premises and so forth.
   
   Whether we like it or not, we live in an increasingly litigious society where individual freelancers are being held liable for negligence, incompetence, improper conduct or even misfortune in relation to the services they provide to clients. Comprehensive Professional Indemnity (PI) insurance is therefore indispensable, although not yet a legal requirement. Many agencies and intermediaries will no longer offer contracts without the contractor being covered by (substantial) PI insurance, so make sure you choose an umbrella that provides the necessary coverage.
   
   
4. Funds Management
   As a freelancer, you do not generally have the luxury of getting paid when you are not working. Periods of inactivity therefore (e.g. holidays, sickness, idle time between assignments) can cause cashflow to dry up unless you make provisions for setting aside some funds to cover these lean times. Many umbrella companies offer holiday- and sick pay schemes, retaining a fixed percentage of turnover (e.g. 12%) in order to pay freelancers while they are not actively working. Most of these schemes lack flexibility and are of limited use.
   
   Always remember that it is your money - an umbrella company should help you keep as much of it as is legally possible, not dictate how it should be paid to you. Look for a company that provides a flexible funds management solution, allowing you to choose how much, when and even where the turnover you generate is remunerated.
   
   
5. Benefits
   Unlike regular employees, most freelancers do not have much in the way of fringe benefits. Umbrella companies try to even the score slightly by giving access, amongst others, to pension schemes, private healthcare, life and critical illness insurance and childcare vouchers. Keep in mind that having a link to a provider's website or introducing you to a broker that can sell you an insurance policy is not enough - look for the capability to make employer contributions, deductions or salary sacrifices through payroll and insist on preferential corporate rates.

B. Cost
As with most things in life, where umbrella companies are concerned, you tend to get what you pay for. Service charges vary widely from company to company and are normally calculated either as a percentage of gross turnover (e.g. 3% of the gross value of each invoice raised on your behalf) or as a fixed amount per period (e.g. £50.00 per week). Different pricing structures and additional costs that are sometimes hidden in the fine print make it difficult to compare service charges between different companies, but be aware that cheaper is not always better. If the service is not comprehensive, you will have to incur additional costs to gain access to certain features or benefits elsewhere, which means that the eventual total cost to you might be higher than a comparable (but more feature-rich) package offered by another company.

For instance, many companies offering a fixed weekly/monthly charge can seem cheap when compared to those charging a percentage of turnover (especially if you expect to earn a fairly good rate), until you realise that most of these fixed fee companies do not offer Professional Indemnity insurance, or do so at a hefty additional cost not included in the fixed fee.

C. Legality and Regulatory Compliance
Unfortunately, there is no shortage of unscrupulous umbrella companies offering quasi-legal or even downright illegal schemes amounting to tax evasion. Most of these schemes are highly complex, depend on some (mythical) tax loophole that is being exploited and revolve around an 'offshore' company or trust. The Inland Revenue has investigated and stamped out many of these schemes over the last few years and are actively targeting others. You would be well advised to steer clear of any scheme that might make you fall foul of the Inland Revenue.

As a general rule, unless special circumstances apply (e.g. you are not tax domiciled in UK), British taxpayers are legally required to declare and pay tax on income arising anywhere in the world, so most 'offshore solutions' are useless unless you want to risk breaking the law.

Remember: if it sounds too good to be true, it usually is!

-----

At PMMC, the suite of services we offer is second to none, as is our understanding of the freelance marketplace. As a Combined Managed / Composite Services Company run by a team with more than 10 years’ experience, we provide the only viable alternative to a freelancer having their own limited company, at a very competitive cost.

We cater for short- or long-term contracts, falling inside or outside of IR35. Our service is tailored not only to the individual and the sector in which they operate, but also on a contract-by-contract basis, leading to the highest possible rate of retention of income under all circumstances.

We are committed to ensuring that our portfolio of services remains fully comprehensive and we give all our employees this promise – if they come across a service or benefit (offered by another umbrella company) for which we have no equivalent, we will strive to add it to our repertoire, as long as it is legal, compliant with current regulations and commercially viable.

Our Service Charges (which include access to ALL services) are set at a maximum of 2.5% of turnover and are tiered, hence the more you earn, the lower the rate will be in relation to your income. There are no setup charges, joining fees or termination penalties. No additional costs are incurred by working directly with a client and not via an agency or intermediary, nor would there be any fees to pay when you are not working on an assignment.

At PMMC, you will find no quasi-legal offshore arrangements, outlawed foreign exchange loans or defunct Employee Benefit Trusts, just a plain and simple vision – to help each freelancer to focus on what they do best while retaining as much of their generated income as is legally possible, operating either inside or outside IR35.

Whether looking to become a freelance professional for the first time, mid-way through an assignment or currently between contracts, there has never been a better time to join the ranks of PMMC’s many partners in all sectors of the contracting market: Education & Training, Engineering & Manufacturing, Finance & Banking, Hospitality & Catering, IT & Telecoms, Medical & Pharmaceutical and Sales & Marketing.

Johan Steyn

Editor's Note: Johan Steyn has been working as a freelance Enterprise Resource Planning (ERP) & Management Consultant for 10 years and he is the Managing Director of PMMC (UK) Limited.

Wouldn't it be nice to have more time on your hands and more money in your pocket this summer?

Are you still running your own limited company while drowning in a deluge of regulations and wading knee-deep through a quagmire of paperwork and administration?

Maybe you are permanently employed at the moment and fancy taking the plunge as a freelancer, but don't quite know how to proceed or how much it is going to set you back financially.

If so, you might very well be in need of a new umbrella...

This summer, we would like to invite you to sample the ultimate freelance lifestyle with PMMC, where you will find everything a freelancer needs under one umbrella. We have simplified our fee structure and lowered our service charges, so now it is even easier to join and our fees are more competitive than ever.

For a limited time only you can also avail yourself of our FREE TRIAL OFFER - join before the end of August 2005 and we will waive our service charges completely for three months, allowing you enough time to try out our service without any risk.

For more information, contact PMMC or browse the Services or Our Fees section of our website. You can also sign up online by completing the secure registration form.

PMMC (UK) Ltd. - Much more than just an umbrella company...

How did Britain avoid the 2001 recession that ensnared other countries? Recessions followed after each of the post-war periods when real house prices rose above the level of real household disposable income - in 1972, 1979 and 1987.

Britain’s manufacturers did suffer a recession. Total output of the economy rose by over 5% from the end of 2000 to the end of 2003, but manufacturers had a different story to tell. They suffered a fall in output of over 5% in that period. The 6.7% rate of return on their capital (2001) was the lowest since the trough of the recession nine years earlier, in 1992.

So how did Gordon Brown guide Britain through the global turbulence of these years to avoid the embarrassment of a formal recession for the whole economy? His achievement provided him with a political narrative which he put to good use. One week before his 2004 budget he told the New Labour Party faithful at their spring conference:

"When I present my budget next week the first, the central and most important theme...will [be] for hard working families, to lock in economic stability...not just for a year or two, not just for an economic cycle. Our aim should be to lock in stability for a generation...we will take no risks with inflation."

Inflation, that is, excluding a large slice of the costs that people incur when they buy their homes.

According to the official definition of inflation, the one on which the Bank of England had to focus, Britain had enjoyed stable prices. But so, indeed, had the rest of the world. Japan’s prices declined for a decade. Germany also appeared close to deflation. In other countries, inflation was moderate as retailers slashed prices to attract customers and producers competed for shares in the increasingly cut-throat global markets.

How, then, do we account for Britain’s missing recession? Had Gordon Brown, the editor of unremittingly socialist tracts during his early political career, changed the rules of the capitalist economy?

The clues are to be found in the financial sector. Gordon Brown sponsored a classic Keynesian pump-priming operation. This time, however, there was one peculiar difference. Instead of accepting responsibility for managing the economy, he shifted the burden on to ordinary families.

According to the wisdom passed down through the decades since Keynes wrote his General Theory in 1936, governments could counterattack the prospect of a recession by employing offsetting measures. Unemployment was supposed to be due to a shortfall in the money people spent in the markets. So if government increased public spending, this would compensate for declines in private consumption and investment.

Brown stood this doctrine on its head. Instead of accepting the political obligation to maintain full employment, he silently shifted responsibility onto Britain’s households. Instead of increasing taxes and/or public debt, to finance investment in infrastructure - to create jobs and sustain growth - he presided over the growth of a record level of personal indebtedness. By July 2004 that debt reached a staggering £1 trillion. To underpin this indebtedness, a blind eye had to be turned to inflation in the housing market.

If the business cycle had played out in the way that we would have predicted on the basis of historical trends, the price of houses would have deflated in 2001-2. This would have been the outcome of a mid-cycle recession. Instead, under Gordon Brown’s stewardship, the residential sector was allowed to bubble. This set new benchmarks for prices: the next housing bubble would have to inflate to stupendous levels before finally collapsing and driving the economy into the Depression of 2010.

But in the meantime, Britain’s consumers were on a spending spree. They borrowed like there was no tomorrow to finance the purchase of luxury goods, holidays in exotic locations, new cars, and improvements to their homes. Following the election of New Labour in 1997, consumption grew faster than output, with retailers sucking in imported goods to make up the difference. Between 1999 and 2001, consumption grew exactly twice as fast as Gross Domestic Product (GDP). Unsecured consumer debt rose at an annual average rate of nearly 11% over the five years to 2004. While Gordon Brown preened himself with declarations about his virtuous ‘prudence’ in handling the nation’s public finances, he sanctioned private bingeing that undermined the culture of thrift. Britain’s consumers would Spend, Spend, Spend the economy out of the recession before anyone noticed! They spent more on their credit cards than the rest of Europe put together. By 2003 those credit cards were loaded with a debt of £120bn. Shoppers in the other 14 nations of the European Union (EU) spent just £45bn between them.

The financial and psychological key to the spending spree was an out-of-control housing market. With every percentage increase in the capital gain on their homes, owners felt wealthier if not wiser. They withdrew equity at record rates so that they could buy the luxury goods that created the trade imbalance between Britain and the rest of the world. They also borrowed more to ‘trade up’ to more valuable properties - the home-owner’s way of speculating in the capital gains of the future.

The hothouse finances of the nation were devastating for industry. They drove up the value of sterling relative to other currencies. Britain imported cheap goods from the Far East while her manufacturers suffered a collapse in orders. As Gordon Brown directed people’s attention to the 2.5% target inflation rate, house prices were soaring ten times faster.

The Financial Services Authority (FSA) rang the alarm bells in January 2003. It described as ‘unsustainable’ the escalation in mortgage debt. And what was the Treasury doing about the borrowing binge? Gordon Brown failed to take effective action against the inflationary pressures coming from the one asset that mattered in his campaign to deliver stability. The official outcome was the appearance of inflation under control. This was a statistical illusion that was exploited for political gain by the chancellor.

In short, the UK economy escaped a formal recession in 2001 because Gordon Brown had imprudently allowed the population to neglect the need to save and invest. The nation’s savings ratio sagged. It was over 10% of income when New Labour was elected in 1997, and it dropped to 4% in 2000; recovering a little, but dropping to under 5% in 2004.

Savings are crucial for at least two reasons. Money needs to be set aside in the form of pensions, if people do not wish to live on the breadline in their years of retirement. Secondly, the formation of capital equipment with which to compete in the global economy was crucial if the UK was not to be left behind by its competitors. It was incumbent on Gordon Brown to ensure that savings were sufficient to meet the needs of the nation. Strangely, the chancellor was silent on the prudential need to save.

In March 2004, a coalition of six investment organisations launched a campaign to try and stir interest in the Treasury on the need to save if the nation was to meet the challenges of the 21st century. The financiers were pessimistic, for "Mr Brown has not used the word saving in a Budget or pre-Budget report since 2001". The Association of British Insurers noted that saving was not one of the government’s top five issues, and its members were concerned that the government did not have a coordinated strategy for filling a huge hole in the nation’s finances.

The low savings rate aroused anxieties in the financial sector, but it made sense for the Treasury. It was bound by the rules of prudential management invented by Gordon Brown and his economic adviser, Ed Balls, a Harvard-educated journalist. Their way to avoid a formal recession was for the nation to deplete its savings, the reciprocal of which was for people to sink into debt.

So responsibility for the economy was covertly shifted away from the Treasury. Families were left to prime the financial pumps and keep the credit flowing so that the economy would not suffer six consecutive months of negative economic growth - the formal definition of a recession. Brown’s role in disturbing people’s willingness to save was criticised by Sir Richard Sykes, an adviser to the government and Rector of Imperial College, London. But the criticism came too late to moderate the Treasury’s priorities.

The price of Brown’s financial negligence would be a terrible one. For the best part of three years, beginning in the summer of 2001, the increase in financial liabilities of Britain’s households exceeded the increase in assets. People were dangerously exposed to the vagaries of a world economy that was contracting.

If unemployment in the UK suddenly turned upwards, tens of thousands of families would be bankrupted, many of them forced to yield their homes to pay their debts. That this has not yet happened is not due to prudential management; quite the reverse.

The economy has stayed afloat because households sank into debt.

Fred Harrison

Editor's Note: This essay was taken from Fred Harrison's book, 'Boom, Bust: House Prices, Banking and the Depression of 2010' (Shepheard Walwyn, 2005). In his compelling and easy-to-read analysis of 200 years of economic history, he shows how the coming downturn could run deeper than any in living memory as the globalised economy moves towards a globalised cycle of boom and bust.

Formerly chief reporter for the News of the World and an economic advisor to the Russian government throughout the 1990s, Fred Harrison is now executive director of the Land Research Trust in London.