Welcome to the November 2005 edition of the PMMC Freelance eNewsletter. In this edition, we introduce our Winter Giveaway in which you could be the lucky winner of a case of something bubbly to liven up the Festive Season.

First up, an article by Keith Preece in which he throws some light - from Qdos Consulting's unique perspective as market leader in IR35 expertise - on the state of IR35 enforcement by the Inland Revenue.

We conclude with an essay by Bill Bonner in which he eloquently argues the merits of doing nothing; sage yet unconventional advice.

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.

Since the introduction in April 2000 of the Intermediaries Legislation, known as "IR35", the word "contract" seems to have been on everyone's lips. This is hardly surprising, because the IR35 legislation appears to be designed specifically to impose additional tax liabilities upon freelance companies that are contracted by their customers or clients to provide services, or sub-contracted to do so through other agencies. However, in the context of the enforcement of the IR35 rules by HM Revenue & Customs, the word "contract" might have become somewhat misleading.

Where there is a written contract to supply services between the freelance company and its client, or more commonly between the company and the agency acting for the client, it has become normal practice for the contents of that contract to be reviewed by an expert in matters of tax status, to assess whether it falls within or without the IR35 rules. However, as any such expert will concede, it is not possible to rely wholly upon terms and conditions stated within a contractual document. To be confident that the contract is genuinely outside of IR35, it is necessary to ensure that the day-to-day, practical working arrangements under which the services are supplied also remain outside of IR35. Thus all aspects of the engagement, from the written and theoretical to the manual and mundane, have to be considered.

It should also be borne in mind that a significant number of engagements to provide services are not subject to written agreements. In such circumstances, there is no written contract to consider, notwithstanding the probable existence of a verbal contract.

In the context of enquiries by HM Revenue & Customs, years of experience have taught us that a written contract that appears watertight for IR35 purposes is often insufficient. It is becoming increasingly common for Revenue Status Inspectors to pay only scant regard to the written contract and to seek to investigate the nature of the actual working arrangements under which the contracted services are provided. This means that the Inspector will approach the customer or client direct, to put questions in writing, or to undertake a face-to-face interview. Typically, the ensuing discussion between the Inspector and the customer or client will focus upon day-to-day issues that are not detailed within the written contract, and which the service provider might not have even thought about when the contract was signed.

For the freelancer who is supplying services in the confident belief that the terms of his contract place him outside of IR35, the results of the Inspector's enquiries can be alarming. He might discover that his client has a rather different view of the engagement, and the client might have described the day-to-day arrangements in such a way as to lead the Inspector to conclude that IR35 should apply. The freelancer might end up wishing that he had clarified with the client all aspects of the engagement at an early stage in their association.

IR35 is concerned with employment status, which is a complex area based upon legal precedent rather than statute. In accordance with both precedent and the IR35 legislation, what has to be considered is the working relationship between the individual worker and the customer or client. These factors make it impossible to rely solely upon the content of a written contract. It is necessary to view all aspects of the engagement as a whole, and to pay particular attention to what happens in practice, or what would happen in specific, hypothetical but realistic situations. For the freelancer to remain confident of operating away from the tax burden imposed by IR35, some key aspects of the day-to-day working relationship with the client must be clarified.

Many tax advisers now recommend the use of some form of "Confirmation of Working Arrangements". This is a list of key statements and /or questions that may be addressed by both the freelancer and the client, with a view to a joint clarification of the nature of their association, in accordance with the fundamental criteria used to assess employment status for tax purposes. Ideally this form should be brought into play at the outset, well before the Revenue Inspector decides to mount a challenge to the freelancer's tax status.

The use of a "Confirmation of Working Arrangements" procedure is to be recommended especially where the freelancer is providing services through an agency. This is because the end customer or client might have formal agreements with the agency, the existence or nature of which is not evident within the terms of the freelancer's own agency contract. Any lack of knowledge on the freelancer's part would not prevent the Revenue Inspector from obtaining sight of the relevant documents, the contents of which might be damaging to the freelancer's IR35 position. If the client refuses to sign some form of confirmation of arrangements, and the agency will not disclose to the freelancer the contents of its contract with the client, it might be time for the alarm bells to ring. On the other hand, if the client is happy to confirm that the arrangements are such that IR35 should not apply, then the signed "Confirmation" can be retained as evidence.

I prefer the word "engagement" to "contract", because it is more encompassing, and helps to steer us away from the impression that IR35 is solely about the written contract. Whatever term one uses however, the point is that there is much more to IR35 than the freelancer's written contract, especially where an agency is involved. Furthermore, it is both possible and desirable to strengthen the freelancer's IR35 position by clarifying particular aspects of the working relationship with the client, in accordance with the recognised employment status criteria.

Keith Preece - Qdos Consulting Ltd

Editor's Note: This article first appeared on Contractors Unlimited, the website for freelance contractors in the engineering industries, offering a unique combination of News, Contractors' Guides, Products and Services for freelance contractors and small businesses.

Qdos Consulting are specialists in taxation, VAT, employment law, health & safety and legal fees insurance, with a UK-wide network of associates and clients. Qdos are also the UK's leading authority on IR35 having defended over 560 cases, without having lost one; this has resulted in a saving of over £12 million in tax for clients.

This Festive Season, there are two cases (6 x 750ml bottles each) of Moet & Chandon Brut Imperial Champagne up for grabs in our Winter Giveaway.

The draw will take place on the 20th of December and the lucky winners will receive their prize in time for Christmas.

To be eligible and stand a chance of winning a case of the world's most popular bubbly, all you need to do is register to join PMMC or refer a friend or colleague to us (ask them to quote reference WG-05) before 20 December 2005.

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

You must be 18 years or older to enter. Winners will be announced on 20/12/2005. The decision of the adjudicators is final and no further correspondence will be entered into. If you do consume alcohol, please do so responsibly.

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

The newspapers and TV blabbermouths have been in full throated yelp against inactivity. In the wake of the New Orleans inundation for example, they surf for sound bites. In those crucial hours, local officials 'did nothing', they say. Federal officials, too, including the highest official, were nowhere to be seen, doing nothing.

Nothing. Nada. Zilch. The null category gets no respect. The hollowness of it is repulsive. The emptiness of it is unbearable. Even nature is said to abhor a vacuum. The poor man who 'has nothing to say' is a pariah. He is like the investment advisor with nothing to recommend, save cash. He will get no work as a hedge fund manager; he will drive no fancy car...nor live in a beach palace at the Hamptons.

And zero? For centuries the number couldn't even be found. Mathematicians didn't know what to make of a number that was not a number at all, but an absence of numbers, a graphic display of nothing - a round, empty hole.

And pity the poor renters. While everyone else has been getting rich, the renters have been left behind, stranded...like people who showed up too late at an airline counter in Duluth, just before a snow-storm...doomed to spend a weekend there.

Imagine the conversations between husband and wife: "You did nothing! This was the biggest housing price boom in history...and we missed it. Now, we'll never be able to afford to buy a decent house."

Few things are as damnable as inaction. In politics, it is cause for recrimination. In marriage, even the Catholics allow for annulment in case of non-consummation. In finance, it is cause for regrets. In war, it is cause for firing squads.

In conversation, an absence of words is embarrassing. When a man stares you in the face and says nothing, you assume he is thinking something dreadful. Unless he smiles; then you think he has lost his mind.

The other problem with inaction is that there is never any excuse for it. Stalin's generals, charged with inaction during the early days of German assault on Moscow, might have explained that they were busy with their mistresses...or attending a child's birthday party. Either excuse would be perfectly satisfactory to a civilized man - for both were better than killing people in order to defend the Soviet Union. But Stalin was scarcely civilized. And while the Soviet Union was abominable, Hitler seems to have offered something even worse. But how could they know that?

And how could the poor husband know that house prices would rise? Of course, he could not. But his wife nevertheless holds him responsible, as if he not only saw the train coming but intentionally failed to get on board.

No, dear reader, inactivity is almost always unpardonable. But here, nevertheless, we say a kind word for it, maybe two. First, we point out that doing nothing is usually the best course of action - especially in public affairs and investments. Second, we deny the possibility of 'doing nothing' in any case.

Since the entire world nurses a prejudice against inaction, the burden of proof is clearly on us. So let us bend to our work like a field hand, knowing that our labours will be many...our rewards few.

In public affairs, as in private ones, there is a powerful compulsion to 'do something'. The problem on the Eastern Front was not really caused by inaction, but by Hitler's desire to 'do something.' After the invasion and capitulation with France...and after the Battle of Britain...he found himself with time on his hands. Western Europe was buttoned up, from Poland to Spain, he was master of all and everyone. Only Britain held out. But he had not the means to invade Britain...so his eyes wandered across the map - as Napoleon's had done many years before...and saw Russia.

He would have been much better off staying home. Then, Stalin's generals could have continued to bounce their mistresses on their knees...and hand out candy at birthday parties. Inaction would have begotten more inaction, in other words. And the world might have been a better place.

And now we read in the news that the administration and congress have finally sprung to action on the bayous. They are going to spend more than $50 billion! That the money will be almost certainly squandered seems to trouble no one. That every penny of the money could otherwise, and better, be spent by the people who earned it bothers neither conservative nor liberal. The impulse to 'do something' is so powerful, no one wants to stand against it.

But our beat here at the Daily Reckoning is money. Are you ever better off doing nothing with your money? The answer falls in our lap like a ripe cocktail hostess: 'Of course.'

Warren Buffett holds billions in cash. He is probably the best investor who has ever lived. If he cannot find anything better to do with his money than to leave it in cash - effectively doing nothing with it - how can the average lumpeninvestor expect to do better?

Is this the time to buy stocks? Probably not. Stocks are still relatively expensive. The idea is to buy low and sell high later. When stocks are high already, there is no alternative; you must do nothing.

Is it time to buy bonds? Probably not again. Bonds are expensive too; yields are low. Will they become even more expensive? Will yields go even lower? Maybe. But we cannot predict the future. All we can do is look at the present and the past. We know, from past experience, that bonds have become more expensive almost every year for the last quarter of a century. At today's prices, you are not likely to make money in bonds, especially corporate and junk bonds; it is better to do nothing.

But there is always real estate, isn't there? Since 2001, investors have made such rapid advances in the property market they would have made Guderian or Rommel envious. In the late summer of 1941, Guderian - the leading proponent of panzer-led blitzkrieg warfare - was racing towards Moscow. The man could not bear inaction; he took to the offensive even against his Fuhrer's orders. On the other side, the Russians were full of action themselves. Guderian faced Zhukov, who was beginning to understand how to beat the panzers. You know what happened next. Action produced reaction. Finally, the whole campaign ended in a bloody mess.

But it is still sunshine for house buyers. Should you join them...while the getting is still good? Or should you do nothing? 'Do nothing,' is our advice. Most houses are too expensive. You will get more for you money as a renter. Most likely, you will be able to buy later - at better prices.

"You are either long or short", said our old friend Mark Hulbert twenty years ago. "There is no such thing as a hold". What Hulbert was describing was the impossibility of inaction in the investment world. You may like to do nothing, but you can't. If you do not buy stocks, you buy something else. Nothing cannot exist; it has no meaning. If you have money, you must have it in some form. You must be 'long' something. You may be 'long' cash...as Buffett is, but that is just as much a something as being 'long' property or stocks.

The real question is not whether you will do something or nothing, but what will you do. When all major asset classes are expensive, the sensible thing to do is nothing. But since you can't do nothing, our advice is to do as little as possible.

The trouble with cash is that it is much more something than nothing. Dollars are a gamble. They are I.O.U.s issued by the world's biggest debtor. Despite nearly a hundred years of decline, dollars are still expensive in our view. That is, they still buy something. That they will buy less in the future is practically assured. Buffett hedges this gamble by buying foreign currencies. But it is still a gamble.

A more perfect 'nothing' is gold. It is a sort of anti-asset. It pays no interest. It issues no press releases. It offers no 'guidance' on quarterly earnings; it has no earnings. It does no mergers, no acquisitions and it never restructures. It hires no celebrity CEOs. It offers no discounts. It makes no excuses. But it is the thing that goes up when other assets - including dollars - go down.

Gold is as close to nothing as you can get. Buy it.

Bill Bonner

Editor's Note: This essay first appeared in The Daily Reckoning, of which Bill Bonner is the founder and editor. He is also the author, with Addison Wiggin, of the New York Times and international best-seller: "Financial Reckoning Day: Surviving the Soft Depression of The 21st Century" (John Wiley & Sons).

Bill Bonner's latest book - 'EMPIRE of DEBT' - has finally arrived in Britain. This follow-up to his collaboration with Addison Wiggin exposes the Anglo-American economy for what it really is - an empire built on delusions.