All the latest news from Contractor Mortgages
Posted by December 6th, 2019on
Despite recent catastrophic public losses, HMRC continues to push IR35. Managed service companies, contractors working ‘outside’ IR35 and clients employing them? This is the taxman’s stance:
HMRC will investigate and challenge these arrangements through every route open to it (including litigation)
This statement signals clear intent. It also explains why so many large corporates have already scrapped their contractor policies.
IR35 Reform will stack odds in HMRC’s favour
Now, fast-forward a few months from now to April 2020. That’s when IR35 decision-making kicks in for the private sector.
Yes, Sajid Javid has given an election promise to ‘review’ the upcoming changes. But the coalition promised the same 8 years ago and we’re still waiting.
Few contractors will have the choice about how they’re paid. Clients will decide the contract status, if it’s inside (PAYE) or outside (paid gross).
Some think that this is the end of contracting as we know it. But we shouldn’t write off the sector as dead. Far from it.
UK businesses have grown used to the flexibility contracting brings. Contractors share a joint responsibility to maintain that dynamic workforce.
Responsiveness, Responsibility and Thinking Like a Business
Clients and the service-providing contractors alike need to think on their toes.
With so many clients going carte blanch PAYE, the volume of IR35 targets will shrink. That increases the odds of HMRC calling on remaining single entity limited companies.
Contractors will need to up their game and take more responsibility. They’ll have to prove that they are a business and not a disguised employee.
Those that think like an employee will be putting a target on their backs. To prove they’re a business and stay outside, they’ll have to start thinking and acting like one.
Don’t wait for the dreaded letter before acting
When the IR35 team are onto you, you’ll get a letter from HMRC. It’s not an invitation to their Christmas Ball.
The letter’s guise is that the taxman wants to check you’re paying the right income tax and NICs. The subtext is: we’re checking to see if you’re inside IR35.
They will ask to see your accounts, contracts and expenses and benefits. It may refer to the current year, the last tax year or a period even further back. HMRC can backdate an IR35 investigation and does so regularly.
The letter then asks if you’ve “considered the possibility” that you’re working inside IR35. If you say you’re ‘outside’, you must explain how you’ve “arrived at that conclusion”.
What happens next
There’s a chance IR35 will ask for a face-to-face meeting. They will no doubt ask you if you’ve used the government’s CEST tool at that meeting. But here’s the kicker.
Many leading lights in the industry believe that the CEST tool isn’t fit for purpose. However you input your information, the tool will conclude that you’re working inside IR35.
It’s the same with a face-to-face interview. Those who know about tax protection declare that the questions there are stacked, too. No matter how you answer their questions, chances are you’ll put the IR35 noose around your own neck.
Level the playing field
If you’ve got the letter, don’t agree to a meeting until you know the agenda. There is no obligation for you to agree to a meeting at this point.
Write back to them and ask them to be more specific. Ask them what the meeting will entail and the questions you’re likely to face.
Once you have their response, you can prep yourself properly. Then, there is only one real course of action to take: seek professional help.
But you’ll help yourself no end if you don’t wait for the letter to arrive. Think like a business from the off.
Right now, if HMRC asked you to prove that you’re outside IR35, could you?
Here are several ways you can ‘evidence’ yourself as a bona fide business, starting now:
Sending In A Substitute
If you’re a limited company contractor, the contract is with your business, not you. Or should be. In the event that your contract is through an agency, the same applies. A client engages the agency, who in turn engages—and pays—your company.
Your contract should make this clear. Back it up with an agreement with a substitute willing to step in on your behalf. The contract and the agreement should both be with your limited company.
It might take some getting your head around and more work. What if the substitute is better than me and usurps my extension? How will my client perceive me if I need to send a replacement in? How will it affect my earnings?
This is where you have to start thinking B2B. Better to keep your client happy AND keep IR35 at bay than the alternative.
On that note, make sure this is a conversation you have up front. If you’re working with sensitive information, you may have to follow certain protocol.
Confirmation of Arrangements (CoA)
Okay, you say. How will the substitute know what the client expects of them? Would they risk exposing themselves to IR35 without a contract to back it up?
To answer that, ask yourself how you know that the client wants of you. IR35 evidence must be watertight, with no room for ambiguity. So a Confirmation of Agreements helps all around.
Your contract should document the work your client expects of you. Talk to your client. Explain why it’s key to have an agreement framework.
If you think about that for a minute, it makes sense. Only with the full picture can an IR35 expert accurately review your situation. If you have that extra assurance, your substitute is then confident they’ll be safe, too.
It won’t hurt to run your credentials through the CEST tool. But even if it does come out in your favour, it won’t solely influence their decision. It’s client evidence that often affects the outcome of many IR35 cases.
Obligation and Control
As a business owner, you should retain an amount of control over your own destiny. Again, a client would expect nothing less, given that yours is a B2B arrangement.
What control can you reasonably ask for, given you’ve a role to fulfil?
Can you undertake any of the defined work from a remote loaction, like home? Or Starbucks?
If so, do your hours need to align with the client’s office hours? Showing key differences to employees in the way you provide your service matters to IR35.
It similar with tasks. In your contract, you’ll have confirmed your area(s) of responsibility. Stick to them and the services you’ve agreed you’ll supply. Neither should the client expect nor you volunteer to work outside that remit.
Where Control bleeds into “MoO”, or “Mutuality of Obligation”
The only obligation you have is what’s outlined in your contract. But getting the balance and tone of ‘rejection’ right can be difficult.
So as hard as the temptation might be, resist extra tasks. Note dates you’ve refused, even if it makes you sound like a ‘jobsworth’. If there’s recourse, note that, too. Even if your client’s employees become disgruntled, distance yourself from anything fractious.
You’re not an employee with an ambiguous remit. Provide your service in the manner you’ve outlined in your contract.
Prove that you’re liable for self-supporting finances
Every business faces some element of financial risk. As a contractor, you may think proving that you’re liable is impossible. If the client suffers hardship, you may get terminated early. But there’ll be other contracts, right?
There is evidence that will prove you’re running a bona fide business.
You will have laid out—sometimes significant—costs that you may take for granted. Hardware—laptops, special gear and bespoke software—are great examples of outlay by you.
To stay competitive, you also have to keep up with your industry. Training can cost a small fortune, depending on your role. Record all the niche-specific training you’ve taken. Itemise where you’ve paid out for it from your business.
Don’t disclose training you’ve had from your client. This will plant you in the ’employee’ category, without question. As will having your own parking space and attending social events for free.
If you’re on a fixed price job rate, you have more options
You may have had cause to adapt or correct work in your own time, and for free. All the better. This is a great way to evidence your financial independence.
With fixed rate jobs, time can be your friend (as well as your enemy). Complete the task within the time frame and you can look for extra work elsewhere. Supplying more than one client is a sure-fire way to prove independence.
Plus, if you’re thinking like a business, you’ll be marketing like one. Website creation and hosting, social media promotion and business cards. These all point to you being a genuine independent business, which is what you want to prove.
Is it all worth it, given IR35 Reform?
No doubt, some contractors will see this as a lot of work for what could be little reward. And perhaps the point of the upcoming Reform.
Many private sector clients will whitewash contracting. They’ll put all such service providers on payroll without thinking twice. Some may wait until after Reform in April 2020. But others—banks in particular—have started already.
Some contractors have already unwittingly tied themselves into contracts beyond next Spring. How flexible clients are to renegotiation will depend on each client. That’s another reason to open and maintain dialogue with the hirer.
What is the point of all this work when you’re going to be PAYE anyway?
Interesting, many contractors brought this question up in one of the contractor forums. They were bemoaning the changes and claiming “the death of contracting” was nigh.
But others had a different view. Their argument was (is) that the new changes will sort the wheat from the chaff. Anyone who is a disguised employee should go PAYE and stop sullying the industry. This will leave genuine contractors to provide services B2B.
The amount of this advice you take on board will depend on your own perspective. If you’d rather not put in the work, perhaps you’re better off as an employee. HMRC will catch up with you at some point. Even if they don’t is it worth working with that constant Dementor?
For any genuine, remaining contractors, life should treat them well. Acting like a business is, perhaps, the B2B all and end all. For further help with your status, do get in touch with our contractor-specialist partners.
Posted by November 13th, 2019on
Now and then, housing market stars align to present a surprise opportunity. Such is the case now.
But it’s very much of the moment and this sweet spot won’t last forever.
Brexit fears aside, many other factors could pull these stars out of true. Not least the upcoming General Election.
But right now, there’s a unique opportunity for contractors looking to buy a home!!
Borrower profiles: the less risk, the better!
Contractors’ strong earning power and penchant for saving and investing curries favour with lenders. Their overall tendency to err on the side of caution also displays prudence.
Ahead of the great unknown we face, mortgage lenders are looking to reduce risk. Your borrower profile—combining high income, savings and caution—is a win-win-win for them.
It’s even stronger when you stack these traits up against the competition!
First time buyers account for 52% of all new mortgages. That’s growth in market share of more than 50% since FTBs represented a third in 2015″! And many of those are intergenerational borrowers (borrowing deposits from the bank of mom-and-dad).
Here’s why I think the whole scenario has inherent flaws. Moreover, how contractors could take advantage of this once-in-a-blue-moon opportunity right now.
Inter-generational borrowers: good for business?
In a way, this shift feels a little like self-cert. Inter-generational borrowers are, in effect, borrowing from their future selves. It is entitlement taken to the nth degree. And it’s worrying.
Many existing homeowners are waiting for Brexit results before moving home. So, for now (at least), lenders are running with the surge in first time buyers.
What else can they do? Without first-time buyers, the market would feel more than a tad deflated.
But I ask myself, “if the rest of the mortgage market was more buoyant, would they?”
It’s this simple. The more lines of credit a borrower has, the higher the risk on the part of the lender. And, yes – I’m sure that some parents are gifting the money to their offspring.
But not all of them. For those homebuyers taking equity from parents as a loan, it’s another debt. Eventually, you’ll have to repay your parents’ or grandparents’ loan. The scary part is that, quite often, it’s an unquantifiable debt for the lender involved.
The win-win(-win) for lenders
So, why should banks worry? On paper, first time buyer borrowers meet lending criteria. And the lender is potentially getting double bubble from the transaction:
- Equity release products from (at least some of) the generous parents and grandparents;
- New customers by way of the first-time buyers that their folks releasing equity facilitates.
The Bank of Mom and Dad helps GDP, too. More money released from savings and equity, the more in circulation. The more borrowed for mortgages, the greater the amount in the economy’s ‘profit’ column. Everybody’s happy.
So, am I being too cynical? I don’t think so.
Why this is such a good thing for contractors in the here and right now
Those little windfalls of inheritance that have helped past generations pay off lump sums? They’ll be much reduced in the future. You can only spend it once. Spending it now limits inter-generational borrowers’ options in the future.
And lenders aren’t ignorant. They know this. So, what will they think of a contractor with high, sustainable income and even savings?
Oh, yes: lenders will take that, providing the contractor goes through the right channels. I can’t stress that last bit enough: use a contractor-aware broker every time.
It’s making lenders see a contractor’s affordability that’s often the issue. Getting to underwriters who’ve taken off their blinkers is key to a successful application!
The underpinning issue in contractors’ favour: time
The UK landscape is about to change forever, for better or worse. And right now, it’s taking 162 days to sell a home (on average) in England and Wales. 109 days are from putting the house on the market to accepting an offer.
The mortgage going from accepted-to-completion devours the other 53 days. That’s the biggest part of two months! From time of writing, there could be a whole new Government in that time.
What bank wants to wait that long? And we know they don’t want to wait because of another tell-tale sign.
Have you noticed how many lenders are encouraging you to overpay your mortgage?
Ducks in a row before Brexit
Like I say, lenders aren’t ignorant. Ahead of Brexit, they want reduced risk, more money in the kitty and assurity. They don’t want another financial crisis.
If a contractor uses a broker who knows what they’re doing, they can have that guarantee. Most contractor mortgages complete in 3-4 weeks, some even quicker than that.
What lenders won’t welcome that business compared to their other options?
Now might not seem like a great time to buy a home, but:
- Brexit is looming;
- Who knows which way the General Election will go;
- And contract-based underwriting might disappear as we know it after April 2020!!
Many banks are scrapping their contractor employment schemes already. And it was they, primarily the Halifax, that got the contractor mortgage train a-rolling.
Don’t wait until buying a home using your contract rate is not an option. The alternative will be you using your ‘salary’ only. Now that would be a disaster!
Posted by May 20th, 2013on
The housing market has bounced back in a big way – and home prices have increased to keep up with this trend in a major way over the past month.
While this isn’t necessarily good news for anyone looking to secure a home loan, owners looking to sell their homes will indeed be happy to learn that the price of the average home increase by around 2.1 per cent over the past 30 days. This has added around £5,000 to the price of your typical home, leading to an average price of almost £250,000.
Continue reading »Steady Increase in House Prices Prolongs Market Recovery
Posted by May 10th, 2013on
The Council of Mortgage Lenders has reinforced its message that monitoring forecasts and budgets for repaying interest only home loans is the safest way to ensure mortgagees are not left high and dry.
Many banks and building societies pulled out of interest only or ‘endowment’ mortgages at the end of 2012. One reason was the creditworthiness potential customers needed to bring to the table, but weren’t.
The other was the lack of long-term verification that any plans in place would actually produce enough capital to pay off the mortgage at the end of the term.Continue reading »“Interest only” mortgages for contractors not the pipe dream they were
Posted by April 22nd, 2013on
One of Chancellor Osborne’s newest schemes announced in the Budget specifically designed to support the mortgage lending market has been criticised by MPs.Continue reading »Chancellor’s new Help to Buy scheme strongly criticised by MPs
Posted by April 15th, 2013on
There may be some good news for those first time buyers that have grown weary of being tossed table scraps by major home lending providers.
It turns out that first time buyers – especially those that lack the cash on hand to put down weighty deposits – may finally be able to find a relatively affordable mortgage loan, even though they don’t have much in the way of a deposit amount. This is because both Halifax and First Direct recently announced that interest rates on lending products ideal for low-deposit first time buyers were being slashed.
Continue reading »Lenders To Make First Time Buyer Mortgages More Competitive
Posted by April 8th, 2013on
That attractive fixed rate mortgage loan might look like a fantastic deal, especially in the wake of ultra-low interest rates, but beware the bait and switch. Continue reading »Beware of Too-Good-To-Be-True Deals on Low Rate Mortgages
Posted by April 1st, 2013on
The EU’s human rights rules could have a knock on effect to UK housing. Under them, it’s likely that the Help-to-Buy scheme will help foreign EU and non-EU residents buy a home in the UK.
The Help-to-Buy scheme in itself is the shot in the arm the depressed housing market needs. Through it, lenders would offer mortgages subsidised by the Government.
For one, it would make the housing market more accessible to first time buyers. It would also help younger/lower-income Brits with 5% deposits buy a home.
But, under EU rules, the UK can’t confine this type of mortgage lending to its indigenous citizens. People both inside and outside the Eurozone will have equal access to Help-to-Buy.
Continue reading »Human Rights May Get Non-EU Residents Help-To-Buy Mortgages
Posted by May 14th, 2012on
Permanent Health Insurance Vs MPPI
The scandal over mis-sold PPI has meant that a lot of self employed contractors have refused to take out income protection on their mortgage payments because they do not understand that it is a different product.
Continue reading »Contractors shouldn’t ignore protection insurance