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Contractor Guide
 for clinical pharma contractors
Tight employment markets, downsizing
and heavy competition have created more opportunities for contractors.
If you're the type of person who likes to settle in, then a so-called
permanent job might suit you best. But if you're the adventurous,
entrepreneurial type who likes new challenges, then working as a
contractor might be right for you.
Contractors are sometimes called consultants,
freelances, free agents and just contractors. Regardless, all
are self-employed for tax reasons in the UK and essentially the
same in practice. But, speaking of tax reasons, the Inland Revenue
has only two distinctions: contractor or employee. More about
that is in the next section.
Why
become a contractor?
For CRAs, data managers, programmers and statisticians,
the main attraction of being a contractor will probably be the
money. The prospect of earning twice the rate or more than a permanent
employee is undoubtedly inviting. Average pharmaceutical rates
vary anywhere between £27-45 per hour, though these vary
depending on your experience, your role, the client, the agent(!)
and market conditions.
There are other considerations of course. Contractors
can, when the market is buoyant, choose their contract location
and duration. They can also decide the length of their holidays
(with prior consultation between agency and client if you're mid
contract). This greater freedom brings a major responsibility;
you have to find work. This can be easy when many projects are
underway, but can be difficult at other times. Additionally, you
will have to manage your own finances, which may perhaps involve
dealing with an accountant, completing tax and VAT returns etc.
For many, the advantages outweigh the disadvantages (see section
below).
Advantages
of Working as a Contractor
Be your own boss
As a contractor, you are your own boss. That's
the main reason why most employees turn contractors. Even though
you may occupy office space and work shoulder-to-shoulder with
permanent employees, companies are not your employers, but your
clients. Naturally, your clients are entitled to state the results
they expect for the rates you're charging as a contractor. It's
also in your best interest to satisfy your clients, if you wish
to receive favorable referrals to help you land more contract
jobs, even though you'll probably be reintroduced through an agency.
You may earn more than employees
Contractors usually make more money than employees.
Companies are willing to pay more for contractors because they
don't have the expensive, long-term commitments they do with permanent
employees, such as benefits, unemployment compensation, and National
Insurance and pension contributions. Contractors may also deduct
more business expenses than employees, which may sweeten your
net pay.
Contractors are able to "withhold"
their own taxes. This gives you the option of "working the
float" on your gross pay, until taxes are due. For example,
you might bank it to earn interest.
Disadvantages
of Working as a Contractor
No job security
Contractors don't have the same job security
as employees, if there is such a thing anymore. The gold-watch-reward
days of our grandfathers are pretty much a thing of the past.
But even in a slowing business climate, employees continue to
get paid. In really bad times, employees who survive layoffs continue
to get paid, and those who don't may at least collect get some
form of compensation.
Contractors are usually among the first to get
the axe when slowdowns, layoffs and indeed takeovers occur. Contractors
typically aren't eligible for unemployment benefits, because they're
self-employed. Contract jobs might be fewer, and you might find
yourself competing more, bidding lower, and going without work
for some time. Even worse, you might have to temporarily go back
under the corporate thumb as an employee.
Fewer benefits and
job perks
Contractors don't get free benefits and perks
as do employees. You'll have to pay yourself for sick leave and
vacation, fund your own retirement accounts, and among other things,
buy health, dental, disability and life insurance. Insurance rates
for self-employed individuals are usually higher than what employers
pay per employee at group rates. Some companies may require you
to carry liability insurance, but this is will be covered if you
are employed through an agency.
Tax and accounting headaches
Since companies don't withhold taxes for contractors,
you are solely responsible for filling out all the paperwork and
paying your taxes on time, every time, including self-employment
taxes. Of course a registered accountant will be of help in sorting
out your accounts and dealings with the tax system.
Getting
Started as a Contractor
Deciding to go contracting can be a daunting
consideration. Obviously expertise in a niche is a definite plus.
You'll need to be experienced in your particular field, although
if you're a statistician a pharma may take you on if you have
statistical or SAS experience from a non-pharm industry (research
etc). It's a similar case for programmers and database designers,
many of which will have come from a financials or straight IT
environment. Having decided that you have the necessary skillset
to service your clients, you have to give your notice to your
present employer. You will no doubt have to work your month's
notice. This month can be put to good use though.
Things to do:
Get your CV up to date. Make sure it is in a common format,
e.g. MS Word, PDF etc, and virus free! This means that no matter
whom you e-mail it to, they will be able to read it. Read more
here in our CV Guide.
Get your business card printed. Use the icon on the left
to get 250 free business cards. And don't be afraid to circulate
it to your managers and the personnel department/contracts department.
Start looking for a contract. Read more here.
Consider how you intend to operate i.e. through your
own limited company, joining an umbrella company, or PAYE through
an agent. Find the ins and outs of each here. More info here.
Get a new suit and brush up on your interview technique.
See our interview
guide
Decide what you're going to do with that extra income!
Getting
a contract
You can either approach your potential client
direct, but it's more usual for contractors to work through an
agency. Because of contractor vs. employee issues most pharmaceuticals
and CROs won't hire contractors direct, and the only route to
take is via an agency. Today there are a plethora of agencies
and it's best to seek personal recommendations from your fellow
contractors when choosing whom to register with. Most pharmaceuticals
also have a preferred supplier list, so it can be a good idea
to contact their HR department for further information. Unfortunately
most agencies claim to be on everyone's preferred list!
It also helps for you to network by joining your
professional industry body (e.g. ACDM, RSS etc) and staying in
touch with personnel departments may pay off should they require
your skill-set. Although you'll most likely have to work through
a third party (i.e. agency) you're in a much better to position
to dictate your rates!
Working
through Agencies
Most pharmaceutical contractors find work through
agencies that supply your services to their clients (CROs and
pharmaceuticals). They will charge the client a daily rate (usually)
for your services out of which you will be paid. If you are
an employee of the agency, then you will usually have all the
benefits including sick pay, paid holidays, pension, national
insurance contributions. Some agencies offer benefits and training
or share the expenses with you, too. If you are contracting
though the agency, then you will get none of the aforementioned
but will or should be remunerated at a higher rate!
Agency rates - how does it work?
An agency might pay you 30 euros an hour while
charging the company 60 euros. Thirty euros an hour may be more
than what you were making as a permanent employee, but you have
to consider your increased expenses as a contractor, if the
agency doesn't cover them. In the absence of an agency, you
could be collecting closer to the 60 euros (Remember the agency
is a business and does have to make money too - it's unfortunate
that there are a number who take exorbitant margins). Obviously,
if you are able to find work direct with a client then you are
able to earn the 10-50% margin that the agencies would have
been making! Knowing what margin your agent is on can be very
contentious.
There are two schools of thought when it comes
to transparency on rates. One says "If £75/hr is
the high end of what people with your skills get as contractors
in your region, and if you negotiate £80/hr for a job
you want to do, it should be irrelevant what the agent is getting!
If you're happy with the rate you're getting then it can be
argued why quibble!! ". However the others say that an
honest agency will freely and openly disclose the client rate.
Only when you know the client rate can you make a fully informed
decision on whether to accept an assignment. After all, you
may decide to work with an agency that will offer you assignments
with a higher client rate, a lower agency cut, or both.
Full disclosure of the service fee is a hallmark
characteristic of professional service providers. Accountants,
estate agents, architects, solicitors, graphic artists, caterers,
and professional consultants of every kind work on a fee for
service basis. So when estate agents (regarded as being on the
bottom rung of the lowlife ladder!) are able to quote you a
commission rate of 2.5% on the sale of your house then why can't
your agent be open and honest with you?
Unfortunately only a few agencies have adopted
an open policy towards margins between their clients and you,
the contractor. This is a major contributor to the trust and
potential long-lasting relationship between contractor and agent.
ContractPharm would like to see greater transparency in margins
and encourage contractors to demand what clients are paying
for their services. Contractors should be seen for their true
value, and be recognized for the contribution they make to the
business of an agency. In essence, screwing a contractor won't
see them sign up with that agency again! Question your agency
now, but be prepared for their poor responses like the examples
below.
"I've got a great
contracting opportunity for you. You're a perfect match. It's
near where you live, and it pays £36/hour."
"Sounds like a good
assignment. What's the client paying for me?"
"I don't know."
"My manager won't tell me."
"Oh, that's proprietary information."
"Our contract with the client
prevents us from disclosing that."
"It doesn't matter
because we always pay our contractors top wack." "Blah,
blah, blah, etc."
Honest Reply:
"£60/hour."
In order for you to gain a bit more of
a balanced view, we have compiled a few notes on the costings
of an agency, so don't be unreasonable with your agent without
reading this first.
If you need further information on contracting,
rates please feel free to email us or check out the forums!
Operating
as a contractor - how is it structured?
Once you've landed yourself a contract, you essentially
have three tried and tested forms of company/payment structure:
1. One person limited company.
2. Umbrella or composite limited company.
3. PAYE (through you're the agency that gets you your contract
role)
Option 1 is a well established route, whereas
option 2 is a more recent innovation and although option 3 is
the easiest option, it is also the least beneficial.
The following discusses the differences between
the three and gives practical advice on which option to choose.
Considerations
Choosing your payment structure will depend on
your individual circumstances and indeed to your approach to life.
Most contractors work through their own limited company because
the tax advantages of working this way can outweigh the other
methods. However, options 2 and 3 will suit particular circumstances.
Choosing between options 2 and 3 will not materially
affect your net pay, although the administration costs of running
an umbrella company are likely to be a little higher, since you
are delegating all director and company responsibilities to a
third party. It is bit like deciding between the cheaper option
of owning a car, which comes with the extra hassle of running
it, or using a taxi which you pay more for, but has a reduced
hassle factor.
Option three is in effect being the an employee
of the agency and although you'll be getting all the perks (pensions,
sick leave, holiday pay), there seems little point in deciding
to be a contractor when in effect you're not! Indeed, once a contract
comes to an end your employer, the agency, will have the option
of giving your four weeks notice or desperately finding you another
contract. Possibly on the other side of the country!
NB The choice of payment structure does not influence
any Inland Revenue review or decision as to whether the contract
falls within the regulations of IR35. What
is IR35?
Limited company
You can set up a limited company through Companies
House (costs £60-£100) which will take 5 working
days (A same-day company incorporation service is also available
for an additional fee). Generally getting a company formation
specialist to do it for you may cost a bit more but will save
you going grey over the forms and is usually quicker. Your accountant
may set up your company on your behalf for a small charge, or
free if you agree to stay with him for a few years.
You may find it beneficial to use a company formation
agent as they cost little more (see resources
below). Most agents now have specialist software which allows
them to incorporate companies electronically with Companies House.
This is one reason why they are relatively cheap and making the
market very competitive. It's noteworthy to mention that should
you be thinking of the DIY approach, if you end up having to resubmit
any forms to Companies House, this will incur further legal fees.
The cheapest agents at £35 will provide an emailed copy
of the certificate of incorporation and usually a copy of your
new memorandum and articles. If you pay around £50 you will
get printed documents posted to you and usually get the statutory
books and share certificates. More expensive agents tend to have
more experience and come from a business advisory background as
opposed to an IT background. A good test of any agent is to see
if they are easy to contact and if they openly offer free telephone
advice and support.
One thing your company will need is a company
name. There are a few rules concerning names. These can be seen
on the Companies
House website.
The structure
The
contractor is the director of the company and in full control
of all company transactions.
As director they are responsible for compliance with all company
and other statutory issues, including company law requirements
to file accounts and returns to Companies House, calculation
and payment of corporation tax liabilities, payroll calculations
and returns and various other statutory and other Government
requirements.
As director they raise all company invoices, run a simple accounting
system to record transactions and appoint an accountant to deal
with accounts, taxation and payroll matters.
Advantages
Complete control of all transactions and company matters.
Contractor can be seen to be "representing" the company
and "running a business" with its own trading name.
Full control of revenue. Paid directly into the company bank
account, rather than passing via an umbrella company bank account.
Faster payment and administration process due to direct control,
assuming the contractor deals efficiently with all transactions.
Disadvantages
Main disadvantage is the amount of administration/paperwork
arising, particularly in the late filing/payment penalty culture.
Responsible for day-to-day issues as invoicing, keeping a simple
accounting system and fully liaising with their accountant,
to ensure all forms, returns and accounts are filed by the due
dates.
NB Many contractors, particularly first timers
do struggle with these responsibilities.
Umbrella
company solution
An umbrella company is
a single, managed limited company through which many contractors
simultaneously operate their contracts. The umbrella company carries
out all the administration normally associated with running a
limited company. They will issue invoices on the contractor's
behalf, collect payments from clients/agencies, calculate tax
and N.I contributions and pay the contractor their net pay. The
contractor is obviously charged, either a percentage of their
rate or a monthly fee (or both).
Structure:
The contractor would not be a director or the responsibilities
associated with running a limited company.
The umbrella company provider would take care of all accountancy
and taxation matters and also deal with all administration matters.
The contractor completes a timesheet and forwards it to the
umbrella company, who then invoices the agent.
Following payment by the agent to the umbrella company, a payment
is made by the umbrella company to the contractor.
Advantages
Avoids time and trouble of running a limited company. After
a simple set up, the contractor completes timesheets and forwards
to the umbrella company.
Knowledge that money is lodged into their bank account and documents
are sent to them explaining how the payment is calculated. No
need to be involved with running a spreadsheet, VAT returns,
payroll matters, company accounts, taxation, etc.
For short term contractors, a main advantage is not having the
costly process of forming a company and then arranging for it
to be dissolved.
Disadvantages
The contractor will by definition not be running the company
and will therefore be using it simply as a service to process
transactions.
The contractor cannot represent themselves as running their
own independent business, through which they can make policy
decisions, take risks or act as company director.
There is inevitably some delay in the contractor receiving their
money, since it needs to pass through a third party account
before reaching them. This is down to the efficiency of the
umbrella company.
There is an element of trust on the part of the contractor,
since their money will be passing through the third party umbrella
company bank account.
Summary of Criteria for Making a Choice
In making a decision, the contractor should
consider the following criteria:
1. Company Control: How important
is it to control the company? - if important, take the one person
company director route.
2. Presentation/Status: How important
is it to be a company director for presentation/status with
third parties? - if it is important, then the one person company
should be taken.
3. Administration: Attitude to
administration, including dealing with forms, returns, correspondence
with accountants and other third parties, spreadsheets, VAT
returns etc. - if it is no problem, then take the own company
route but if it is likely to be a problem, then the umbrella
route would be preferable.
4. Length of contracting: - if
it is a long term contract, a one person company may be preferable.
If it is short term or dependent on factors which may change
in the short term, then an umbrella company solution may be
preferable.
5. Borderline case:
- if the decision to go "own company" or umbrella is
a difficult one for a first time contract, then it would be best
to go with the umbrella company solution for at least the short
term. The reason for this is that it is very simple to leave an
umbrella company and start up your own company but very much harder
in terms of administration and expense to go from your own company
to an umbrella.
Making the Right Choice
Making the right choice will always depend on
your consideration of the above criteria.
Either solution will result in you being paid
a similar amount of money. Making the right decision based on
your own circumstances and requirements will achieve the most
efficient result. There is no "always right" or "always
wrong" solution - both methods will work for you and achieve
a similar result but with different working arrangements.
Your choice is similar to owning a car or using
a hire car or taxis/bus service.
With car ownership, you are fully responsible for the purchase,
running costs and eventual sale of the car (just like your own
limited company). It works well as a long-term solution where
you will need the car for a minimum of one year.
Compare this with a holiday situation, where
you would hire a car or use taxis - much better for a short term
solution where you do not want or need the benefits of ownership
and do not wish to be concerned with the running costs of the
taxi/bus - you just want a simple solution to get you to your
destination (just like an umbrella company would do for you).
Before deciding you should have a chat with your Accountant so
your particular circumstances are considered.
Getting
Paid
How you get paid will depend
on how you have set yourself up i.e. limited company etc. No matter
which way you are set up, you will be required to fill in a timesheet
and possibly even issue an invoice.
Timesheets
The contractor's definition of heaven is a signed
timesheet. A timesheet details the work you have done for the
client, and the number of hours you have worked in a given time
period, usually weekly. Your timesheet needs to be authorised
(signed). This is usually done by your supervisor.
Agents often issue timesheets for a contractor
to complete, though many accept the client's in-house sheet.
Invoices
Most agents will require an invoice to accompany
a timesheet, unless you are working PAYE through the agent. When
you sign your contract with the agent, they will supply details
of what information they require on the invoice, typically this
will include a contract reference, the number of hours worked,
your hourly rate and VAT (if you are registered).
If you are operating through a limited company,
then you will have to raise and issue the invoice. If you operate
through an umbrella company, then they will do this for you.
Where is the Money
Paid, and When?
Again this depends on how you are set up:
Through
a limited company: The money will be paid into your company's
bank account. Payment times can vary from agency to agency,
although most of the larger ones tend to pay promptly (some
within 7 days).
Umbrella
Company: The agent will pay the umbrella company who will then
pay you via your own personal bank account. This will usually
be weekly, though may be monthly.
PAYE:
The agent will pay your salary direct into your personal bank
account usually monthly.
Fingers
crossed, you should not experience any payment delays, but if
you do - chase up the agency/client. It is your money after
all.
Accounts
and Accountants
No matter how you eventually decide to operate,
it is essential to speak with an accountant BEFORE you decide.
They will be able to advise the optimum route for you, based on
your individual circumstances. They will also be able to explain
the advantages and disadvantages of each of the routes open to
you in more detail than this site.
For further information please refer to our Tax
and Accountant
sections
Resources
Company Registrations Online www.companyregistrations.co.uk - One of the
UK’s largest company formation agents and was the first in the
world to introduce a complete online company incorporation service.
In addition to limited company formations, Company Registrations
Online offers a range of company secretarial services including
Registered Office facilities in London and Cheshire, Annual Compliance
services, Trademark search and registration, Corporate Company
Secretary Appointment and Shareholder Agreements.
Taxbuddies www.taxbuddies.com
- Provide accountancy services at every level of operation whether
you are self employed or need to manage limited company accounts.
They have particular expertise in recouping income tax rebates
and also place special emphasis on the management of tax returns.
Their 80 strong team comprise of qualified accountants and senior
ex Inland Revenue staff.
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