Opportunity to Benefit from Sound Management
Those who are in business in their own account have an opportunity to benefit from sound management. This can be from the perspective of gaining extra income from performing well or in cutting costs.
If you have an opportunity to benefit from sound management then this differentiates you from an employee and will be a pointer to your having a contract for services rather than having a contract of service.
The employee gets fixed payments and doesn’t have any opportunity to benefit from doing the work more efficiently beyond getting a bonus or promotion. Bonuses they get are often team bonuses rather than individual bonuses or if they are individual they tend to be indicative of the achievement rather than mapping directly to how they have done.
Business Opportunity
However, someone who is operating a real business will have an opportunity to do financially better through sound management of the business.
There are two ways to do this. Firstly, like any proper business, you bring in more income and secondly you cut costs.
Although IR35 is looked at contract by contract when it comes to Opportunity to Benefit from Sound Management, recent court cases have tended to look at this from the point of view of the business as a whole.
Risk Factor
There must also be a risk factor in all of this. In other words you need to be able to profit handsomely from success and you need to have a financial risk if you do not do well.
An employee comes into work, does his or her job and gets paid at the end of the month the same whether he or she does well at the end of the month.
Sound Management
Here are ways to show that you have an opportunity to benefit from Sound Management.
1. Do Some Fixed Price Work
Do some fixed price work. If you finish ahead of schedule you have benefited from sound management. If you finish behind schedule you lose money.
2. Agree a Bonus for Work Done on Time
Try to organise a bonus if the work gets done on time and an even better one if it gets done ahead of time. Make it directly related to how well you do rather than being fuzzy like an employee’s bonus.
3. Agree Penalties for Late Work
Conversely try to arrange penalties if you deliver late or screw up
4. Buy Indemnity Insurance
Buy indemnity insurance in case you screw up. This is not something an employee would ever have to get.
5. Make Payment dependent on Functionality Delivered
Make any payment dependent on Functionality delivered. Measure this in Function Points delivered per man month. Set up a proposal where you get paid, for example, £10,000 to deliver 100 Function Points worth of functionality.
The quicker you deliver the better and the later you deliver the worse it is for you. However, you have the opportunity to make more money by allowing scope creep (which there always is) so that you get extra money for delivering more functionality then was originally planned. This could be a great source of extra cash for you and one that an employee would not get.
6. Agree to Fix Problems for Free
Make a provision in the contract that you have to fix problems caused by you in your own time and for free. Factor this into your fees charged
7. Try to Cut Costs
Look for ways for costs to be cut, e.g travel or equipment costs
8. Pay for Your Own Training
Pay for training in skills where you can earn more money
9. Choose Suppliers Carefully
Choose suppliers like Accountants wisely so that they maximise the difference between income and costs most efficiently
10, Create a Business Plan
Create a Business Plan which shows how you intend to maximise income and Keep costs to a minimum for the next 3 years.
Differentiation
All these are just suggestions that could help to show that you have an opportunity to benefit from sound management. It is a reasonably important factor as regards keeping you outside IR35. If you did about 7 or 8 of these it would be hard to argue that you were a disguised employee of the company.
You do not have to do all of these things but the more you can do the merrier.
IR35 is all about differentiating yourself from a permanent employee of the company in as many ways as you can.
To see all the IR35 Factors and what to do about them click on IR35 Factors
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