Memorandum submitted by the Professional
1. The Professional Contractors Group is
the cross-sector representative body for freelance contractors
and consultants in the UK. Its members provide their services
to a range of clients using their own one or two-person companies.
They work in IT, engineering, project management, oil and gas
extraction, marketing and many other sectors.
2. As the smallest of small businesses,
and also a significant part of the growing of people numbercurrently
about one in seven workerschoosing to work for themselves,
freelancers are a group that sit outside the traditional divide
of employer and employee.
3. The UK's freelance contractors and consultants
are a highly skilled, highly flexible and highly mobile workforce.
The UK's model of freelancing is uniquely sophisticated and, by
affording companies the ability to acquire specialist skills on
a flexible basis, offers the UK a meaningful competitive advantage,
particularly in the knowledge-based industries on which its future
4. This dynamic body of workers leaves the
UK well-placed to capitalise on the opportunities offered by globalisation.
The slowness of the government to come to a full understanding
and acceptance of freelancing as a valid business model has, however,
led to a legislative and regulatory framework which disadvantages
freelancers and hinders the UK in taking full advantage of globalisation.
5. Specifically, the structure of the UK's
tax regime hinders small businesses, whose cash flow is often
tight. The burden of complying with all regulation can hinder
small businesses disproportionately in competitive global markets.
The government's understanding of business risk is often lacking
and its schemes and regulations flawed accordingly.
6. Globalisation has led to much work being
moved from the UK to overseas locations. The effects of this offshoring
do not seem to have been as beneficial as economic theory predicted.
The result may be a long-term erosion of the UK's skills base.
The government has not allocated resources to study the impact
of this phenomenon and continues to base its policy on economic
7. This submission comprises two case studies,
in which the owners of two different freelance small businesses
set out both how globalisation provides them with new opportunities
and the difficulties involved in making the best of them. Further
observations on the impact of globalisation on the structure of
the economy are then set out.
8. Derek Pattenson is the founder of, and
principal consultant for, Small Office Solutions Ltd. He founded
the company in 1995, to provide quality independent software development,
training and consultancy services to small businesses in Hertfordshire.
Initially also providing ad-hoc troubleshooting and support on
a range of platforms, the company subsequently specialised in
desktop- and web-based software development for the Windows platform.
9. Derek has over 25 years' commercial IT
experience, gained working for major domestic and international
blue-chip companies. His roles have included development, maintenance,
systems analysis, database administration, pre- and post-sales
support, help-desk management, consultancy and training. His clients
range from specialist SMEs to large companies including J Sainsbury,
Mothercare (UK), Red Star Parcels Ltd and British Home Stores
10. "Over the past 3-5 years my own
business has changed from servicing purely UK-based clients to
getting around 50% of business from overseas, yet without ever
meeting these distant customers. From their perspective, in terms
of the services I provide, it makes no practical difference whether
I am in the next town, the next state or the next continent. Providing
I can be flexible about working hours there is no practical impact
on clients in the USA, Canada, Australia or any other English-speaking
country. Language is potentially a barrier to some markets, but
a much smaller one to UK-based suppliers than to suppliers in
many other locations. It is arguable that the need for flexible
working hours favours home-based micro-businesses over larger
outfits; I do not mind checking email from home just before bedtime
but I would not want to drive into an office in the next town
just on the off-chance that a customer needs some urgent input.
11. "There are implications, however,
for the supplier. I find that contract terms and wording, payment
methods and timings etc tend to vary with client location, and
as a business I need to be much more flexible in the contracts
and agreements I enter into. Of course should a client fail to
pay there may be little I can do to recover debts, so I need to
be careful about choosing clients and billing; but conversely
should a client not like what I deliver, there is a reduced risk
that litigation would be contemplated or successful. From an administrative
point of view, however, there are complexities arising over contract
management, accounting (especially taking account of currency
conversions), VAT handling and more. These should not be underestimated
by small businesses entering a global marketplace. On the plus
side, I find that many of my US and Australian clients pay their
bills by return of email, often within 24 hours of raising an
invoice. Given the 45 day average payment time for my UK-based
customers this is a big bonus.
12. "In the market in which I operate,
which is typically very low value, short duration tasks (often
my first job for an overseas client will be in the region of $100)
clients often put their tasks out to global tender, using online
`auction' sites. One such site, Rent-a-Coder (http://www.rentacoder.com)
currently has well over 100,000 small companies and individuals
worldwide bidding on work placed there (I am currently the top-ranked
UK supplier). But whereas a UK or US-based supplier may be used
to charging, say, £50 an hour for their services, globalisation
of the marketplace means that suppliers in Romania, Russia, Argentina
or India will often offer a whole day's work for less than that.
In order to gain a foothold in the marketplace, therefore, it
is essential to either offer outstanding service (which is hard
to do until you have won the contract) or start off by making
very low bids on work, and accepting that for potentially quite
a while, you will be making a loss on every job. There comes a
time when, if you are good, your reputation builds up and you
can start to place higher bids for new work, and charge higher
fees to existing customers, as they begin to realise that it is
virtually impossible to identify the good suppliers from the tens
of thousands on the Indian subcontinent, for instance, all offering
rock-bottom prices. There even comes a time when those developing
world suppliers seek assistance, and can be prepared to pay `Western'
rates. But even with established clients, there is always the
spectre of dirt-cheap competition and therefore one must continually
demonstrate outstanding value-for-money. In the old-style market
when everyone charged pretty much the same, because they were
in the same environment, there was far less price pressure.
13. "Certainly the Internet has opened
up enormous new markets and opportunities, but inevitably that
brings enormous competition as well. In my own experience the
key competitors are in India and Romania, with Russia, South America
and other eastern European countries not far behind. It seems
the far-eastern economies are not yet supplying into this micro-business
end of the market, probably due to language barriers."
14. This case study is from a PCG member
who prefers to remain anonymous.
15. "During the last 10 years or so
I have been contracting as an executive programme director with,
for example, IBM, AT&T. The responsibilities are to represent
these companies in the countries I worked inmainly the
CIS and CER statesat the highest level in negotiations
with ministries and government owned enterprises in order to have
access to the state infrastructures (telecoms, satellites etc)
that are necessary to implement and enable large projects for,
say, IBM's large global customerssuch as Sony, Johnson
and Johnson, Coca-Cola etc.
16. "Obtaining overseas business in
this field is a protracted process; small firms are disadvantaged
in this by government policy. The issue here is that jobs tend
to be of high value and long duration, and absolutely require
personal meetings to `test the chemistry'. In addition there are
long lead times (typically upwards of nine months) of protracted
and deep negotiation before anything is agreed, consequently pre-sales
costs are relatively very hightypically £15k to 30k
per prospectand the conversion rate is relatively lowthat
is, one expends `sales cost' against maybe 10 potential clients
to get one actual contract. It is particularly awkward, accounting-wise,
if this expenditure straddles a tax-year end. The net total level
of work needed is very high, as you have to maintain the standard
of service to the current client in parallel with seeking out
the next contract.
17. "Because of the long lead times,
the taxation regime for small companies is proportionately extremely
onerous. Corporation tax is levied annually on perceived surplus.
HMRC is usually unwilling to allow a small company to justify
carry-forward accruals against the cost of sales expenditure expectations.
While it is true that in future years one can obtain rebates,
this is of no help in a tight `current cash-flow' situation in
terms of day to day payments. Attention also needs to be paid
to the tax regime in the client country, involving, for example,
withholding taxes of different types. While handling these is
not, of itself, difficult, the rolled up effort for a small company
is extremely significant, firstly in elucidating the requirements
and then conforming.
18. "In one year I can operate in over
15 countries, and trying to work out the optimal money handling
strategy, and what will fit in with the client's needs, can be
taxing (sic). A large company, on the other hand, can easily assimilate
these costs out of pre-sales budgets.
19. "Payment can be a problematic issue
and UK policy is unhelpful. Because of the nature of my work it
is often not always possible to know when it is finishedalthough
strategies to sign-off work by stages are common. Nevertheless,
it is not uncommon for large sums to be withheld on various pretexts
and for considerable periods in spite of full sign-off having
been obtainedI think of an associate owed more than £500k
by a Gulf state for over now three years.
20. "This is not seen as commercial
risk by the UK authorities, who seem to presume that, as far as
a small company is concerned, all commercial regimes are as relatively
honest as the UK. In practice therefore HMRC are unwilling to
differentiate between paper profit and `cash paid'. The practice
of presuming future incomes on the basis of prior incomes and
therefore demanding advance payment is particularly offensive.
If one seeks to mitigate this and makes an error then one is obliged
to pay interest and penalties on top of the structural on-costs
arising from the cash-flow disruption.
21. "In the case mentioned above, my
colleague argued that as he had not been paid any of the money
his advance taxes should be nil. If and when that money is paid
then he will likely be fined for `misleading' the tax authorities
about his advance expectationsbut the matter is entirely
out of his hands. No sensible advice on such things is available
from HMRC, over their help linesthey are not geared to
provide a specialist response and I would not have confidence
in such a response as definitive even if I could obtain it.
22. "R&D grants do not assist small
firms in the global marketplace. It has been suggested that the
research necessary in generating international Governance processes
should be attributable to Research and Development, thereby making
the expenditures eligible for various R&D relaxations and
grants. But the costs of going through the hoops involvedoften
requiring the fulfilling of various criteria, which are time-bound
in that you cannot do certain things until some government department
has issued approval, and completing ill-thought-out forms with
extraneous informationare far too burdensome for small
company even to consider attempting it. In my own case, it is
not even considered valid by government agencies for you to be
researching such legal matters as an R&D project if you are
not legally qualified: this often automatically invalidates the
claim, on the apparent reasoning in that you are not serious about
it being R&Dif you were, you would employ a lawyer!
23. "The net effect is that very many
potential relaxations and grants might as well not exist. The
companies that are most likely to benefit from them are the large
companies who need them least.
24. "UK policy disadvantages small
companies providing services globally more than policy in other
countries. It used to be the case that `exporters' had advantages
taxation-wise and in the treatment of expenses etc, but this is
definitely no longer soin fact small companies often seem
to be positively discouraged from operating at this end of the
market. Even the most recent of UK government initiatives to attract
smaller firms as suppliers require financial guarantees and histories
of the type that only a large company can provide, or ask for
qualifications irrespective of experience. Small businesses seeking
to trade overseas are, in my experience, constantly looking over
their shoulders to watch for new penalties or barriers imposed
by the government.
25. "This is definitely not the case
in most other countries, which have policies designed to maximise
net inflow of funds. CER countries specifically allow all advance
expense expenditures that give rise to net importation of `dollar'
funds, and only take the taxes (though they may be levied at any
point), after the income is secured.
26. "Transferring funds earned by a
small company out of certain countries can be made difficult by
withholding taxes, which can render a job non-viable if you are
not careful. Sometimes it is necessary to structure payment so
as to allow the value to be transferred to a country with a less
punitive tax structureand even then it is extremely arduous
to ensure compliance with all legislation.
27. "Methods for transferring funds
between countries, especially with non-convertible currencies,
are also an onerous cost, because you are a prisoner of the financial
systems. This is especially foggy in the services sector where
most countries with `added value' style taxation require that
invoices for services delivered in a country, and originating
in that country, must have both parties VAT registered. This becomes
almost insurmountable in countries with non-convertible currencies,
such as Kirkitzstan. The widespread assumption in practice by
all Western regimes that all movements of money are laundering,
unless proven not to be, adds yet more cost: time must be spent
in repeatedly proving income transaction audit trails, involving
an additional fee, at each movement. In the UK this is so bad
that, even having been with my bankers for over 50 years, and
having a family connection with them for over 120 years, I now
need on every occasion to show a passport to draw £100.
28. "It is fortunate that the UK's
market value is not derived from being a low wage/cost area: we
could not be ahead in the Regulatory Regime game if it were. Nevertheless,
my overall feeling is that 25% of my effort is spent fighting
the system with all the cards stacked against small companies."
29. Beyond offering new opportunities to
UK businesses, globalisation also has implications for the structure
of the UK economy and labour force, which the government is not
30. It has become increasingly common for
work in many sectors to be outsourced to companies outside the
UKso-called "offshoring". This affects several
sectors in which PCG members operate, including IT and the design
processes associated with engineering. The government has placed
much faith in the economic theory that suggests this is beneficial:
it allows companies to make cost savings which off-set the short-term
economic upheaval caused by the loss of work in the UK. Very little
research has been done, however, to assess whether this beneficial
effect is being seen in practice.
31. If this beneficial effect is not occurring,
offshoring has obvious dangers: it could result in the UK's skills
base being eroded and therefore a long-term decline in competitiveness.
A study by PCG, utilising publicly available accounts and financial
statements of large companies in various sectors, showed that
there is no clear competitive advantage for companies who offshore
over companies who do not. It also suggested that the hoped-for
cost savings usually fail to materialise in practice. There can
be many reasons for this, for instance outsourcing contracts are
often insufficiently detailed, creating problems in the delivery
of services. The government has not allocated resources for a
full study of the effects of offshoring in practice to be carried
32. Nonetheless, the government continues
to promote offshoring and associated policies. It is common for
companies about to offshore their operations will bring overseas
staff to the UK for a period of up to two years, to familiarise
themselves with the business, usually utilising work permits known
as Intra-Company Transfers (ICTs). In its new immigration strategy,
details of which were announced in March 2006, it proposed that
workers on ICTs would be granted automatic access to the UK, irrespective
of the checks and balances on other workers, such as skill levels.
This is in order to continue easy facilitation of offshoring;
but the economic rationale behind this is still open to doubt.