Business woman is confused, Thinking business woman surrounded by question marks

Limited Company or Umbrella Company – which is right for you?

Business woman is confused, Thinking business woman surrounded by question marks

If you’re looking for a career change and have decided to work for yourself, Tax Agility’s accountants can advise you on the best contracting option for your business.

Before starting out as a freelancer or contractor, it’s worth taking some time to decide if you should set-up a limited company or register with an umbrella company.

Deciding which route to take often comes down to your requirements, the level of control you want, your long-term business strategy and the type of operations that you'll be undertaking.

At Tax Agility, we believe that there is no right or wrong decision when it comes to choosing between a limited and an umbrella company. If in doubt, our expert accountants for contractors can help you understand what your business requires to determine the best course of action for you. With years of experience in helping contractors across London, we can provide you with solid guidance and advice so that you can make an informed decision.

Contracting through a limited company

A limited company is a type of business whose legal standing is independent of its shareholders and directors. Setting up a limited liability company can take only a few hours. It involves choosing a name for your company, submitting the required documentation to Companies House, and registering with them once the documents have been approved.

Setting up your own limited company means that you are in control, and your personal finances will be separate from your company’s finances. In the event that something goes wrong with your company, your personal finances will not likely to be affected. However, it is also important to understand that setting up a limited company means that you will be in charge of managing your administrative and legal obligations for the company.

Is a limited company the right option for you?

If you are planning on contracting for a long period of time, a limited company could be the most tax-efficient way of working – as it allows you to claim various expenses and pay yourself a combination of salary and dividends (a sum of money that a limited company pays out to someone who owns shares in the company, i.e. a shareholder) to benefit from the tax free allowances available to each. You can also make tax-free pension contributions through the company and leave funds within the business to grow and expand.

On the other hand, a limited company is costly to set-up (more so than registering with an umbrella company). Also, there is some administration involved in running a limited company even with an accountant for contractors supporting you. For example, you will need to keep track of your income and expenses, such as receipts and invoices, as the information is required for the submission of your year-end accounts and tax returns.

It is worth noting that if you fall within the IR35 legislation, the tax benefits of a limited company will completely disappear. IR35 is a tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary were not used. By falling on the wrong side of IR35 due to your working arrangements, you can end up paying tax and National Insurance at the same rate as a permanent employee. To understand more about the IR35 legislation, you can check out this post, What does IR35 legislation mean? 

Contracting under an umbrella company

Contracting under an umbrella company means that you are considered an employee of the umbrella company. You will need to submit timesheets to the umbrella company which will then invoice the end client or agency for the work that you have completed. In terms of salary, you will be paid as a PAYE (Pay As You Earn) employee minus the umbrella fee, which the company will charge each time you receive a payment. Contractors who prefer no administrative duties generally favour this type of contracting route.

Is an umbrella company the right option for you?

An umbrella company frees you of all the administrative and financial responsibilities that come with being a contractor, meaning that you don’t have to manage or pay your taxes or National Insurance, allowing you to focus on your work.

You will work under a form of employment contract, which still guarantees you the benefits offered to permanent employees, such as holidays, sick leave, maternity and paternity pay.

However, the biggest disadvantage of working with an umbrella company is that they charge a substantial sum of administrative fee, as they take care of your timesheets, billings, PAYE and National Insurance. As such, this option is only suitable for contractors who are new to contracting or work on short-term contracts.

Tax Agility accountants for contractors

Before taking the leap into contracting, contact one of Tax Agility’s specialist accountants for contractors and discuss the options that are best for you given your individual circumstances.

It is also worth checking out these pages written specifically for contractors:

If you choose to set-up a limited company, we will work with you to ensure that you understand what is required of you in terms of your financial and tax obligations, so that we can try to maximise efficiency and minimise your tax obligation where possible. We can also assist you with registering with Companies House, and subsequently, assist you in bookkeeping and accounts so you can concentrate on your business.

If you are already a contractor and want to increase your take-home pay, need assistance with adhering to regulations (such as IR35), or help with your ongoing accounts and bookkeeping, contact us today on 020 8108 0090 or get in touch via our contact us page to arrange a complimentary, no obligation meeting.

If you found this interesting, you might also enjoy:

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.

 


Man overwork in office

How to lighten your workload as a contractor

Man overwork in office

Here at Tax Agility, we believe that managing your financial affairs can be an extra hassle that contractors simply don’t need, which is why our specialist contractor accountants are on hand to lighten your workload and give you that work-life balance you deserve.

What is a contractor?

Contractors are self-employed individuals who have escaped ‘traditional’ company-dictated working hours by setting up a business for themselves. Contractors offer a specialised service to a wide range of clients. Some examples include writers, carpenters, builders and IT specialists.

Why does a contractor need an accountant?

Running a business means contractors need to market themselves, prepare quotations, fulfil contractual obligations, invoice clients, and also taking care of the administrative function and tax obligation. They are busy individuals who constantly juggling the stresses of multiple roles.

Concerningly, 44% of contractors who took part in a YouGov survey revealed they had missed a personal occasion due to work, while a staggering 10% said they missed their own birthday party due to their workload. A further 11% said that they had missed anniversaries.

Accounts and tax are areas that most contractors do not possess enough knowledge to complete the financial tasks required accurately and efficiently, and this is where an accountant for contractors comes in.

How can accountants help contractors?

Allowing accountants that specialise in helping contractors handle your finances will enable you to focus on growing your contracting business and put your mind at ease, with the assurance that a team of specialists are on the job.

At Tax Agility, our dedicated team of contractor accountants is perfectly placed to lighten the weight of financial administration on contractor’s shoulders. The areas we can assist include:

1. Find a company structure that is best for you

As a contractor, you can choose to set up a limited company or work under an umbrella company. Most contractors prefer to run their own limited company because it is tax-efficient. In this case, we will guide you through the necessary legal requirements and help you to understand your legal and financial responsibilities as a shareholder, director and employee.

2. Manage accounts and bookkeeping requirements

Assisting with bookkeeping, cash-flow forecasts, preparing your monthly management accounts, filing annual statutory, are just some of the tasks we can manage on behalf of you.

3. Contractor tax services

VAT, NI, PAYE, Self-Assessment tax returns, and using dividends to make up a portion of your income are tasks that we can help you with. If you would like to know more about dividends, check out this post "Understanding dividends".

4. IR35 support

IR35 is a mind-bogglingly complex issue that troubles many contractors as there is no definitive guideline that stipulates the conditions of a 'breach'. This means you can read as much about IR35 and still do not know if you are inside or outside the scope of IR35. The best approach is to contact an accountant for contractors like us and discuss your situations in detail.

5. Answer any questions you have

It is natural to ask questions when you run a contractor business. Questions such as should you (and can you) register for flat-rate VAT? What business expenses you can claim as an IT contractor? Can you put a family member on the payroll? - all of them are valid questions deserve honest answers from our accountants.

6. Keep you out of legal trouble

There are many tax deadlines associating with setting yourself up as a contractor and running a business; we can help you to submit all the necessary documents before the deadlines to avoid fines. Moreover, while we strongly believe in helping contractors being tax-efficient, we do not practice creative accounting that will raise questions from HMRC.

7. Peace of mind

With us working alongside you, you do not have to spend needless hours managing headache-inducing financial tasks. This means you can focus on matters that are important to you, like amplifying your business visibility and driving the success of your contracting business.

Tax Agility is here for contractors

With three offices across London - we are in Putney, Richmond and Central London, our team of accountants specialise in contractors can manage your accounts and financial tasks for you. To find out how we can help, call us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.

 

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This post is intended to provide information of general interest about current business issues. It should not replace professional advice tailored to your specific circumstances.


Person preparing invoices for the customer

How contractors should invoice for expenses

Preparing invoices for the customer

Knowing how to invoice for expenses when you first start out as a contractor, regardless of your profession, is crucial to ensure that you keep up a professional appearance and can breeze through the first few months of your contracting career.

As a contractor, you are likely to incur a few expenses when providing your services to clients. For example, you may need to travel and visit premises in another town (an expense which you incur), or you may need to purchase a piece of equipment on behalf of your client (a disbursement which you will invoice). To help you navigate the expense and disbursement process, our accountants for contractors in London at Tax Agility share three common methods that you are likely to encounter when invoices your clients for your expenses.

Adding VAT

Regarded as the simplest invoicing method, adding VAT involves charging VAT on any expenses you have incurred while working or carrying out your services for your clients, such as hotel stays, public transport expenses and mileage. In this case, you add the VAT regardless of whether or not you were charged VAT on these items in the first place.

For example, you performed £2,000 worth of work for your client and you incurred £40.00 in petrol cost due to driving out to an in-person meeting with your client (a cost they had agreed to reimburse), you would invoice them £2,448 and the breakdown is as follows:

  • £2,000 for the work
  • £40 for petrol cost
  • £408 (20% VAT on £2,040)

Splitting VAT

In the event that your clients do not like the above method as they are paying VAT on the petrol cost twice, then you will need to remove any VAT you paid on expenses you claim back from them, then applying VAT to your final, gross invoice.

Let’s say you performed £2,000 worth of work for your client, and you also paid £1,200 (with VAT) for a training course which your client suggested you attend and promised to reimburse you for. In other words, the training cost is actually £1,000 + VAT £200.

In this case, you will invoice your client £3,600 and the breakdown is as follows:

  • £3000 (£2,000 for the work + £1,000 for the training cost)
  • £600 (20% VAT on £3,000)

Disbursement

Disbursement payments occur when you purchase something on behalf of your client and pass that cost over to them in your invoice. In this instance, you do not charge VAT on the items and you cannot claim back any VAT.

As explained by HMRC, there are various rules surrounding disbursement including:

  • You paid the supplier on your client’s behalf and acted as the agent of your client.
  • Your client received, used or had the benefit of the goods or services you paid for on their behalf.
  • It was your client’s responsibility to pay for the goods or services.
  • You had permission from your client to make the payment for the said goods or services.
  • Your client knew that you were not the supplier of the goods or services.
  • You show the costs separately on your invoice.
  • You pass on the exact amount of each cost to your customer when you invoice them.
  • The goods and services you paid for are in addition to the cost of your own services.

Here is an example: you performed £2,000 worth of work for your client and you incur £40 in petrol costs which the client would pay. To do the job, your client also asked you to purchase a piece of electronic (a Geiger counter worth £200) which they would need in the project. You will invoice £2,648 and the breakdown is as follows:

  • £2,040 (£2,000 for the work done + £40 petrol expenses)
  • £408 (VAT on £2,040)
  • £200 (Geiger counter disbursement)

How can Tax Agility help contractors?

At Tax Agility, we understand that contractors are constantly juggling different tasks at once, which is why we want to step in and help. With the assistance of our dedicated accounting and tax services for contractors, you can focus on building your business while we manage your financial and tax affairs.

Our contractor tax and accounts services include:

  • Setting up a limited company to help you get started
  • On-going accounts and bookkeeping management for contractors
  • IR35 support for contractors
  • Construction Industry Scheme (CIS) support
  • Corporate tax advice
  • Self-Assessment tax returns
  • Personal investments

If you would like to arrange a one-to-one meeting to discuss any tax or invoicing queries you might have, we offer a no-obligation, free consultation. Contact us today on 020 8108 0090 or get in touch with us via our Contact Page.

If you found this useful, take a look at:

This post is intended to provide information of general interest about current business issues. It should not replace professional advice tailored to your specific circumstances.


Understanding dividends

Concept of money

When a company makes a profit, it pays dividends to its shareholders.

If you are a contractor or have recently started your own limited company, you have probably heard from other contractors or business owners about taking a low salary and using dividends to make up a portion of your income.

At Tax Agility, our small business accountants work with contractors and small business owners across London. As we are often asked about the advantages of taking dividends from a business’ profit, we aim to discuss dividends in this post.

What are dividends?

Dividends are money paid by a company to its shareholders after it has met its financial obligations (like paying business expenses and taxes). Another way to look at it is that when a company makes a profit, it usually retains a portion of its profit and distributes the rest to its shareholders in the form of dividends.

Why contractors and small business owners like dividends

The main benefits of dividends are:

  • Unlike salary, dividends are not subject to National Insurance Contributions (NICs)
  • The first £2,000 of dividends are not taxable
  • Dividends have a lower tax rate than salaries

For tax year 2019/20, dividend tax rates are:

  • 7.5% (up to £37,500)
  • 32.5% (£37,501 - £150,000)
  • 38.1% (over £150,000)

If you intend to declare dividends, you must hold a board meeting and minute it whenever you make a declaration. Then your accountant will prepare a dividend voucher for each company shareholder stating the net dividend paid.

Prior to the tax year 2016/17, the was something known as a notional 10% tax credit but HMRC has abolished this.

An example of dividend tax

In the tax year 2019/20, you receive a salary income of £8,600 and this is not subject to tax because the income is below the Personal Allowance threshold of £12,500. This also means you still have a balance of £3,900 left to use.

In the same tax year, you receive dividends worth £15,000 and out of this amount, you only need to pay a low 7.5% tax rate on £9,100. This is because:

  • £3,900 of your £15,000 dividend income is tax-free since you have this balance from your Personal Allowance (£12,500 Personal Allowance minus £8,600 salary income)
  • Another £2,000 of your £15,000 dividend income is also not taxed as you have a £2,000 Dividend Allowance

The upshot of it is you are only required to pay £682.50 tax on your £15,000 dividend income. This low rate is not achievable if you are drawing a salary. You must then declare this dividend income on your Self Assessment tax return in the ‘Dividends’ section.

IR35

If you are a contractor, chances are you already know how confusing IR35 can be. If you are considered a “disguised employee” under IR35, you will face severe tax implications. If IR35 is stressing you out, please set up an appointment with us so we can understand your situation better. Alternatively, our post “What is IR35? A brief guide to the IR35 legislation” may make a good read.

Professional advice on dividend distribution

To speak with a professional to discuss how to successfully distribute dividends to your shareholders and to maximise your take-home pay, contact one of our small business accountants in London today. You can call us on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.


Hiring specialist contractors can reduce SME costs

To thrive in the contemporary business ecosystem, SMEs need to optimise the use of resources and achieve maximum customer value.

Being lean in every business process gives SMEs the ability to compete and deliver outstanding value in an ever-changing economic environment. The term ‘lean’ was first used by MIT researchers to describe Toyota in the late 1980s on how they eliminated waste and inefficiency. Since then, every wise business owner – be it a CEO of a large-scale manufacturer in India, a specialist healthcare provider in New York or a business owner with 10 employees in London – aims to optimise every business process, thereby enabling the company to grow in a structured, disciplined way.

For a small business owner, being lean requires you to think differently, plus taking a critical look at your operations and finding ways to eliminate inefficiency, in everything from your office facilities, labour costs to marketing strategies, to name but a few.

As labour costs typically account for 20% to 35% of expenses in a small business (and could be up to 50% if you’re a service-based company), staffing is an area which many small business owners want to optimise. So in this article, our local small business accountants in London aim to discuss ways in which hiring specialist contractors may be more efficient than hiring an employee on a full-time basis, which in turn may lower operating costs for SMEs and start-ups.

What is a contractor?

Recently we have optimised our contractor pages and published a series of posts relating to contractors. For the purpose of this article, we want to outline what a contractor is with respect to business before getting into how they may be able to assist with reducing your company’s operating costs.

Simply put, a contractor, often referred to as a freelancer or a consultant, is an individual who supplies a service for a company on a short-term or a project basis. A contractor works outside of the normal employer-employee paradigm, meaning they work for themselves (as self-employed, usually through a Limited Company) and they supply a service to a ‘client’, the company that has enlisted their services.

There are many complexities surrounding contracting, particularly with respect to the Government’s IR35 legislation which dictates the terms under which a contractor can supply his/her contractor services to a client and vice versa (the conditions under which the business owners can enlist their services).

Benefits of hiring an independent contractor

In circumstances where you, the business owner, are able to legitimately employ a contractor on a short-term contract, this can be incredibly beneficial with respect to the level of expertise they may be able to bring to your company, as well as being a cost-efficient way to employ this expertise. The four main benefits of hiring a contractor for an SME are:

1. Cheaper workforce

In the UK, the true costs of hiring a full-time employee can be substantial if factoring in National Insurance Contributions, pension, benefits (sick pay, holiday pay among others), private medical, insurance and office facilities. Hiring a contractor means your company only pays an agreed fee to the contractor.

2. Niche areas

For many small business owners, areas of expertise such as web development, copywriting, database management and cybersecurity measures are best left to specialists who know what they are doing (unless your business is based around these disciplines). As it is unlikely that you would require these specialists permanently, hiring a contractor only when necessary will save you money.

3. Flexibility

Hiring a contractor gives you greater flexibility, one that you can’t achieve with a full-time employee. For example, you can require the contractor to come periodically depending on your needs. In most circumstances, you can also terminate the contract with short notice without giving a reason. With flexibility comes the ability to adapt quicker, for instance you can respond to market changes by increasing or decreasing your staff number.

4. Reduced liability

Businesses are required to have employers’ liability insurance which protects you against the cost of compensation claims from your employees due to a workplace-related illness or injury. Contractors usually have their own insurance which covers them should the unforeseen happen.

Tax Agility can help SMEs to reduce costs

At Tax Agility, we are small business accountants that deliver more to our clients across London, helping them on accounting and tax-related services including:

  • Accounting and bookkeeping: helping you to manage day-to-day financial tasks.
  • Payroll: outsourcing this function to us can help your business eliminating inefficiency.
  • Tax planning: lowering your tax obligations legitimately.
  • VAT: improving cash-flow and preparing returns and reconciliation.
  • Management consultancy: working with you to put an actionable plan in place and set your business on the growth path.

To speak with a professional SME accountant or to discuss how we can ensure your finances are always up to date and in order, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.


IT Contractor Tax: What do I have to pay?

As an IT contractor, two common ways to provide your IT services to clients are either through a limited company or an umbrella company – and each mode of operation will determine your tax obligations.

The UK business landscape is mostly made up of SMEs ranging from micro (0-9 employees), small (10-49 employees) to medium-sized (50-249 employees) companies. The nature of SMEs makes getting external IT contractors a viable option for companies that lack the internal resources to fulfil their IT functions, particularly in this day and age when the rate of technological advancement can be startling, making it hard for non-experts to keep up.

Common IT services engaged by SMEs include network set-up, software support, database management, cloud storage and computer repair, to name but a few. In the UK, particularly in London, there are hundreds of thousands of IT contractors assisting businesses with various IT issues.

Most IT contractors choose to operate through an intermediary such as a ‘personal service company’ in the form of a limited company. The reason is simple – incorporating your IT contractor business as a limited company is tax efficient as it allows you to:

  • Split your income between salary and dividends. Dividends aren’t subject to National Insurance Contributions (NICs) and also taxed at a lower rate, meaning you pay less tax.
  • Claim tax relief on legitimate expenses

Tax obligations for IT contractors operating through a limited company

For IT contractors operating through a limited company, your main tax obligations are National Insurance Contributions (NICs), Dividend tax, Corporate tax, VAT and income tax. It is, however, best to take advantage of our free initial consultation and discuss your tax obligations with one of our specialist accountants for contractors face-to-face.

National Insurance Contributions (NICs)

National Insurance is a tax system that funds state benefits. At present, if you draw a salary of more than £166 to £962 a week, you are required to pay 12% Class 1 National Insurance rate. For a salary above £962 a week, you pay a 2% charge on the additional earnings.

Most contractors pay themselves by drawing a salary and also declaring dividends. While dividends aren’t subject to National Insurance Contributions, drawing a salary above £166 a week will see you make a contribution to National Insurance as stated above.

There are contractors who consciously pay themselves less than £166 a week to minimise their exposure to NICs. They then take dividends from retained profit to form the majority of their income. It is best to talk to an independent accountant and work out your annual salary if you plan to take this approach.

Dividend tax

After a company pays its Corporate tax, the retained profit can be distributed as dividends to shareholders (which generally means you, as you are likely to be the sole shareholder of your limited company).

Thanks to its three main benefits, many contractors choose to use dividends to form part of their income. The benefits are:

  • Dividends are not subject to NICs.
  • A £2,000 dividend allowance is provided, meaning the first £2,000 of dividends aren’t taxable.
  • Dividends have a lower tax rate than salaries. For tax year 2019/20, dividend tax rates are 7.5%, 32.5% and 38.1% which you must declare on your self-assessment.

You pay dividends by declaring them in the company board meeting minutes and writing up a dividend voucher showing the date, company name, name(s) of the shareholder(s) being paid a dividend and amount of the dividend.

Corporation Tax

Corporation tax is a levy paid on a company’s profits; the figure of which emerges once legitimate business expenses have been deducted from revenue. As mentioned in the article “Business expenses you can claim as an IT contractor”, if you’re a contractor operating outside of IR35, you can claim more business expenses than a contractor in IR35 and the article lists quite a few examples. In the event that you are still unsure about IR35, it’s best to talk to one of our accountants specialising in contractors or check out this post “What is IR35? A brief guide to the IR35 legislation”.

For tax year 2019/20, Corporate tax rate is at 19%, but the government plans to reduce the rate to 17% for tax year 2020/21. The Corporate tax year spans from 1 April to 31 March annually which may or may not be aligned with your company’s accounting period, and in general, you have 12 months from the end of your accounting period to file your return and 9 months to pay any tax due – deadlines are imperative so most contractors rely on a qualified accountant to handle this.

Value Added Tax (VAT)

It is commonplace for contractor businesses to be registered for Value Added Tax (VAT), which is applied to all services you provide to clients. You will be required to submit a quarterly VAT return to HMRC alongside an electronic payment for this sum.

The standard rate for VAT charged to clients is 20% of the service fee, however, you can apply to HMRC for the VAT Flat Rate Scheme, which can be beneficial to your business (depending on its structure and setup) in circumstances where you negotiate a reduced fixed rate of VAT and can keep the difference between what you pay and what you charge your customers.

Current VAT flat rates that can be applicable to an IT contractor and save them money are:

  • Computer repair services 10.5%
  • Computer and IT consultancy or data processing 14.5%

To join the scheme, your VAT turnover must be less than £150,000 (excluding VAT) a year.

Income Tax

In the UK, if you’re self-employed, a business partner or a director of a limited company, you’re required to file a tax return. You must submit your self-assessment tax returns by 31 October (paper) or 31 January (online), otherwise, you risk being penalised as discussed in our post “Self-Assessment Penalty: What happens if you miss the Self-Assessment Tax Return Deadline?

As an IT contractor juggling multiple tasks, our advice to you is to use an accountant with proven track records working with contractors to help you manage your tax affairs.

Umbrella Company Tax

For IT contractors who work under an umbrella company, you’re considered as an employee in the umbrella company, meaning the company deducts all taxes and NICs and you receive a net salary have no further taxes to pay. Although it sounds easy, in reality, you are likely to pay more as the monthly fee charged by the umbrella company can be substantial.

Experienced accountants for IT contractors

To speak with one of our professional accountants for contractors to discuss more tax planning tips for IT contractors operating as a limited company in London, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

If you found this interesting and informative, you should check out:

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.


Male software developper - IT contractor

Business expenses you can claim as an IT contractor

Male software developper - IT contractor

For IT contractors, staying up to date with the latest developments, technologies and innovations is part and parcel of your job description.

As the IT industry is ever changing, staying on trend is imperative. Likewise, staying informed about the latest developments and changes to your business’s tax considerations and requirements is equally important.

In 2017, public sector contractors’ tax status changed following amendments made to IR35 legislation. Under these reforms, IR35 now stipulates that it is the role of the ‘client’ to ensure that a contract meets the requirements of IR35 categorisation, where previously the onus was on the contractor to ensure that these requirements were met.

From April 2020 onwards, all contractors, operating in both public and private sectors, will be affected by these changes with IR35 consolidating a mandate that requires clients to ensure that any contract entered into is valid under IR35. The contractor tax sphere is, therefore, a complex and complicated paradigm that is constantly shifting and being updated.

Staying on top of these categorisations is hard work, and so too is understanding the various expenses you can claim for now that these classifications are shifting. In this post, our London’s local accountants for contractors aim to discuss the business expenses IT contractors can claim for both inside and outside of IR35 legislation, as well as what to do in the event that you find yourself unsure of your classification.

What is a business expense?

A business expense is a charge your business incurs while operating that is considered “ordinary and necessary” with respect to the running of the enterprise. You can claim these expenses back as deductions from your business’s yearly tax returns and thereby mitigate the overall tax payable on your annual returns.

As a contractor, a business expense is one that is incurred in the performance of your core service or on behalf of your client. You are able to claim back such expenses as deductions, meaning they can be taken from your gross profit before tax is applied. Just as your business’s structure will determine what type of taxes you are eligible to pay, your IR35 status will also determine which expenses you are allowed to claim.

What business expenses can IT contractors claim outside IR35?

As a contractor working outside of IR35, you are classified as operating a legitimate, genuine contractor business and as such, are not deemed to be a ‘disguised employee’ as defined by HMRC’s guidelines. This means that you have greater freedoms with respect to your rights as a business operator, improved tax efficiency and the expenses you can claim.

If your contract falls outside the scope of IR35, you can claim for a number of business expenses that can make a significant contribution towards reducing your overall taxable revenue, such as:

  • Costs associated with setting up your company.
  • Salaries of company employees (typically just yourself as a contractor – and only where applicable as specified by HMRC).
  • Costs associated with an external accountant providing accounting and bookkeeping services.
  • National Insurance Contributions (NICs) and contributions to a pension plan.
  • Basic costs of operating a business such as business rent, utilities, Internet services, phones, insurance, office costs.
  • Equipment costs such as PCs, laptops and software.
  • Training expenses if they are directly related to your contract work.
  • Subscription to HMRC-approved professional organisations or magazines related to your contract work.
  • Costs of entertaining clients or potential clients.
  • VAT on expenses if your company is VAT registered.

What expenses can IT contractors claim inside IR35?

As a contractor working inside of IR35 in the private sector, you can claim a fixed 5% to cover the cost of running a company (please note that this isn’t applicable to contractors working in the public sector). They can include:

  • Costs of using your home as an office
  • Administration and secretarial support
  • Accountancy and tax advice
  • Business development costs
  • Printing, postage and stationery
  • Telecoms
  • Insurance
  • Training costs
  • Certain computer equipment
  • Bank charges
  • Hire purchase payments

Please note that travel and subsistence expenses cannot be claimed.

As per the changes to IR35 legislation with respect to contractors working in public sectors, if HMRC finds you to be working inside IR35 in a public sector occupation this 5% expense allowance cannot be claimed. As for the imminent changes to IR35 classifications in private sector jobs, this will likely transfer also, however, this is yet to be confirmed.

Do note that these lists are not exhaustive, and it is always advisable to consult your accountant with respect to the applicable expenses that you might be able to claim as a contractor business or limited company. If you’d like to know more about the expenses you might be eligible to claim when operating outside or inside the scope of IR35, contact one of our specialist accountants for contractors today.

Accountants for IT contractors

Becoming an IT contractor is as demanding as it is rewarding. While there are some significant benefits to working as a contractor, the financial and fiscal requirements of anyone operating their business can be overwhelming.

To be a successful IT contractor, balancing your business operations and financial responsibilities is key, and this is where Tax Agility can help. Our team of accountants work with contractors from all walks of life and what expenses you can or cannot claim is one of the enquiries we handle daily. If you’d like to know more, contact us on 020 8108 0090 today or drop us a line via our contact page.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.


Tax planning tips for self-employed contractors

Tax Planning Tips for Self-Employed Contractors

Having worked with self-employed contractors across London for many years, we understand that you’ve got a lot on your hands juggling your business operations and financial responsibilities. When it comes to tax planning and reducing your tax obligation legitimately, your busy schedule often means that this is an afterthought and as such can fall by the wayside, leaving you in a difficult position come the end of the financial year.

This is why Tax Agility exists, we’re here to help contractors like yourself maximise your tax returns and increase your contractor business’s profitability. We do this providing tailored advice that suits your business and your industry. In this article, we aim to discuss the top five tax tips for self-employed contractors that you should be aware of with respect to both your day-to-day and long-term operations.

Top 5 tax-planning tips for self-employed contractors

1. Take IR35 seriously

Perhaps the most helpful tip we can give to a self-employed contractor, recognising where you are in relation to HMRC’s IR35 legislation is of the utmost importance at all times. Understanding how to navigate IR35 with respect to your classification and categorisation as a contractor or potentially as a ‘disguised employee’ could mean the difference between a huge increase in tax payable to the government, so taking IR35 seriously is imperative.

On our ‘What does the IR35 legislation mean page, as well as in our ‘What’s IR35? A brief guide to the IR35 legislation’ post, we cover IR35 extensively including what it is, why it was introduced, how it might impact your taxes and how to tell if you’re at risk. The main point is, if HMRC believes you to be operating under IR35, in other words, they consider you as a ‘disguised employee’ rather than a genuine contractor, then you will be required to pay back the underpaid tax or have to pay a penalty and interest. It also means that your current contractor tax planning structure and methodology will need to be re-evaluated.

Getting IR35 right the first time is important because HMRC doesn’t give you the benefit of the doubt, so speak to one of our experienced accountants for contractors if you aren’t sure if you’re inside or outside of IR35.

2. Becoming a Limited Company

Assuming the services that you provide don’t fall inside IR35, incorporating your contractor business as a limited company is an effective way to pay less tax while simultaneously growing your business and boosting its profitability. The main reasons are:

  • With a limited company, you can split your income between salary and dividends. Dividends aren’t subject to National Insurance Contributions and also taxed at a lower rate, resulting in you paying less taxes legitimately.
  • You can claim tax relief on legitimate expenses.

In short, incorporating a limited company is the most popular means of establishing a self-employed contractor business, mainly due to the significant financial benefits it affords the business owner.

Establishing a limited company does have its drawbacks, however, and brings with it a number of responsibilities and administrative necessities that non-company owners wouldn’t normally be required to fulfil. They include accurate record keeping, quarterly submission of accounts and annual returns, as mentioned on our ‘Managing a Limited Company page. The good news is, the teams at Tax Agility can help to alleviate the stress by managing your bookkeeping, payroll, VAT returns, and completing annual returns.

3. Consider the VAT Flat Rate Scheme

The Value Added Tax (VAT) Flat Rate Scheme allows contractors who have an annual turnover of £150,000 or under (excluding VAT) to pay a fixed amount of VAT based on their turnover. This can be beneficial in circumstances where contractors don’t have the time or manpower required to add up every taxable purchase to produce an exact VAT amount, instead paying a fixed rate of VAT to HMRC and keeping the difference between what you charge your customers and what you pay the Government.

As with most of the tips in this list, the VAT Flat Rate Scheme isn’t for everyone, so speaking with your accountant is advised to gauge whether this scheme is suitable for your business structure.

4. Take advantage of the Annual Investment Allowance (AIA)

The AIA, which is currently set at £1,000,000 between 1 January 2019 and 31 December 2020, allows you to deduct the full value of a qualifying item from your contractor profits before tax.

There is a large number of exceptions here, including cars and any item that you previously owned before using it for your contractor work, as well as items given to you or your business (i.e. not specifically purchased).

You can find out more about AIA on this gov.uk page or speak to us if you want to take advantage of this allowance.

5. Submit everything on time

In the same manner that not taking IR35 seriously can make your professional life difficult, not submitting your tax returns on time can also add stress, and even harm your tax planning efforts due to the penalties you’re likely to receive. This is why using a cloud accounting platform and having an experienced accountant working alongside with you are imperative.

With Making Tax Digital now effective for VAT-registered businesses earning above the threshold of £85,000, and soon to be applicable to all businesses regardless of structure, size or industry, transitioning to a cloud accounting platform is an efficient and effective way to streamline your finances and ensure that you provide HMRC and your accountant with all of the necessary data and information required, well in advance of the filing date.

Experienced accountants for contractors

To speak with a professional, specialist contractor accountant to discuss more tax planning tips for self-employed contractors like yourself, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.


Team of contractors

Moving from permanent employee to full-time contractor

Limited or Umbrella - TaxAgility Accountants LondonIt’s said that in the UK the numbers of contractors are between 1.7 to 1.9 million, depending on which data source you refer to/ depending on which source you get the data from. What’s certain is that they contribute billions to the UK economy collectively and the number of contractors is set to increase further.

So, there must be a rationale that explains why we’re seeing this trend as it’s rather obvious that becoming a full-time contractor has many benefits. Among them, greater flexibility when it comes to working hours, higher pay rate, a greater degree of market demand and tax benefits (depending on the structure of your business) are often cited as key benefits.

How do I switch from working as an employee to working as a contractor?

With growth forecast for the coming year for contractors and contractor work, particularly in manufacturing, automotive, engineering, design and construction industries, the time is right for you to get ready and take full advantage of the robust contracting landscape in the UK.

While you may be aware of the benefits of contracting, you might not be privy to how you can actually make this move, primarily if you’ve worked in permanent employment all your life. This is why our contractor accountants at Tax Agility put together some useful tips to help make your transition smoother.

Sending out speculative applications

First and foremost, you should begin by testing the waters to gauge whether there is a demand for your services in your area. Doing your due diligence on your target audience/ potential clientele, as well as researching the market and any competitors in your locale is always advisable and considered good practice. One effective mechanism for implementing this is by sending out speculative applications offering your services.

Assuming you send out a high volume of applications, you’ll be able to measure the current state of the market concerning the ways in which various businesses react to your proposal. Don’t be deterred by the number of responses you receive initially, as this is more of a numbers game than anything. The rule of thumb is generally a 10% response rate, depending on the quality of your email and offer.

Even if you don’t receive a contract from this initial interaction, don’t give up. View this as an opportunity to increase your visibility within the marketplace and to companies who might not have been open to the possibility of hiring a contractor in the first place. As long as your details are in their systems, it’s likely that they will contact you when something comes up.

Networking

As a contractor, it’s important to develop a network that can deliver consistent opportunities and work. You can do this by creating a comprehensive networking plan, appearing at business events, distributing business cards or networking online, particularly on the social network, LinkedIn. To be successful, you’ll need to establish relationships within the industry that could potentially provide you with employment opportunities.

In a nutshell, it’s all about getting your name out there. You generally shouldn’t contact clients that you previously worked with when you were a full-time employee for someone else – this is considered poaching and bad etiquette. However, there’s no reason why you can’t reach out to individuals whom you used to liaise with that have since moved company.

Forming your company

When you first begin as a contractor, you’ll have to make the choice between working under an umbrella company, or alternatively, for your own limited company.

We’ve written at length on the differences between umbrella and limited companies in the past, but to put it simply: when you work through an umbrella company they take care of the financial side of things; taking payment from clients then paying you, minus tax, national insurance, and their personal fees.

When you form a limited company, everything (including the financial side) is your responsibility; but you’ll ultimately make more money as you won’t have fees to pay, and you’ll more than likely be operating outside of IR35 legislation if you have established a legitimate contractor business.

Hiring an accountant

If you haven’t already enlisted the services of a specialist contractor accountant at this point, then you should research a suitable financial services provider in your area who can assist you with the operation of your business. A specialist small business accountant is advisable for contractors and freelancers, and an expert in start-ups such as Tax Agility can assist with the transition from full-time employment to full-time contracting.

We’re able to advise you on the requirements for establishing your business, including all aspects of company formation, opening business banking accounts, and registering your incorporated entity with Her Majesty’s Revenue and Customs (HMRC).

To speak with an experienced tax accountant and discuss your potential move from permanent employee to full-time contractor, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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What is IR35? A brief guide to the IR35 legislation

IR35 is a tax legislation designed to mitigate tax avoidance by workers, particularly contractors, who supply their services through the use of intermediaries.

Introduced in 2000 by HMRC, IR35 is effectively a means of identifying individuals who are providing clients with a service under an intermediary, such as a ‘personal service company’ (usually in the form of a limited company), that would normally be classified as regular workers, known as ‘disguised employees’, without the existence of said intermediary.

Determining whether you’re operating inside or outside the scope of IR35 is mind-bogglingly complex and requires a thorough understanding of your unique situations. For the purposes of this article, our team of London’s local accountants for contractors aims to explain the various requirements for contractors under IR35, as well as gives an outline of the best practices for ensuring that you aren’t categorised as a ‘disguised employee’ under IR35’s classifications. Information given in this post should not replace professional advice tailored to your specific circumstances.

Why was IR35 introduced?

Previously, companies who engaged these disguised employees saved a significant amount of money as they didn’t have to pay employers’ National Insurance Contributions, nor provide any employment benefits.

On the other hand, contractors operating through a personal service company could also minimise their tax obligation as they were more inclined to split the income between salary and dividends. Dividends aren’t subject to National Insurance Contributions and also taxed at a lower rate, resulting in contractors paying less taxes and getting a higher take-home pay than a normal employee would.

It was a win-win scenario for companies who engaged contractors and also for contractors themselves. However, because HMRC did lose out on tax revenue they would otherwise receive, they had to close the loophole by introducing IR35.

In short, IR35 legislation was effected as a mechanism for cutting down on individuals wrongfully claiming tax advantages as contractors (or through other intermediary means) when they would normally otherwise be classified as regular employees.

In April 2000, IR35 became effective for small businesses supplying clients with contractor services and aimed to better establish the conditions by which contractor-client relationships exist for tax purposes. Despite their best efforts, the Government has been widely criticised for IR35, particularly with respect to its implementation and the impacts it can have for legitimate contractors and their small companies.

Am I at risk of coming under IR35?

Anyone who works as a contractor is potentially at risk of being categorised as a ‘disguised employee’ under IR35, and if you are deemed to fall inside this definition by HMRC, you will face some severe tax implications.

The problem with IR35 is that there is no definitive guideline that stipulates the conditions of a ‘breach’ so to speak, and as the issue is contractual in its nature, anyone investigating on behalf of HMRC is required to make a notional judgment based on the relationship between the company and the contractor rather than on the ‘written’ agreement.

As such, it is often difficult to determine whether you’re categorised as a ‘disguised employee’ in certain circumstances. Typically, HMRC looks at the working arrangement and uses these three principles (aka tests of employment) to determine the employment status of an individual.

Principle 1: Control

This refers to how much control the company has over you the contractor, from what you do, how you do it, when you start and finish it to where you complete it. If the client requires you to come in from 9 am to 5 pm every weekday for a specific period of time to finish a series of tasks, then HMRC is likely to classify you as a normal employee and therefore IR35 is applicable.

Principle 2: Substitution

A normal employee cannot go out to source for an individual to complete their work for them but if you are a genuine contractor, you should be able to send a substitute to undertake the work on your behalf, provided that your client is reasonably satisfied that the proposed substitute has the right skillset and qualifications to undertake and complete the work.

Principle 3: Mutuality of obligation

This concept hinges on the question: is there a degree of obligation with respect to the employer supplying the work and the worker accepting this offer? If you are a genuine contractor, you must have the right to terminate the contract early if you choose to.

Understanding these principles can offer an insight into circumstances where a contractor may come under IR35 categorisation, however, these are not exhaustive and there are other factors that can be taken into account when making a judgment. For example, HMRC may check if you receive any employment benefits or if you use their equipment to complete your work to name but a few.

We’re specialist contractor accountants

Essentially, it’s important for a contractor to consult a specialist contractor accountant like Tax Agility to better ascertain where they sit with respect to this legislation and whether they may be required to pay more tax as a result. While there are a number of IR35 calculators that might be able to give a rough estimate, it’s always advisable to go to a professional. Call us on 020 8108 0090 today or send us a message via our Contact Form. We offer the first consultation for free in order to understand your circumstances and provide you with the best possible advice with regards to your contractor work.

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