Domestic VAT reverse change for building and construction services

Traditionally, the value-added tax or VAT is a tax based on a percentage of the sale price; and is applied at each stage in the production and distribution chain. However, for the construction industry, that's all changed.

CIS VAT reverse charge schemeFrom 1 March 2021, the new VAT domestic reverse charge system for building and construction services will take effect. As the name implies, it only affects jobs that building tradespeople carry out for their clients in the construction industry.
This new system aims to reduce the missing trader fraud common in the construction industry, whereby a supplier or subcontractor would invoice and charge VAT to another builder, before going missing or going into liquidation. With this reverse charge, the VAT is moved down the supply chain, making the main contractor responsible for the VAT and pay it directly to HMRC.

To aid the process, the government has published a flow chart which lists key questions that can help you determine whether a reserve charge should be applied or not if you are supplying services customers. As such your customer must have the following attributes:

  • Does the supply fall within the scope of Construction Industry Scheme (CIS)?
  • Is the supply standard-rated or reduced-rated?
  • Is your customer VAT-registered?
  • Is your customer registered for CIS?
  • You’re not an employment business supplying staff or workers
  • Your customer has confirmed that they are not an end user or an intermediary supplier?

If the answer is ‘yes’ all of these questions, then the domestic reverse charge applies, meaning when you issue an invoice to your main contractor, you don’t include VAT on your invoice. Instead, your invoice should state “Reserve charge: Customer to pay VAT to HMRC", along with the VAT rate. This is to make it clear that the reserve charge system has been applied, and the main contractor knows what rate to declare on their return later.

If the answer is ‘no’ to any of the first four questions, then normal VAT rules apply.

Further guidance provided, explains some of the differences between ‘end users’ and ‘intermediary suppliers’.

What is the difference between an end user and an intermediary supplier?

End users are the actual consumers or final customers of a service. The reverse charge does not apply to end users.

An intermediary supplier is a CIS and VAT registered business connected or linked in some way with an end user. This connection could be through the holding of relevant interests in the land or buildings with the construction work is to take place. Landlords and tenants are an example, as are constructions services carried out within a group of companies.

Further helpful definitions

To help define the circumstances and applicable scenarios further the government provides the following additional guidelines:

When you must use the reverse charge

  • Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures including offshore installation services;
  • Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, i.e. walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, and more;
  • Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure;
  • Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
  • Painting or decorating the inside or the external surfaces of any building or structure; and
  • Services which form an integral part of, or are part of the preparation or completion of the services i.e. site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

When you must not use the reverse charge

Do not use the charge for the following services, when supplied on their own:

  • Drilling for, or extracting, oil or natural gas;
  • Extracting minerals and tunnelling, boring, or construction of underground works, for this purpose;
  • Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site;
  • Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site;
  • The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants;
  • Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements;
  • Installing seating, blinds and shutters; and
  • Installing security systems, including burglar alarms, closed circuit television and public address systems.

Some basic examples of how this works in practice

Example 1: a transaction under reserve charge

You are a subcontractor who is VAT-registered and you charge 20% VAT normally. You carry out painting and decorating work in an office block for the main contractor AB Construction Ltd. Upon completion, you invoice AB for £2,000 on paint and other materials, and £4,000 for labour. You charge £6,000 in total but no VAT. Your invoice will mention the VAT rate (20%) and the phrase ‘Reserve change: Customer to pay VAT to HMRC’.

On your VAT Return:

  • VAT on sales – suppliers must not enter output tax on sales under reverse charge. The supplier only need to enter the net value.
  • VAT on purchases (goods) – if you buy services subject to reverse charge, you must enter the VAT charges as output tax on your VAT return. Make sure you do not enter the net value of the purchase as a net sale.
  • If the services provided (expertise/labour )are  subject to reverse charge from the subcontractor, the VAT must be accounted for in your VAT return and VAT will be recovered simultaneously on the same VAT return.

Example 2: a transaction not under reverse charge

You are a subcontractor who is VAT-registered and you charge 20% VAT normally. You carry out painting and decorating work in an office block for the owner, who confirms that he is the end-user. Upon completion, you invoice the owner £6,000 for the materials and labour, plus £1,200 for VAT.

This is reported normally in your VAT return.

Important note on the cash accounting and VAT flat rate schemes

An important point to note here is that the cash accounting scheme cannot be used for supply of services that are subject to the reverse charge. The same is true for the flat rate scheme (FRS). Users of these schemes will need to consider whether it is still beneficial to their businesses to use these schemes.

This will impact likely your cash flow, so be aware

Under the old scheme, a business would charge their fee plus VAT. If the customer was a prompt payer, the charging business would have a 20% cash flow advantage from the VAT, potentially for up to 3 months. Under the new scheme, the business won’t charge VAT and therefore won’t benefit from the cash flow advantage.

If you aren’t sure, talk to Tax Agility

Prepare yourself by making sure that your accounting systems and software can deal with the reserve charge, and take time to review your contracts with other builders and suppliers.

At Tax Agility, we are also here to provide professional guidance on this issue. You can speak to our VAT specialist.


IR35, new changes from on 6 April 2020

IR35 concept image

News relating to IR35 abound. Read on to see if the latest changes, taking place on 6 April 2020, will impact you.

Back in 2017, the onus to prove one’s self-employed status shifted from the contractors to the company that hires them across the public sector. This April, private companies (medium to large organisations) must also take on the responsibility to determine a contractor’s IR35 status.

While the law will go ahead, the government has announced a 12-month grace period as it acknowledged that ‘shifting responsibility for determining employment status is a major change for employers and other organisations that use contractors and contingent labour’, according to the report published by HMRC.

What does it mean?

From 6 April, medium and large companies must determine the tax status of the freelancers and contractors they employ directly or via an agency. This means companies must set the tax status and deduct income tax and National Insurance contributions from the fees paid.

Most contractors aren’t happy with this arrangement because they can’t set their tax status (but they could before 6 April). Plus they now have to pay tax and National Insurance (like an ordinary employee) but with no access to benefits like paid holiday or sick pay.

It must be noted that IR35 does not apply to small businesses. A company is considered small if two or more of the following conditions are met:

  • Annual turnover is less than £10.2 million
  • Balance sheet total is less than £5.1 million
  • Has less than 50 employees

IR35 is a highly controversial subject and many organisations and freelancers already expected it will cause issues. If you want to know about the new IR35 changes and how they affect your company, give us a call on 020 8108 0090.


Accounting concept

How to find a good accountant in London

Vector image of money, receipt, calculator, pen and laptop screen

Don’t undervalue your accountant by meeting up only once a year. Also, the right accountant should go above and beyond for you, understand your business completely and offer solid advice that you need to manage and grow your business.

What services should a good accountant offer?

A well-rounded accountant offers services that can address the current and future needs of your business, which can include but not limited to:

  • Company secretary services
  • Corporate tax planning and advice
  • Accounting and bookkeeping
  • Payroll services
  • VAT
  • Cash flow forecast
  • Short and long-term strategies

Essentially, you are looking for someone to take over the administrative work (like bookkeeping and PAYE) as well as someone who can help review your numbers and make sound recommendations so that your business has the best chance to succeed.

Every business is unique too. Perhaps you have just launched a start-up which is in need of funding, a contractor who struggles with IR35, a small business owner whose business is experiencing consistent growth, or you may be looking for an exit strategy – this is why our accountants are divided to teams that specialise in start-ups, contractors, small businesses and individuals respectively in Central and Greater London. Having expert knowledge in your area means we can provide relevant accounting and tax advice that help you manage and grow your business.

How do I check their qualifications?

While most people find their business accountant through word-of-mouth referrals, it is always worth checking if they are ICAEW (Institute of Chartered Accountants in England and Wales) accountants.

Guided by strict codes of conduct, ICAEW accountants uphold the highest standards of professional conduct and business ethics. At Tax Agility, we are ICAEW chartered accountants and we follow these principles:

  • Integrity
  • Objectivity
  • Professional competence and due care
  • Confidentiality
  • Professional behaviour

This means that as our client, you will receive honest answers from our knowledgeable accountants who keep abreast with the latest developments in practice, legislation and techniques. We also act diligently and respect confidentiality. With us working alongside you, you know you are in good hands.

Top key traits of a good accountant

  • Knowledge and skills – A good accountant should be able to assist you in areas that you need.
  • Listen to you – Only by understanding your situation first, then your accountant can come up with ideas that will make an impact to your business.
  • Excellent communication skills – Having the ability to interpret data and convey the information in a meaningful way to you.
  • Adaptable – Your needs evolve and how a good accountant assists you should evolve too.
  • Honesty – A good accountant should provide honest answers, as well as excellent work without any hidden charges.
  • Efficient – A good accountant will make sure that your financial records are managed efficiently, so you can concentrate in other aspects of your business.

At Tax Agility, our fees are transparent – most of our clients pay a fixed monthly fee with no hidden charges. In the event that you have additional projects that need our attention, we will discuss the work and cost with you upfront.

What can Tax Agility do?

At Tax Agility, our accountants specialise in start-ups, contractors, small businesses and individuals across London respectively.

Our accounting services include but not limited to:

  • Annual compliance with Companies House
  • Maintenance of statutory books
  • Bookkeeping
  • Management accounts
  • Accounts payable and receivable
  • Cash flow
  • Sales reporting
  • Tax returns
  • Tax planning
  • VAT returns
  • PAYE registration
  • PAYE administration
  • Pensions

We have offices in three locations – Putney, Cavendish Square (Central London) and Richmond.

For more information on our services, talk to us on 020 8108 0090 today or use our enquiry form to get in touch.

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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.


Business planning

Planning the future of your business

Business planning

Your small business can flourish through business planning, continuous improvement and strategic advice.

Turning a business vision into reality requires entrepreneurs to navigate through a river called planning that is full of twists and turns, with rapids as well as areas of calm-moving water. Before launching a business, most entrepreneurs need to analyse their business idea and their appetite first, asking tough questions such as:

  • Are you ready to take on the challenges of being an entrepreneur?
  • Do you have the skills needed to run your business successfully?
  • Is your business idea viable?
  • Is there a market for your services or the products you intend to sell?
  • Is it worth investing your time and money into it?

After the analysis, it is time to put your thoughts down into a very important piece of paper called the business plan. Do not dismiss this step because a business plan sets you up for success when you first start, and it goes on to help you adapt as your business grows. Yes, you read that right – a business plan is not just for fresh-faced entrepreneurs who are eager to launch a business, it is also for seasoned small business owners who want to expand and grow. In this article, our small business accountants at Tax Agility put together what we have learned from working with small business owners throughout London over the years into tips that can help you plan for your business.

We cover:

  • What is a business plan and why is it vital to both start-ups and also established businesses looking to grow?
  • Business growth planning
  • Exit strategy planning
  • Business debt planning
  • How our small business consultants can help in each of the above situations

Let’s talk about business plan

In our line of work, it is common to meet entrepreneurs who trust their gut feeling more than a business plan. There is nothing wrong with it if you know how to translate your gut feeling into a series of actionable items and manage to assemble a team and sell your vision based on your gut feeling alone. In most cases though, gut feeling isn’t enough and this is where a business plan can help:

  • It helps to prioritise – By defining your business objectives, your business plan gives your business direction, maps out strategies to achieve your goals and helps you to manage possible challenges along the way. If you are already in business, use your business plan to recalibrate your objectives and set out plans to adapt to the changing market.
  • It gives you control over your business – Your business plan requires you to study the business landscape and know your competitors and other factors that may affect your success. If you are already in business, it is time to take a step back and review because your business plan should evolve based on your experiences – both successes and failures. A good rule of thumb is to review your business plan once in every six months.
  • It gets you funding – It is highly common for entrepreneurs to use their personal savings, liquidate their assets or even max out their credit cards to launch a business. But to sustain and grow the business, additional funding may be required and in this instance, your business plan is a tool that will help to convince investors why they should invest in your business. If you would like to know more about funding, “The complete guide to business funding” may make a good read.

What goes into your business plan?

A good business plan typically covers the following points:

  • Your business objectives, both short and long-term objectives
  • The products or services it will provide
  • What is your pricing strategy?
  • What is your budget?
  • What are your risks?
  • Who are your customers?
  • How do you reach out to potential customers so they are aware of you and your business?
  • Who are your competitors?
  • What sets you apart from your competitors? In other words, why should your customers buy from you and not them?

It can further expand to cover:

  • If your ideas or products are innovative, how do you protect them?
  • How do you keep up with technology?
  • At what point can you take on staff?
  • What is your exit strategy?

As you can see, you can make it as comprehensive as possible. The most important lesson here is not to write it and put it aside because you are busy managing the day-to-day. Use it, review it, improve it – because your business plan will empower you to think, plan and stay ahead of the game.

Let’s plan for your future together

It is worth noting that having a robust business plan is one of the many steps required to launch or to improve a business if you have already set-up your company. Other types of knowledge needed to make your business successful include cash flow, compliances, debt, gross profit margin, net profit margin, to name but a few. As not everyone is an accounting expert who understands numbers and how they can affect your business, it is time to reign in small business consultants like us who can help you do number crunching and maximise your business success.

We do this by:

  • Understanding your business and your objectives
  • Focusing on your interests
  • Analysing your numbers
  • Reviewing the key trends in your business
  • Forming tailored solutions for your needs
  • Offering cost-effective services
  • Providing honest and expert advice

At the end of the day, our small business consultants produce:

  • Annual business plans, forecasts, and projections
  • Management accounting complete with regular overview information
  • Review of credit control and cash flow
  • Attend important business meetings
  • Strategic plans for business acquisitions and disposals
  • Advice pertaining to capital structure and business valuations

If you would like to know how we can assist, give us a call on 020 8108 0090 today. In the next section, we will discuss specific planning pertaining to common issues faced by many small business owners today:

  • Business growth
  • Exit strategy
  • Debt reduction

Business growth planning

Businesses exist to make money and grow either organically or inorganically.

Organic growth refers to utilising your current business structure to increase output and boost sales, thereby driving growth. The process takes time and effort, but it is sustainable, less risky, and most importantly, it adds value to your company.

On the other hand, inorganic growth means you gain instant market share and revenues boost by acquiring or merging with another company. While it is risky, the benefits of having a larger market share are indeed attractive.

Most small business owners prefer to grow organically but some prefer the acquisition route, particular those in the high-tech industry. The thing is, there isn’t a standard business growth recipe that can be applied systematically to every business. Growing your company relies on your business model, your general management, and above all, your financial numbers. If you are planning to grow your business this year, either organically or through acquisition, contact one of our small business consultants and we would be happy to review your numbers and help you formulate a realistic growth plan.

Exit strategy planning

At some point you may be thinking of selling your business to a third party or finding an internal succession, and this process of withdrawing yourself from the business you have created should ideally be a smooth transition.

As small business accountants in London, we often hear from various business owners about their plan to sell up and in most instances, turning this concept into reality requires thoughtful planning. For instance:

  • How fast do you want to sell?
  • What is the valuation process?
  • Should you restructure the business to optimise the sale value?
  • How to ensure that all relevant tax issues are managed?
  • What is the due diligence process?
  • How to identify and evaluate potential buyers?
  • How to create a competitive bidding environment?
  • How to negotiate?
  • What are the strategies you can use to maximise the sale of the business?

The list goes on and touches on various elements, from addressing accounting and tax queries to a mountain of documents that spell out everything from confidentiality to terms of sale. If your plan is to exit the business, contact our small business consultants at Tax Agility today so we can help to kick-start the process and set the strategy in motion.

Business debt planning

Assuming you are in control of your cash flow, chances are, you should not need to borrow. Cash flow is really one of the biggest issues for small business owners and many people do not understand why they are suddenly short of cash when everything seems well. This is where our small business consultants can help – we are here to analyse your numbers and provide cash flow forecasts, as well as helping you to plan for multiple scenarios that will have an impact on your business.

In the event that your business is short of cash and you need to borrow, then these tips may be helpful to you:

  • Know your ability to pay it back before you borrow
  • Have a sensible repairmen plan, this will allow you to pay back the money and still have money to fund the operation
  • Know when you can be debt free
  • Plan how you can create extra income to pay off debt
  • Review how you can cut expenses and save, as a pound saved is a pound earned

Cash flow is a subject that many small business owners find it fascinating and if you are interested to know more, this post “Five ways to improve your company’s cash flow” highlights practical steps you can use to control your cash flow.

Tax Agility is your trusted small business consultants

Every business owner needs some forms of help – it can be someone helping you to figure out what’s next, someone providing a valuable second opinion, someone introducing new clients to you, and someone working with you to improve profitability.

At Tax Agility, our dedicated small business consultants work cohesively with you to help build your business and take it to the next level. We use numbers and data to recommend changes, mitigate risk and improve profitability.

Give our small business consultants a call on 020 8108 0090 today because your business deserves the best opportunity to succeed.

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.


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.

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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.

 


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.

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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.


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.