Contractors

Business expenses you can claim as an 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.

If you found this useful, you might also like:

• How Xero can help contractors in the UK
• Moving from permanent employee to full-time contractor
• Tax planning tips for self-employed contractors

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.

by Donovan

Moving from permanent employee to full-time contractor

It’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.

If you found this interesting, take a look at:

• How Xero can help contractors in the UK
• Eight top tips for choosing a contractor accountant
• Tax planning tips for self-employed contractors
• Business expenses you can claim as an IT contractor

by Donovan

How Xero can help contractors in the UK

In the United Kingdom, many businesses are gravitating towards more flexible employment structures as a way to not only cut costs but also enjoy greater autonomy and larger returns and profits. One of the structures that facilitate these benefits is independent contracting; whereby business owners offer their contracted services to companies in place of a traditional employee. For accounting purposes, the government considers you a contractor if you own all or part of your business, work for multiple companies on short, temporary assignments, supply your own materials and equipment and take your directions from a client.

While the prospect of having to constantly find new short-term contracts may sound like an insecure life for an independent contractor, many contractors cite freedom and independence in their choice of employment and personal development as the deciding factor. It allows them to maintain a work/life balance that traditional employment does not provide. If your service is in high demand, you can easily earn more income than you would if employed as a traditional employee, and even taking into account loss of benefits such as holiday pay and sick pay, many contractors still come out ahead financially.

Accounting for contractors

Independent contractors, unlike company employees, do not have access to the benefits of a company department to assist with bookkeeping and financial accounting. As a contractor, you are now required to manage your own payroll, taxes, expenses and any invoicing of clients for services provided. Further to this, you may also face differing accounting needs depending on the nature of the work that you do, including but not limited to the various taxes applicable to the structure of your business, and the statutes and limitations that are applicable to your contracting company.

As a contractor, particularly if your business has been incorporated as a limited company, there are additional taxes that you need to be aware of, and that are applicable to your business as a financial operation. These include corporation tax, employer’s and employee’s National Insurance contributions, VAT and income tax, all of which are relevant and applicable in addition to your own personal tax return. Also, there are certain tax laws such as IR35 legislation that affect contractors, and understanding these laws (and knowing how to negotiate them and the situations in which they might apply) is of paramount importance, as they may categorise a contractor as a de-facto employee which in turn will increase the amount of tax that needs to be paid under that specific contract.

There are also various expenses that you incur during the course of your contracting work, such as products, services, professional subscriptions, utilities, travel expenses, entertainment and business start-up costs. It is important for contractors to stay on top of their accounting and bookkeeping so that they’re able to accurately and efficiently gauge the financial stability, positioning and health of their business. If you’re a contractor or considering incorporating your small business as a contracting limited company, Tax Agility, London’s local accountants for business can assist you with the finer details of setting up, or better understanding the requirements to make the switch to a more profitable and flexible business structure.

Making tax digital and cloud accounting

Historically, many contractors have relied on accountants for their financial record keeping, and many have used Tax Agility when they’ve needed help managing their fiscal and financial responsibilities. As of 2019 however, HMRC has implemented a statute that will revolutionise the way that businesses lodge their accounts and pay their taxes each year. Under the Government’s ‘Making Tax Digital’ legislation, businesses will be required to transfer their finances, accounts and bookkeeping to an online, cloud accounting software platform, lodging quarterly returns as well as an annual one. In effect, this initiative represents an attempt to make tax administration more effective, efficient and easier for taxpayers, utilising a fully digital tax system. This means that contractors no longer have to keep track of their finances with physical ledgers and receipts, streamlining the accounting process and making it simple for them to communicate with their accountant and better understand their finances. Taxpayers will be able to do so by subscribing to a compatible online ‘cloud’ tax accounting software package such as Xero.

While it’s true that this move to digital accounting allows contractors to do their own taxes, budgeting, invoices and VAT management, many still prefer to use an accountant so that they can focus on running their business to the best of their ability, as well as receiving specialist tax advice and receiving a ‘human touch’ that the computer cannot offer. Some accountants for contractors, such as Tax Agility also collaborate with cloud accounting companies like Xero, to manage their clients’ tax accounts through the platform. Under HMRC’s digital initiative, contractors are now required to report accounting information every quarter, in a similar way as a quarterly VAT return. Tax Agility, a gold partner of Xero, have been working with cloud accounting software platforms for years, so if your business is yet to make the switch for ‘Making Tax Digital’, we can assist you to migrate your finances and accounts and provide bespoke, expert advice as to how you can maximise the profitability of your operation.

Cloud technology tools with Xero

Apart from its HMRC recognised cloud accounting software, Xero also offers many other cloud services for independent contractors, such as:

• A simple project management and time-tracker software designed to help you track your work by time and project,
• An intuitive ‘to-do list’ tool designed to manage your time for you
• Word processing, spreadsheet and presentation software
• A suite of marketing apps designed to create and maintain your website, manage your social media presence, and help publicise your contractor business

Built for small business owners, Xero was created with a clear vision - to be a simple, user-friendly interface that requires little expertise or prior knowledge. The dashboard overview provides a clear view of your business’s most important financial information, and also offers ‘in-the-cloud’ security and maintenance-free financial record keeping designed specifically for small contractors.

Being cloud-based, Xero also facilitates instantaneous invoicing, meaning you can send one through to the client as soon as you finish a job, meaning you get paid more promptly and don’t have to wait to serve them with a physical invoice.

Get a better deal with Tax Agility

At Tax Agility we have worked with Xero since 2011. We are gold partners and certified Xero advisers, meaning that we have access to a whole host of benefits that other firms do not, including 25% discounts on Xero subscriptions made through us. In addition, we are experts in Xero, and we can help make your transition to the future of online business accounting smooth and problem-free. Take advantage of their free 30-day trial to quell any doubts you may have.

If you’d like to learn more about the ways in which Tax Agility can help your business transition to the cloud in preparation for the Government’s ‘Making Tax Digital’ legislation, please contact us today on 020 8108 0090 or get in touch with us via our contact page and we’ll call or email you back (your preference).

If you found this helpful, you might also like:

• Xero accounting: Update your business
• Xero: How Xero can help with Making Tax Digital
• Business expenses you can claim as an IT contractor
• Moving from permanent employee to full-time contractor

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. 

by Donovan

Eight top tips for choosing a contractor accountant

Being a contractor comes with many responsibilities, from communicating with clients to purchasing materials and equipment. With so much to think about, things like finances can easily be pushed aside in favour of more pressing issues. Choosing a specialist contractor accountant can help you to manage your accounts, keep track of your taxes and reduce some of the stress of dealing with your finances.

Here are our eight top tips for choosing a contractor accountant:

1. Make sure they understand your work

It’s important that your accountant knows about the type of work you do and how they can best help you and your business. For example, they need to understand IR35 tax legislation and how to keep you compliant with it, because if they don't then it could cost you a significant chunk of your income.

2. Assess their qualifications

Before hiring an accountant, ensure they are registered with an official accountancy body, such as the Association of Chartered Certified Accountants (ACCA) or the Institute of Chartered Accountants in England and Wales (ICAEW).

3. Decide between a small or large accountancy firm

A smaller accountancy firm tends to offer you a tailored service, and someone is usually available to talk to you whenever you have a question, but they often lack the reputation that bigger firms enjoy. A larger firm may have several accountants well-versed with the regulations pertaining to your area but the service can be highly impersonal. Both have pros and cons, and you need to weight them up before making a decision.

4. Speak to other contractors

Talking to other contractors about their experiences with their accountants can help you understand how you should be using an accountant for your business. It can also give you an insight into the responsibilities your accountant should be taking on.

5. Know what you’re paying for

There are a number of things you can expect from your accountancy firm:

• Annual accounts
• Tax returns
• Payroll (including set-up and ongoing management)
• Self-assessment
• VAT returns

Make sure you find out exactly what your contractor accountant can offer you. Let them know what you need and what you expect to be included in the price. Discuss your business needs with your accountant clearly and make sure you understand what you're paying for.

6. Check reviews from existing clients

A good way of checking if an accountancy firm is reputable or not is by listening to what their existing customers have said. When doing this, you need to ensure that you have a wide variety of sources - don't just rely on online reviews as both bad and good reviews can be fake.

7. Check if they use online accounting

Cloud-based accounting has become so popular that every reputable company has a presence in the online accounting world. The better ones are often part of rewards programs that can offer you certain benefits for pairing with the accounting software. For example, Tax Agility is a gold partner to Xero, meaning we can provide you with numerous advantages as opposed to other firms that don’t hold this status.

Remember that there are various cloud accounting programs, each with different incentives, so it’s always worth checking to see what you’re getting.

8. Make sure you have the option to switch

Not all partnerships are fruitful and in the unfortunate circumstance when things don't work out, then the process of switching should be quick and painless. Before you accept their services, discuss the options of leaving whenever you want to ensure that there aren’t any circumstances that prevent you from making a quick switch.

Tax Agility – the contractor accountants you’re looking for

At Tax Agility, we work hard to provide contractors with the best advice regarding their finances. We offer tailored accountancy services for contractors that are specific to your needs and those of your business. By working with us, we can help you to be in better control over your finances and can ultimately save you time and money.

We can take care of your taxes so that you can concentrate on building your business. We understand what services contractors require from accountants, including IR35 advice, tax returns and annual accounts assessments. That’s why we can provide a comprehensive service to our contractor clients. By working with us, we can ensure that you are prepared for the future and saving you money in the meantime.

For more information on how Tax Agility can help you with your contractor accountancy needs, call us today on 020 8108 0090 or fill out our Online Form.

If you found this useful, you may want to take a look at:

• As a contractor, why do I need an accountant?
• How can management accounting be used effectively?
• Moving from permanent employee to full-time contractor

by Donovan

Making a limited company dormant - What to look out for

Many contractors choose to close their limited companies completely when they have no intention of returning to contracting. But for those who are just considering a short break away from their limited company, making it dormant may be the better option. This will allow you to reserve your company name, brand and trademark until you return to your operations. However, making your limited company dormant does require you to meet certain filing requirements throughout the year.

In the following article, we look at what makes a company dormant and what steps you need to take to make your limited company dormant.

What is a dormant company?

When a company is dormant, it means it has stopped trading and is therefore inactive for Corporation Tax purposes. Under the term trading, HMRC means buying and selling, renting property, advertising, employing someone or earning interest. Transactions must be limited solely to the payment of shares and any outstanding fees to the Companies House.

When your company is dormant, you are not required to file tax returns. However, you are still required to maintain certain administration on an ongoing basis. This includes submitting a confirmation statement to the Companies House and submitting forms if there is a change to the company’s registered address or if there is a change in company’s directors.

For detailed guidance on requirements, visit the government’s website.

What actions do I need to take to make my active company dormant?

Once you’ve decided to make your limited company dormant, the process is fairly straightforward. To make an active company dormant, you should:

• Inform HMRC that your company is dormant in writing or by phone. This must be within three months of your company becoming dormant.
• Make sure your clients pay any outstanding invoices before you cease trading.
• Close your business bank accounts. Any transactions will otherwise void your company’s dormant status.
• Terminate your contracts with service providers and settle any outstanding bills.
• A dormant company cannot have employees. Pay any remaining wages if your company had employees and follow HMRC protocols to close your payroll.
• Deregister for VAT.
• Prepare your final trading accounts for your accounting year-end and file your final tax return.

Need assistance?

Talk to us at Tax Agility to speak with a professional to discuss the prospect of making an active company dormant if you’re not quite sure what you need to do. As small business accountants and accountants for contractors, we’ve seen all the scenarios and have the answers you’re looking for. If you decide to restart trading under your dormant company, we can also help.

Contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

by Donovan

Understanding IR35 – Are you a disguised employee?

A growing number of professionals in the UK are transitioning from full-time employment to contracting – are they at risk of being misclassified? In this post, we take a look at disguised employment and what happens when your contract falls under the scope of IR35.

In 2009 TV presenter Christa Ackroyd took the advice of her employer BBC and set up a personal service company, changing her status from direct employee to that of a contractor. This was supposed to be a win-win arrangement for both parties with the BBC no longer needing to pay income tax and national insurance contributions for Christa, while she could enjoy greater flexibility and numerous tax breaks as a self-employed contractor.

Fast forward to 2018, when after a five-year dispute with HMRC over the nature of her contract, the tax authority is demanding £419,151 from Christa for the taxes she failed to pay. According to the tax authority, her contract fell under the scope of IR35, meaning she was not entitled to claim for the expenses as a contractor and should now pay up. She’s not alone in this. According to The Guardian, further BBC presenters could be facing backdated tax bills for disguised employment.

If you’re shaking your head thinking BBC is to blame here, consider the story of Gary Smith, a London-based engineer who brought a series of claims against Pimlico Plumbers. Although he worked for the company as an independent contractor, he argued he was entitled to employee rights due to the nature of his work and contract, which set minimum working hours and required him to use a company van. The employment tribunal agreed that he’s under the scope of IR35 and Pimlico Plumbers is now appealing to the Supreme Court against the decision.

What’s the “gig economy”?

The above cases are becoming all too common in the so-called “gig economy” – a phrase increasingly in use to mean a freelance economy based on people working a variety of small jobs to support themselves instead of working under permanent employment. On the one hand, it’s regarded as an arrangement offering flexibility like in the case of Christa Ackroyd, but it can become a form of exploitation with the lack of workplace protection in place, as suggested by the Pimlico Plumbers case. Either way, the gig economy is causing confusion to contractors with regards to where they stand when it comes to IR35.

When does a self-employed contractor become an employee?

IR35 is a legislative act enforced by HMRC, which applies to people that work for a client through an intermediary, such as a limited company. Essentially, HMRC wants to ensure that only genuine contractors benefit from the tax savings associated with this type of employment. If you go into a contract that identifies you as an employee of the client rather than an employee of your own limited company, the IR35 rules will then apply to you. If this is the case, you can expect to pay around 25% more in tax every year.

If you’re not sure whether you’re a contractor or an employee, consider the following points:

• Who are you replacing? If your predecessor was an employee, it might mean you are one too.
• Who is in control of your working conditions? If your contract is restrictive (e.g. defines working hours and holidays), IR35 might classify you as an employee. As a contractor, you should be in control.
• Does your contract mention substitution? As a contractor, you can send a substitute to replace you if you’re unable to work. If your contract doesn’t include a clause on substitution, it might mean you’re an employee in disguise.
• How are you paid? If you’re paid like all other employees at the end of each month, that can also be a sign that your contract falls inside IR35. Contractors tend to get paid at the end of their services or in instalments depending on the nature of their projects.

How to check if someone is self-employed

There are numerous IR35 evaluation tools and tests out there but relying on online IR35 advice is risky as failure to address the criteria properly will put you at risk of tax avoidance.

To make sure your contract passes IR35, the most sensible thing to do is to talk to accountants for contractors like Tax Agility before you set up your company and sign your contract. If you’re already providing services as self-employed but are under the impression you could be a disguised employee, we can also help you disperse or confirm your suspicions.

Contact one of our expert IR35 contractor accountants today on 020 8108 0090.

by Donovan

Should you make the move to contracting?

From experiencing financial benefits to having a more flexible working day, setting up as an independent contractor could be the best decision for you. However, before you make the move, here are some things you should consider:

• What skills do I have?

Setting up as a contractor means that you will be relying predominantly on the skills you’ve built up over the years. A current and comprehensive CV, which includes all your strengths and specialist skills as a contractor, is key to marketing yourself to potential clients and to being successful.

• What rates will I charge?

Contractors are in high demand, putting you in a good position to charge high rates for your services. In order to determine your rates, you should do some research around what others in your industry are charging and think about how much your own services are worth.

• Should I join an umbrella company or set up a limited company?

Before becoming a contractor, you will need to think about how you’re going to manage your business: will you set up under an umbrella company or will you set up your own limited company?

There are many pros and cons to each method and it’s important that you spend some time choosing between the two. Tax Agility can give you the advice you need to work out if an umbrella company or a limited company is the best fit for you.

• Choose an accountant that’s right for you

Owning a business, and running it successfully, requires a good understanding of finances and taxes. While it is fairly straightforward to handle the day-to-day bookkeeping, you may need some professional assistance when it comes to the intricacies of tax administration.

Tax Agility can help you to manage your accounts efficiently and we’ll deal with all the necessary tax responsibilities that apply to you as business owner. By taking on a majority of your accountancy needs, we are able to ensure that you’ll spend less time focusing on tedious paperwork and more time on running your business successfully.

How can Tax Agility help?

Tax Agility offer expert accounting services for contractors. We can complete a range of tasks for you, from filing your self-assessment tax return on your behalf to advising you on pension plans and potential future investments. Working with us can also save you money, as we’ll help you to minimise your tax liabilities by creating strategic tax plans.

For more information on how Tax Agility can help you to set up as an independent contractor, call us today on 020 8108 0090.

by Donovan