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.