Category Archives for "Accountants for contractors"

A Flat Rate VAT Guide for Contractors For April 2017

It is no secret that the 2016 Autumn Statement carried on the ‘noose tightening’ that the contracting sector has felt in recent times. Contractors have long since realised that HMRC was gunning for them and the last couple of years have confirmed that as the May / Hammond double act have made it clear that they are keen on all limited company contractors, self-employed individuals and regular employees being in the same boat when it comes to tax and national insurance. In other words, this government and HMRC are fully intent, it would seem, on removing all perks for contractors working via limited companies over the next few years. They have proven this with the ever-stricter IR35 legislation and a crack down on expenses over the last decade.

First, They Increased National Insurance

Last year they announced an increase in national insurance for contractors. HMRC and the Treasury are trying to decrease the gap between regular salaries and the combination of salary and dividends. Their first move was to raise type 4 national insurance up to 11% from its previous rate of 9%. They also, incidentally, decreased the dividend allowance from £5000 to £2000. And most commentators believe they will keep going further, taking small steps towards that parity between the self-employed and those in regular employment.

Then They Went For VAT

The Autumn Statement of 2016 brought a completely new change by Philip Hammond, a new category of flat rate VAT, which threatened to raise the VAT bill for a regular contractor limited company up to 16.5% (from 14.5%). How does this work? Below we will look at the figures and how they will affect most contractors.

The Limited Cost Contractor

The changes to the VAT system have brought the idea of a new, all-inclusive category – the ‘limited cost trader.’ The definition of a limited cost trader is someone whose (VAT inclusive) expenditure on any goods will be either (a) less than 2% of their (VAT inclusive) turnover or (b) less than £1000 per annum in total.

The problem here though, and what is annoying for anyone who runs a service-oriented business, is that the concept of ‘goods’ does not include capital expenditure (such as the purchase of assets), drink or food, fuel or vehicles. But worst of all, the purchase of services is also excluded. So, even if you run a minor consultancy firm and have no chance of being caught in the IR35 net, you will still be penalised unfairly. Anyone who runs a service based company will know that there are all kinds of significant outgoings. These might include legal fees, accountancy fees, phone and email, website hosting, journal subscriptions and industry memberships and insurances for example. Yet with all of these (and many more) outgoings, it would still not be possible to escape being categorised as the aforementioned ‘limited cost trader.’

So What Happens Next?

From April 2017, as small service limited company owners, service-oriented contractors will have the simple FRS VAT system (Flat Rate Scheme) like other business owners, but they will be required to pay more for that same privilege. This is crazy when you think that approximately 78% of the UK’s GDP comes from service-oriented businesses!

Wow! What Will It End Up Costing Me If I’m A ‘Limited Cost Trader?’

It will be a significant change, that’s for sure. If you have a service business and you charge your clients £350 per day then after the Flat Rate Scheme changes you will end up more than £2000 per annum worse off if you are on the scheme. If your day rate is £150 you would be £864 worse off, if you charge £250 you would be £1440 worse off and so on. Consequently, if you would be classed as a limited cost trader and know that being on the FRS would raise your VAT bill, then you should give some thought to changing to the regular VAT scheme.

FRS or Standard Scheme?

Whilst the FRS will simplify your VAT and you will only pay a percentage of gross turnover, the standard scheme sees you needing to both add the VAT charged to clients as well as deducting the VAT paid on both the goods and services you have paid for. That difference is then owed to HMRC. That might sound overly complicated but with most companies and individuals having access to online accounting apps which can do this in a second, there really is no complication. So it is just as easy to be on the standard scheme as on the FRS.

Ok, So Should I Quit the FRS?

It’s actually quite an easy calculation to decide if you should remain in the Flat Rate Scheme or quit it. Ask yourself one simple question – do you spend in excess of 1% of your yearly turnover on goods and services that are subject to VAT? If you do, then you would likely be better off changing over to the standard VAT scheme.

In reality, it will probably all depend on the kind of business you operate. Should you be the type of contractor who skirts the edges of IR35 and who has very few outgoings except for travel and subsistence then you are exactly the kind of contractor that the Chancellor is after. You will take a big hit on the FRS rate rise and similarly would not be any better off changing to the standard VAT scheme.

However, should you be the type of contractor who operates a service business in the form of a consultancy style company then you will actually probably do better if you change over to the standard VAT option.

How Do I Leave the Flat Rate Scheme?

That part is actually quite simple. All you need to do is talk to your accountant and ask them to write to HMRC on your behalf, requesting the change. That’s it!

In Conclusion…

Once again, all this seems to be deeply unfair to contractors and the contracting sector has more reason to grumble about their treatment at the hands of Chancellor Hammond. He might have done it all because of what he saw as ‘aggressive abuse of the VAT Flat Rate Scheme’, but in reality, this, like many recent measures seems overly punitive and will likely affect the competitiveness of service businesses, particularly with the timing placing it alongside everything going on with Brexit.  Throw in the ever tightening of IR35 and the changes to national insurance and it is becoming clear that contractors should give serious thought to becoming consultants, especially if they don’t wish to continually be the target of HMRC come budget time!

 

How To Find The Best Accountant for Contracting

Talk to anyone who runs their own company and ask them what the biggest downsides are and the answers will always be the same – dealing with paper work and doing their taxes. The same applies to contractors who decide to set up as a limited company. The whole point of contracting is to go it alone, work for yourself and have the freedom to concentrate on working at what you are good at. What’s the point of doing that if you keep getting bogged down in paperwork and admin?

That’s why for every limited company owner, finding a great accountant is so important. This is someone who is going to become an essential strategic partner to your business and who should be able to both save you money and keep you legal! You will be spending a lot of time talking to this person too. So not only do you need them to be competent, reliable and skilled, but you also want them to be a good communicator and preferably likeable too! Moreover, as a contractor, you need them to specialise in contracting taxation and know their way around every single facet of tax legislation. Go online and you’ll see quite a few  accountants vying for your business. The only question is, which one do you choose?

Here are some ways you can help sort the wheat from the chaff:

Are they genuinely contractor specialists?

Clearly if you are looking to hire an accountant to deal with all your contracting issues you should ensure that they specialise in the contracting market. Why? Because contractors have very specific routines and needs and particular ways of handling their finances. Most limited company contractors will operate in much the same way – getting paid either weekly or at the end of the month and with very few outgoings. They will mostly take smaller salaries and then later they will draw down a larger chunk of their income from dividends. Specialist contractor accountants will know and understand this cycle far better than a standard high street accountant. More importantly, contractor accountants will have a long history of dealing with and managing IR35 compliance and appreciate the effect Intermediaries Legislation can have on take home pay if the contractor falls within its scope. A good contractor accountant will look at the individual situation of their client and advise them whether operating as a sole trader, limited company director or umbrella company employee is best for them. In other words, they will be able to work with you on strategic contractor tax planning. When looking for accountants then, look for ones with years of experience in the contracting sector and who now work solely with contractors. If in doubt, ask them the following questions:

  • How long have you been working as an accountant?
  • How long have you been working solely as a contractor accountant?
  • How much experience do you have advising contracting sector clients?
  • What is IR35 and will I be affected by it?
  • What about Managed Service Companies legislation?
  • Will the Companies Act affect my business?
  • What payroll advice do you normally offer limited company contractors?
  • How would you be able to help me develop my contracting business?

Will I Get My Own Dedicated Contractor Accountant?

The next issue to check is whether you will be given your own account manager who you can get to know and who you can deal with every time something comes up. It is important to make sure you get this dedicated accountant as opposed to an ‘account manager’ or ‘support team’ as you will want someone to be able to phone or email or meet (see below) whenever you have an issue to discuss. This allows you to build a relationship and lets the accountant learn all about you and your business and build a picture of your personal goals and strategies.

That being said, it is also important that they do have a larger team of equally competent contractor accountants behind them. This means that should they go on a holiday (or be off longer because they are sick) there will be other people you can trust who could step in and manage your accounts if necessary.

Will They Offer Face To Face Meetings?

Following on from above, it is almost as important that your dedicated accountant will offer face to face meetings as part of their service. This might not be something you ever actually use, but it is essential that it is available. It is also advisable to meet face to face actually – how can you tell of an accountant is right for you if you don’t meet them at least once for an introductory chat? And more importantly, there may well be times when something is extremely complicated or delicate and private. In these instances a face to face meeting would be preferable to using the phone or email.

How Many Other Contractor Clients Will My Accountant Be Responsible For?

There is a fine balance here. You want your dedicated accountant to have a wide ranging group of contractor clients and a long history of dealing with all different aspects of the contracting market but at the same time you also don’t want them dealing with so many other contractors that they don’t have enough time to really manage your account well. Try to find an accountant who works for a medium sized company and who only has between 75 and 100 contractors to manage.

Do Contractor Accountants Offer Any Kind of Service Guarantee?

Many do and it is worth seeking out the ones that do. As an example, look for accountants that guarantee that they will respond to your enquiries within a certain amount of time.

How Much Do They Charge?

An important factor for any contractor will always be how much their accountant actually charges for their services. Don’t assume that the more someone charges the better their service. Most contractor accountants will charge approximately the same sort of fees (usually between £70 and £200 per month) for their services, which would include things such as running your company payroll, completing your annual company accounts and anything to do with dealing with Companies House. Try to get an accountant who will charge fixed fees rather than any kind of percentage linked to your earnings and make sure they don’t hit you for any ‘entry’ or ‘exit’ fees for their services. It is important to bear in mind that getting a good accountant who you are comfortable with and who can competently manage all of your contracting finances is worth its wait in gold. If you find such an accountant it is not worth losing them because you think their fees are slightly more pricey than someone else’s. They will ultimately end up paying for themselves via the tax savings they make on your behalf and by keeping your finances secure, well planned and compliant.

What Accounting Technology Do They Use?

Long gone are the days of shoving all of your financial particulars in an envelope at the end of the month and posting it to your accountants to be processed. Of course, now everything is done online and is (theoretically) much easier. Before you commit to a firm it is worth checking that you are comfortable with their online accounting system. Whereas some companies might ask you to simply upload an Excel spreadsheet, others might offer a service that is fully online on which you can monitor, update and adjust your accounts in real time. This might be via one of many available software packages or might be a bespoke system designed solely for that company. It is important to ensure you are ok using it, so ask for a demo before committing to the company.

However, there is one important thing to remember. No matter what system they use, it is essential to always bear in mind what might happen if you change accountants or if you get into a dispute with them or they go bankrupt? If they run an online system, you want to make sure you do not leave yourself with no records and all your information held centrally online. It is for this reason that no matter which accountant you choose you should always, always ensure you have your own offline copies of all your accounts, expenses, tax forms and any other relevant financial data.

Do They Offer Any Other Services?

As well as the standard services mentioned above – running your company payroll, completing your annual company accounts and anything to do with dealing with Companies House – it is worth comparing what extra services or ‘value added’ services, they are offering too. These might include offering free setup, setting up of a business bank account for you and providing free limited company incorporation. A good contractor accountant would probably include these for free as a part of the service they offer.

How Is Their Reputation?

As with most services in life, the best companies get new clients by word of mouth. So it is for contractor accountancy firms. If you get a recommendation from another contractor then it is worth checking that accountant out. Ask around and get other contractors to tell you about the accountants they have used, good or bad, and you will very quickly build a picture as to who the reputable companies are. As well as this, go online and do your own research, using contractor forums and occasionally comparison websites. Here however it is worth inserting a note of caution. Third party comparison sites have the potential to be influenced by advertising or by web manipulation and are nowhere near as reliable as word of mouth. The same thing applies to any number of meaningless accreditations  and awards companies might list on their website. These should be investigated and checked as to whether they are given by an independent and highly respected trade body or third party as opposed to being handed out by a body set up by that company themselves!