Dedicated advice for freelancers and contractors

Accountancy advice for contractors and freelancers including IR35

HMRC has the authority to levy substantial penalties on freelancers and contractors who neglect to adhere to their accounting obligations. Ensuring accurate bookkeeping, maintaining proper financial records, and submitting tax returns punctually are among the utmost crucial business responsibilities. HMRC retains the right to scrutinise your working practices and tax affairs at any point in time.

Working as a freelancer or contractor involves various accounting considerations. While some require a consistent approach, like regularly updating your books and filing tax returns when necessary, others can be optimised for tax efficiency with the expertise of a qualified accountant.

Here are some suggestions to help you maintain efficient business finances:

1. Open a separate business bank account

If you’re a contractor operating through your own limited company, a business bank account is a necessity. However, self-employed freelancers may not always opt for a separate business account. This can lead to confusion during accounting, as business expenses get entangled with personal costs.

2. Put money aside each month for your tax bill

Unexpected tax bills can have severe consequences, potentially impacting the long-term viability of your business. Payments on account can be especially concerning for freelancers new to the field, as they may face paying one and a half year’s tax liability in their first year.

It’s crucial to calculate income tax, Class 2, and Class 4 National Insurance contributions monthly, setting aside the necessary amounts in a separate interest-earning account to cover the bill at the end of the tax year.

3. Keep track of your cash flow

Maintaining monthly records of your income and expenses makes the annual tax return process much simpler. This practice allows you to foresee your cash requirements in the upcoming months, have a clear understanding of your tax liability throughout the year, and allocate the correct amounts for future obligations.

4. Claim your allowable expenses

As a freelancer or contractor, you have the option to deduct certain business expenses from your profits, thereby reducing your tax liability. If you work from home, this can include a portion of the associated costs.

While using the flat rate for ‘use of home’ expenses may seem easier, it’s advisable to assess whether you might benefit more from the comprehensive, room-based calculation. This method takes into account the number of rooms in your home and the extent to which you use them for work.

 

What is IR35 legislation? 

The Intermediaries Legislation, commonly referred to as IR35, was implemented by the government in 2000 to discourage tax avoidance. HMRC identified instances where contractors operated as ‘disguised employees,’ leading to reduced tax payments for both the contractor and the client. In response, HMRC is empowered to initiate a ‘status review,’ during which they examine the language in your contracts and compare it with your actual working practices.

Read More:

• IR35: How this could affect you and your company
• Understanding IR35, CEST, and the new April 2020 rules
• IR35: How the Public and Private Sector reforms affect contractors
• IR35

 

How can I calculate IR35 liability as a contractor?

If you’re a contractor delivering personal services through your own limited company, it’s crucial to determine whether you come under the purview of IR35 rules. Essentially, this would entail paying tax and National Insurance through the PAYE scheme, as opposed to receiving a modest salary from your company and the remaining compensation via dividends, which incur lower taxes.

At the conclusion of your company’s tax year, you must compute the ‘deemed payment’ to ascertain your tax and NI liability under IR35 rules. This calculation involves deducting allowable expenses, along with 5% for the operational costs of running your company.

Subtract any employer NICs and your salary from this total. If the resulting amount is greater than zero, you will be responsible for additional tax.

For further guidance on your accounting duties as a freelancer or contractor, or to address IR35 legislative requirements, reach out to our knowledgeable team at Vanguard Insolvency.