Accountants for Contractors

As a contractor, it’s essential to have the right support to ensure your finances and business operations run smoothly. Whether you’re working in the IT sector, healthcare, or any other industry, the right contractor accountant can help you to maximize your earnings and minimize your tax bill. Mercian Accountants is here to help you manage your finances, so you can focus on what you do best.

Bookkeeping and Tax

As a contractor, it’s important to have accurate and up-to-date bookkeeping records to ensure that you’re meeting your tax obligations and making the most of your finances. This is where a contractor accountant can help. Mercian Accountants provides bookkeeping, tax, and accounting services tailored specifically for contractors, so you can focus on your work and leave the financial management to us.

Our services include bookkeeping and accounts preparation, incorporation of a limited company, IR35 contract reviews, tax planning and returns, payroll, VAT returns, confirmation statement, income tax and personal tax, corporation tax, and annual accounts. We use the latest cloud accounting software, such as Xero and FreeAgent, to make the process as smooth and efficient as possible.

In addition, we offer IR35 support and guidance to help you determine your IR35 status and ensure that you’re meeting the requirements of HMRC. We also offer wealth management services, including pension and insurance advice, to help you plan for the future.

We understand that every contractor has different needs, which is why we offer customized accountancy packages to meet your specific requirements. Our dedicated accountants are on hand to provide ongoing support, ensuring that your finances are in safe hands.

If you’re looking for reliable and professional bookkeeping and tax services for contractors, look no further than Mercian Accountants. Contact us today to find out how we can help you.

Incorporating a Company

Incorporating a company is a big decision for any contractor, and it’s important to understand the implications and benefits of doing so. Mercian Accountants, as experienced contractor accountants, are here to guide you through the process and provide you with the support and advice you need.

One of the key benefits of incorporating is that it provides limited liability protection, meaning that your personal assets will be protected if the company experiences financial difficulties. This is especially important for contractors who operate in high-risk industries or who have large amounts of debt.

Incorporating a company also enables you to separate your personal and business finances, making it easier to manage your finances and keep your accounts in order. This is particularly important for contractors who want to avoid the confusion that can sometimes come with managing multiple sources of income.

For contractors outside IR35, incorporating a company also opens up a range of tax benefits, including corporation tax and the ability to offset expenses against taxable income. This can result in a lower overall tax bill, which is especially important for contractors who are looking to maximise their income and minimize their expenses.

At Mercian Accountants, we understand the unique needs of contractors and provide tailored accountancy services to meet those needs. This includes company formation and company registration at Companies House, assistance with setting up a registered office, and ongoing support with maintaining your accounts and keeping your records up-to-date.

What is IR35?

IR35 is a UK tax law designed to combat tax avoidance by individuals who provide services to clients through an intermediary, such as a limited company, but would be considered an employee if they were providing the services directly. The IR35 rules determine whether the individual is an employee or self-employed for tax purposes, and if they are considered an employee, their intermediary must pay the appropriate employment taxes.

The IR35 law affects contractors in the UK who provide services through an intermediary, such as their own limited company. If a contractor is found to be caught by IR35, they will be considered an employee for tax purposes and their income will be subject to PAYE (Pay As You Earn) taxes, including employee National Insurance contributions. This can result in a decrease in take-home pay for the contractor, as they will no longer be able to enjoy the tax advantages of operating through a limited company.

The responsibility for determining IR35 status depends on the sector and the size of the employer. When a contractor is inside IR35, the responsibility for paying the correct taxes falls on the intermediary (limited company), not the individual contractor, which can create confusion and administrative burden.

Inside IR35 or Outside IR35?

The determination of whether a contractor is “inside” or “outside” IR35 is based on a number of factors that determine whether the individual is considered an employee or self-employed for tax purposes. These factors include:

1. Control: How much control does the client have over the manner in which the work is performed?
2. Substitution: Is the contractor able to provide a substitute to perform the work if they are unable to do so?
3. Mutuality of obligation: Is there an obligation on the client to provide work and on the contractor to accept it?
4. Financial risk: Does the contractor bear the financial risk for the work they perform?
5. Equipment: Does the contractor provide their own equipment, or is it provided by the client?
6. Right to terminate: Does either party have the right to terminate the contract without incurring a penalty?

The outcome of the IR35 determination depends on the individual circumstances of each contract, and the presence or absence of certain indicators of employment. It’s important for contractors to carefully consider their working arrangements and understand their IR35 status, as failure to comply with the IR35 rules can result in substantial financial penalties.

In the UK, the responsibility for determining IR35 status can fall on the contractor’s limited company, the client (or end-user) or the fee payer, which is typically the agency or company that pays the contractor’s limited company. Whoever is responsible must decide whether a contractor is “inside” or “outside” IR35. If a contractor is inside, the client (or end-user) or the fee payer must deduct and pay the appropriate employment taxes.

It’s important for contractors to be aware of their IR35 status, as the client or fee payer’s determination may not always align with the contractor’s own understanding of their working arrangements. The client may determine that the contractor is inside IR35 and the contractor believe that they are outside IR35; and this can lead to complex problems.

Company Tax and Personal Tax

For contractors in the UK who operate through a limited company, there are different tax obligations for the company and the individual.

Company Tax: The limited company must pay Corporation Tax on its profits. This is currently set at 19%.

Personal Tax: The contractor, as the owner of the limited company, will receive a salary and may also receive dividends from the company’s profits. The salary is subject to Pay As You Earn (PAYE) taxes, including employee National Insurance contributions. Dividends are subject to dividend tax.

If a contractor is determined to be “inside IR35”, their income from the limited company will be treated as employment income and subject to PAYE taxes. This means that the contractor will no longer enjoy the tax advantages of operating through a limited company and their take-home pay may be lower as a result.

It’s important for contractors to understand their tax obligations and to ensure that they are compliant with all relevant tax laws, including IR35. They may want to seek advice from a tax professional if they have any questions or concerns.

Self-Assessment Tax Returns

Self-Assessment Tax Returns are required for contractors in the UK who operate through a limited company and receive income that is not subject to Pay As You Earn (PAYE) taxes, such as dividends. Self-Assessment Tax Returns are used to calculate the total tax owed by the individual for a given tax year, and to ensure that all of their taxable income has been declared.

As a contractor operating through a limited company, you will need to complete a Self-Assessment Tax Return if you receive dividends from your company or if you have any other taxable income, such as rental income, interest from savings, or foreign income. The Self-Assessment Tax Return must be submitted to HM Revenue & Customs (HMRC) by the 31st January following the end of the tax year.

If you are inside IR35, your limited company must pay the appropriate employment taxes and you will not be required to complete a Self-Assessment Tax Return. However, if you are outside IR35 and receive dividends from your company, you will need to complete a Self-Assessment Tax Return to declare these dividends and pay any applicable tax.

It’s important to be aware of your tax obligations and to submit your Self-Assessment Tax Return on time to avoid potential fines and penalties from HMRC. You may want to seek advice from a tax professional if you have any questions or concerns.

Payroll and VAT Returns

Payroll and VAT Returns are two of the key compliance requirements for contractors operating through a limited company in the UK.

Payroll: If a contractor is determined to be “inside IR35”, their limited company must operate a payroll system to calculate and pay the appropriate employment taxes, including employee National Insurance contributions and Income Tax. This involves submitting regular Real Time Information (RTI) returns to HM Revenue & Customs (HMRC) and paying the correct amount of tax and National Insurance by the required deadlines.

VAT: A limited company must register for VAT if its taxable turnover exceeds the current VAT registration threshold of £85,000. If a company is VAT-registered, it must submit regular VAT returns to HMRC and pay any VAT owed. VAT returns must be submitted and any VAT owed must be paid within one calendar month and seven days of the end of the VAT accounting period.

It’s important for contractors to understand their compliance obligations with regards to payroll and VAT and to ensure that they are up-to-date with all required submissions and payments. Failure to comply with payroll and VAT requirements can result in fines and penalties from HMRC.

Tax Planning

Mercian Accountants, like many other accounting firms, may offer tax planning services for contractors to help them minimise their tax liabilities and maximise their take-home pay. The specific services offered by Mercian Accountants vary by assignment, but common services may include:

1. IR35 reviews: To help contractors understand their IR35 status and ensure that their contracts and working arrangements align with their IR35 status.
2. Self-Assessment Tax Returns: To help contractors declare all of their taxable income and ensure that they pay the correct amount of tax.
3. Company Tax planning: To help contractors minimise their company’s Corporation Tax liability by making use of available tax reliefs and allowances.
4. Dividend planning: To help contractors structure their income from their limited company to minimise their overall tax bill.
5. Payroll and VAT compliance: To ensure that contractors are compliant with all payroll and VAT obligations and to minimise the risk of fines and penalties from HM Revenue & Customs (HMRC).

It’s important for contractors to understand their tax obligations and to seek professional advice if they have any questions or concerns. Working with a tax planning specialist like Mercian Accountants can help contractors make informed decisions about their financial affairs and achieve their financial goals.

IR35 Contract Reviews

IR35 contract reviews are assessments of a contractor’s working arrangements to determine their IR35 status, i.e. whether they are “inside” or “outside” IR35. The IR35 status of a contractor is important because it determines the tax treatment of their income, with “inside IR35” contractors being subject to employment taxes, such as employee National Insurance contributions and Income Tax, while “outside IR35” contractors are not.

IR35 contract reviews typically involve an examination of the terms and conditions of the contract, the working practices of the contractor, and any other relevant documentation or information.

It’s important for contractors to be aware of their IR35 status and to ensure that their contracts and working arrangements align with their IR35 status. If a contractor disagrees with the IR35 determination made by the client or fee payer, they may need to take steps to challenge the determination and provide evidence to support their case.

It’s also important for contractors to be aware that the rules around IR35 in the private sector changed in April 2021 to align with the public sector, and that the responsibility for determining IR35 status shifted from the contractor to the client or fee payer in the private sector too. Contractors may want to seek professional advice to ensure that they are fully compliant with the new rules and to minimise the risk of any potential penalties or fines from HM Revenue & Customs (HMRC).

What is an Umbrella Company?

An umbrella company is a type of employment agency that provides a payroll service to contractors who work on temporary assignments. Contractors work for the umbrella company as employees, and the umbrella company acts as the employer, responsible for paying the contractor’s salary, taxes, and National Insurance contributions.

The contractor’s client pays the umbrella company for the contractor’s services, and the umbrella company in turn pays the contractor a salary, minus the relevant taxes and deductions. This structure enables contractors to avoid the responsibilities and costs associated with setting up and running a limited company, and to receive a regular salary with the same employment rights and benefits as any other employee.

It’s important for contractors to understand the terms and conditions of the agreement with the umbrella company and to be aware of the fees and charges that may be associated with using an umbrella company. Contractors may also want to seek professional advice to ensure that they are fully compliant with their tax obligations and to minimize the risk of any potential penalties or fines from HM Revenue & Customs (HMRC).

In general, using an umbrella company can be a convenient and straightforward solution for contractors who want to simplify their tax and payroll obligations, but it may not be the best option for all contractors. Factors such as the length of the assignment, the contractor’s IR35 status, and the contractor’s financial goals will all influence the decision of whether to use an umbrella company or not. It’s always important to weigh the benefits and drawbacks of using an umbrella company, and to seek professional advice if needed, to make an informed decision that is right for the individual contractor’s situation.

Choosing the right accountant for your contracting business

Is crucial for success and peace of mind. Mercian Accountants understand the unique requirements of contractors, and our team of experts can help you navigate the complex world of tax and accountancy, allowing you to focus on what you do best. Our dedicated accountants offer a range of services, from IR35 contract reviews to limited company setup, tax planning, and wealth management. With access to cloud accounting software such as Xero and QuickBooks, and a commitment to providing the best in record keeping and tax services, Mercian Accountants is the right choice for contractors. Get in touch today to learn more about how we can support you in your business journey.