In this article, we take a look at the main factors faced by contractors running limited companies with regards to their tax and accountancy affairs and give advice where possible, on how to address these issues.
Remuneration and tax planning
Assuming your company is your only source of income, typically the optimum remuneration policy is to take a small salary- high enough to preserve your entitlement to state benefits, such as the State Pensions, and the remaining balance as dividends.
This is advantageous for tax purposes, because the salary is low enough to utilise your personal allowance and yet no tax or National Insurance should be triggered, and it is a tax-deductible expense for the company. Dividends are then used because a lower tax rate applies to them and they are not subject to National Insurance.
Dividends are only payable if the company has profits to distribute though, so fledgling companies may not always be in a position to pay dividends if they are incurring large start-up costs with little income.
Dividends received by basic rate taxpayers used to effectively be tax-free. But in April 2016, the rules changed significantly. Paying yourself a dividend is no longer as cheap as it used to be, but dividends can still be more tax-efficient than other ways the self-employed pay themselves.
Working From Home
Generally, any costs paid on behalf of, or reimbursed to, an employee (that includes directors) by their employer will be taxable. The employee will then have to claim the personal tax relief themselves and prove that they incurred those costs 'wholly, exclusively and necessarily' in carrying out their job.
Capital gains tax contains a tax exemption for the sale of an individual's private home, known as principal private residence relief (PPR). Where part of the dwelling is used exclusively for business purposes, PPR relief will not apply to the business proportion of the gain. However, HM Revenue & Customs make clear in their guidance that 'occasional and very minor' business use is ignored.
You are required to register for VAT if the value of your taxable supplies exceeds the current set annual figure (£85,000 from 1st April 2017).
If you are making taxable supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, but you would then be required to charge your customers VAT on your sales invoices.
All businesses are required to keep accurate records for both taxation and VAT purposes- and HM Revenue & Customs may have the ability to fine the business for inadequate records. Good bookkeeping practices also benefit you by helping you manage and control your finances, plan for future growth and ensure that your accounts are completed more efficiently. This should help you avoid late filing penalties and allow you time to plan for any shortages in cashflow.
At TaxAssist Accountants, we can offer a range of options for clients who wish to do no bookkeeping whatsoever- right through to those who want to do the majority of the invoice and receipt processing via our online accounts software which is simple to use.
Although an employee's home may be treated as a workplace for tax purposes this is not enough, on its own, to allow the employee to get tax relief for the expenses of travelling to another permanent workplace. Employees are able to claim tax relief on the full travelling cost incurred in the performance of their duties. However, no relief is available for the costs of ordinary commuting or private travel.
Will IR35 affect me?
As you've already ready seen, the tax advantages of operating via a limited company can be significant, but the 'IR35' rules are designed to prevent the avoidance of tax and national insurance contributions (NICs) through the use of personal service companies and partnerships.
The IR35 rules apply if, had the individual sold their services directly rather than through a company, they would have been classed as employed rather than self-employed.
Your local TaxAssist Accountant can offer contract review services- whereby contracts are tested to see if they breach the IR35 rules. Such a review provides you reassurance that should you face an enquiry from HM Revenue & Customs, you stand a good chance of defending the terms of the contract against IR35. They can also review the company as a whole against HM Revenue & Customs' Business Entity Tests.
We can help
If you are new to contract work then we can do the following for you:
- Register you with HM Revenue and Customs
- Set up your Limited Company
- Help you set up a business bank account
- Register for Value Added Tax (VAT)
- Set up your payroll arrangements
- Prepare your company accounts and tax return, and advise you of any corporation tax payable and the due date
- Prepare your personal tax return
- Tax planning advice; for both the company and you personally
- Review contracts for your projects to ensure they are IR35-proof
- Suggest and obtain bookkeeping software for you
Your TaxAssist Accountant gives you peace of mind that your affairs will be handled accurately and in a timely fashion, which leaves you to concentrate on delivering on your contracts.
By Jo Nockels
Last updated May 2013
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.