Although the following mistakes may seem pretty obvious, you would be surprised how often they occur, especially with new contractors.
Forewarned is forearmed as they say, to with that in mind, here are some pitfalls to be avoided when first stepping into contracting
1. Assuming that you don’t need an accountant from the start
A good accountant who works with contractors and freelancers can provide invaluable advice even before you have left your permanent position. For example, they will setup and structure the company shareholdings according to your circumstances (for example if your partner has any unused tax allowance), in order to minimize tax.
An experienced accountant in IR35 legislation, and accredited by IPSE will also be able to suggest extra clauses that should be inserted into your contract prior to signing, to ensure that your IR35 position is clarified.
They will also advice on salary levels, allowable expenses as well as register your company for VAT and PAYE.
You are unlikely to save any money by adopting a diy approach in this area, quite the reverse perhaps, so choose an experienced accountant with a good online portal, such as AccountsNet, and the launch your business will be plain sailing.
2. Using the accountant as recommended by the agent who found you the contract
You may not be aware of this one, but some of the larger agencies can be paid substantial sums for automatically recommending an accountancy provider to their clients. Obviously, this money has to be clawed back, so you’ll often find that those accountants who charge the most, are the most recommended by agents.
As you are under no obligation to use the accountant recommended by your agent, do some research before making a final decision on accountants.
Make sure they are members of professional bodies either CA or ACCA, and that they have many years of experience working with contractors. Also, ensure that you will be dealing with the same dedicated accountant throughout, so that they are familiar with your accounts.
3. Using offshore tax avoidance schemes
You may see adverts claiming very high take home rates that will involve devices such as foreign currency loans etc. These schemes often claim to be certified by HMRC, but none are. What it means is that they have registered with HMRC (a legal requirement).
Tax avoidance schemes, such as EBT’s, are based offshore because the banking requirements are too stringent in the UK, but one by one they are being investigated and closed down by the revenue.
Its also important to say that it is not the scheme owner or directors that are held liable for unpaid tax, it is the contractors involved in the scheme, a list of which will be handed over on demand.
So, to avoid a nasty demand a few years down the line for 50-100k, avoid these at all costs, and tract through your own limited company instead. They percentages are quite as high, but the peace of mind is priceless.
4. Ignoring possible IR35 implications
Although the chances of being selected for investigation by HMRC remains low, if you are and found to be working within IR35, the extra tax to pay can be significant.
From the outset, you should make sure your accountant is accredited by IPSE, which means that they must have regular training on how to interpret contracts with respect to IR35.
They can also suggest changes to reflect the way you actually work, which can be used as defenses against IR35.
Have your contract professionally reviewed and also consider taking out tax a investigation insurance policy, which you can find here
5. Missing tax or statutory returns filing dates
When running your own company, there are key dates that must be adhered to with respect to tax and other information returns. You’ll have to complete an annual return to companies house once a year. which is basically the same each time, unless there has been a change in registered office, directors or share holdings.
If you are VAT registered, then you will probably opt for paying quarterly, and you have one month from the period end to make payment.
When operating through your own limited company and to minimise tax, you generally take a small salary and top it up with dividends throughout the year.
Nine months after your company year end, Corporation tax must be paid on any profits made through the previous year, so this is another deadline.
As will as the above your have your self assessment deadline to meet of 31st January each year.
Missing deadlines carries a penalty and normally an interest on late payment charge also, so its important to know when payments will fall due. and have enough money kept back to meet these obligations.
AccountsNet accountants and our portal software calculate exactly what has to be paid and when, and our clients can see at the touch of a button the company position on vat, paye, corporation tax and we also have a self assessment module built in. A call or email to you dedicated accountant for ongoing advice and support will clarify anything that’s not clear.
6. Using the Companies money as your own
A limited company is a legal entity in its own right. The bank account is in the name of the company and any monies taken by directors must be in the way of dividends.
Its important that you leave sufficient profit in the company to meet its liabilities and if this is not the case then it could be found by HMRC to be trading fraudulently.
Our portal records your dividends and an online report shows how much profit is currently available for distribution.
7. Getting payments in
It will normally be a month after you start your contract before you can issue an invoice. If everything runs smoothly, you will then be paid within a week or so.
But if things don’t go according to plan, you may find yourself running low on cash, so read all of the paperwork from the agency including payment terms, and get a contact name and email address of a person in the payroll department, so you can notify them first if they money fails to reach your company bank account when it is due.
Many viable businesses have went under simply because of late payment by suppliers, so make sure that you have clear payment terms as part of your contract.
8. Starting work without a contract
Although fairly unusual, this has been known to happen. If you have no signed contract in place from day one, then you are leaving yourself open to the possibility of not being paid if for example the project is cancelled at the last minute. Also, any liability insurances are generally dependent on you having a right to be on the client premises, which without a contract would be hard to prove.
9. Being too picky about job offers
Some contracts will be a joy to work on, some not so much, but the important thing as a contractor is that you keep your idle or out of work time to a minimum. That way, you can get the rewards of moving into contracting in the first place. You can after a period of continuous work, have an extended holiday before looking for your next assignment. But agents like to work with candidates who have contracted for several clients using a good mix of technologies and this is generally achieved by being open to taking contracts outside your comfort zone.
10. Over-egging your CV
It something that many of us have done, and is seen as part of the game. You may feel that if everyone else has said they have a particular skill on their CV, then you will be at a disadvantage if you don’t put it on yours. The important point is to ensure you do have at least some exposure to all of the technologies or frameworks that your are claiming.
Make sure that all versions of your CV are consistent, both on and offline and also on LinkedIn, to ensure that when you go for interview you can confidently represent yourself to the client.