The first time somebody becomes a contractor there are ample opportunities for them to make mistakes. We have come across many types of freelancers and contractors over the years and perhaps the ones most likely to make these types of mistakes are the ones who know ‘everything about nothing‘. You will probably know the type, don’t let that be you.
Starting work without having a contract in place or getting the contract reviewed for IR35. Your client will often have a pressing need for your services and getting you through the door will be the main priority. A contract is necessary as it defines each party’s responsibility and the scope of the work, so any disputes can be easily resolved. Also it is a vital indicator of whether you are inside or outside of IR35 and ultimately what tax you pay.
New contractors often make the mistake of not making this mental separation, that the company’s money is not their own money. This can lead to problems such as VAT and corporation tax money being spent. Just because there is a positive bank balance it does not mean the company is solvent.
Expenses are an allowable deduction for corporation tax and you can only claim for expenses that are wholly and exclusively incurred for the purpose of your trade. If I had a pound for everyone who has attempted to put a business suit through their business and claimed they only wore a suit for business purposes I would be a rich man. Listen to your accountant and do not abuse expenses as HMRC will pickup on any expenses incorrectly claimed and fines and penalties will accrue.
Beware of any scheme which promotes take home rates of 85-90%, we have never come across one which we think will not come back and bite you, and we have seen a few people who have used them and have had years of trouble and stress from HMRC, if it is too good to be true then it probably is.
We often get contractors who have worked solidly for five or six years, and then through change of circumstance, such as change of location, look for an accountant nearer to where they are now located and talk to us.
We find these contractors will have been so busy they haven’t taken the time out to chat through their business with their accountants, and obvious tax savings have been missed and are now lost. Savings which are lost can run into the tens of thousands of pounds.
An hour chatting to your accountant per year, may be your most lucrative hour of the year.
Always use a qualified accountant or tax advisor, and be wary of any advice given to you by a colleague, friend or online forum. Yes use them to guide your questions but don’t take as fact what is said as it is likely to land you in trouble with HMRC.