Introduction — The IT Contractor’s Financial Reality
Working as an IT contractor gives you flexibility, flexibility with your day rate, range of projects you can choose from, and control over how you do your job. But it also means there is some degree of financial stress because you will be dealing with many different types of documents – invoicing. VAT (quarterly or annual), payments from clients, expense reports, payroll taxes (which may vary depending on the size of your company), dividends (if applicable), and filing dates to pay your tax.
For this reason, accounting for IT contractors differs greatly from traditional bookkeeping. Generally speaking, an IT contractor will need to have the support of an accountant who has experience working with the limited company structure. Understanding IR35, dealing with VAT/sales tax and payroll, managing dividends and claiming for business expenses.
This guide will help you identify the kinds of support needed and what to look for when you are searching for a qualified contractor accountant.
Why IT Contractors Need a Contractor Specialist Accountant
An accountant who has worked with IT contractors understands their work type well. The accountant should also have knowledge of how contractors get paid, as the way that contractors receive payments can often be irregular due to changing contract terms and types of work performed, which may require tax planning throughout the year.
Many IT contractor specialist accountants operate as Limited Companies and have multiple clients they provide services to. Therefore, they require assistance on: salary, dividends, VAT, Corporation Tax, expenses and IR35. A general accountant will be able to prepare and submit your tax returns, while a specialist accountant can assist you with planning ahead of any errors, and maximising the amount of take-home pay you receive, legally!
How you choose your accountant is also important, there are some contractors who operate as Sole-Traders, while others choose to operate as Limited Companies. The best option will depend on: the total income of the contractor; the requirements of each of the contractor’s clients; the level of risk associated with the contractor’s work; and the contractor’s desire for long-term sustainability.
If record-keeping is erratic, a contractor specialist accountant may not receive their maximum allowances (for example Child Benefit) or may have unexpected tax bills, poor dividend planning or issues related to IR35 compliance. IT Contractors should have a proactive approach to accounting, not just at year-end.
What Do Contractor Accountants in the UK Actually Do?
The services provided by a contractor accountants in the UK extend well beyond the preparation of annual accounts. A good accountant will help you keep your finances organised throughout the entire year.
Some examples of typical services that a contractor accountant might provide to you include:
- Monthly bookkeeping
- VAT registrations and returns
- VAT compliance with Making Tax Digital requirements
- Corporation tax returns
- Year end accounts
- Self Assessment tax returns
- Director payroll and RTI (Real-Time Information) submissions
- Planning salaries and dividends for directors
- Advice on IR35
- Advice on allowable expenses
- Visibility of cash flow
For Information Technology (IT) contractors, these services can be invaluable because contractors have an unpredictable income that can change between contracts. A good contractor accountant will also help you to identify how much tax you are accumulating, how much you can safely withdraw from your business, and whether your company has sufficient financial health.
IR35 Explained: The Biggest Financial Risk for IT Contractors
IR35 is one of the Top Tax Risks facing Contractors in the UK because it will determine whether your working relationship / arrangement is truly self-employment through your company or whether it has a greater resemblance to employees.
If you are outside of IR35 you may have the opportunity to access a more Tax Efficient Structure by using dividends and allowable expenses whereas if you are inside of IR35 you will be taxed similarly to an employee thus receiving less take-home pay.
The main assessments to being compliant with IR35 are Substitutable Work, Control over the Way/How/When and Where the Work is performed, and Mutuality of Obligation where both parties expected that the contractor specialist accountant would continue to perform work beyond the existing contract terms.
A Specialist Contractor Accountant will be able to help you assess and review your contract in order to highlight any potential risk areas and provide guidance before acceptance of contract work. If you disagree with a Status Determination then you should request a Status Determination Statement and gather evidence to support your challenge to the IR35 Status Determination.
Smart Tax Planning Tips for IT Contractors
To manage your taxes, you will need to use smart tax planning strategies. For example, if you are a contractor with a limited company, then it is very important that you plan your salaries and dividends in the correct way. This will allow for a proper balance of income tax, National Insurance, corporation tax and cash flow personally.
Other areas where you can do some useful planning:
- Pension contributions made through your limited company
- Claiming expenses that you can claim
- Keeping a record of all the software, equipment, training & home office costs you have incurred for the business
- Timing income into different tax years
- Review what your options are with VAT
- Look to see if you’re eligible for R&D tax credits for certain technical work done
Don’t wait until the end of the year to do your tax planning; if you do it all through the year it will be more effective at helping to manage your taxes when they are due.
Professional Bookkeeping Services in London for IT Contractors
The basis of good accounting for IT contractors is properly maintained books of accounts. If you don’t know what your Right Tax Financial Report is going to be, then planning for your taxes is like playing roulette.
For Contractors based in London who wish to keep track of their income and expenses: Budget Accountants provides bookkeeping services where you have all your records & transactions including Invoices, VAT, and Reports professionally maintained to keep your Business more efficiently operated.
All of the Reliable bookkeeping services London that I receive from Budget Accountants will typically include, recording your transactions, tracking your invoices, preparing your bank reconciliation, helping prepare your VAT return and providing monthly reports that show you what’s happening in your Business.
Contractors can always benefit using Cloud-based accounting software like Xero, FreeAgent or QuickBooks, as it allows them access to their Financial Information in real-time.
How to Choose the Right Contractor Accountants in the UK
When selecting contractor accountants in the UK don’t just consider their pricing when choosing yours; you should also check for the following items:
Do they:
- Have a focus on technology contractors and IT contractor accounts?
- Understand the implications of IR35 on contractors?
- Utilise cloud computing technologies for accounting/accounting systems?
- Provide fixed price monthly packages?
- Assist contractors with VAT, payroll, Corporation tax and Self Assessment tax returns.
- Designate a dedicated accountant for your account?
- Provide clear explanations when answering clients’ questions?
Examples of red flags are vague pricing structures, lack of support for IR35 compliance, slow response times to client inquiries, confusion regarding pricing structures, etc…..
Why Choose Budget Accountants as Your Contractor Accountant
Budget Accountants offers practical, effective accounting for IT contractors services to contractors, self-employed individuals, limited company directors and small businesses across the UK.
For IT contractors, some of the ways we can assist you include bookkeeping (including VAT returns), payroll (including corporation tax), self-assessment, advice on IR35, and year-end accounts. Our philosophy is straightforward: transparent pricing, direct communication and practical advice.
To support you with on-going, responsive contractor-based accounting, we can provide remote support regardless of your location in London or the UK.
Conclusion
IT contractors require additional assistance beyond simply filing their taxes. IT contractors can benefit from receiving clear guidance regarding IR35, VAT, payroll, bookkeeping, salaries/ dividends, business expenses, and tax planning.
If you are a contractor, freelancer or limited company director within the IT contractor community. Working with experienced contractor accountants will help keep you compliant and aid you in making sound financial decisions.
Call To Action: Book Your Free Consultation Today with Budget Accountants for Contractor Accounting, Bookkeeping, Tax or IR35 Support!
FAQs
1. What does an IT contractor’s accounting involve?
The accounting for IT contractors generally involves handling an IT contractor’s financial affairs, or assisting a contractor to do so through the company’s financial affairs (assuming he/she works through a company). The contractor will need to manage invoices; expense claims; VAT; Payroll; manage dividends; prepare returns; and ensure compliance with the IR35 provisions.
2. What is the advantage of using an accountant with specialist knowledge of contractors?
The reason why IT contractors require an accountant with specialist knowledge of contractors is because the way in which contractors manage their finances is different than traditional employees. A specialist can provide valuable assistance in terms of determining whether the contractor is IR35 compliant, how to plan their salary/dividend, how to keep accurate VAT records, how to maintain an accurate expense record, and how to comply with other tax laws.
3. What does an accountant for IT contractors do?
A contractor accountant provides services such as bookkeeping, VAT Return preparation, payroll preparation, Corporation Tax Return preparation, Contractor Self-Assessment preparation, year-end accounts preparation, advising on IR35 related issues and assisting with financial planning.
4. Why is bookkeeping important for IT contractors?
Good bookkeeping is important because it helps keep all records related to income, expenses, invoices and taxes organized and in good condition. With well organized and accurate records, IT contractors can easily keep track of their cash flow and are less likely to make errors when filing their tax returns.
5. Do Budget Accountants provide bookkeeping services to contractors in London?
Yes, Budget Accountants provides bookkeeping to contractors in London, and will assist contractors/freelancers/directors of limited companies/small business owners to maintain all required records, invoices, VAT returns, reports and day-to-day accounting records.
