Updated: 8th January 2020
HMRC can impose significant penalties on freelancers and contractors who fail to comply with their accounting requirements. Maintaining proper books and financial records, and filing tax returns on time, is one of the most important business responsibilities - HMRC can investigate your working practices and tax affairs at any time.
A number of accounting issues need to be considered when working freelance or as a contractor, and although some simply require a consistent approach – completing your books regularly, for example, and filing tax returns when needed – others benefit from a qualified accountant’s input to make your business more tax efficient.
With efficiency in mind, here are just a few suggestions to keep your business finances in order:
The Intermediaries Legislation, commonly known as IR35, was introduced by the government in 2000 as a deterrent to tax avoidance. HMRC believed some contractors were working as ‘disguised employees,’ with both the contractor and their client paying less tax as a result. To combat this, HMRC has the power to demand a ‘status review’ during which they scrutinise the wording in your contracts, and compare this to your working practices.
If you’re a contractor providing personal service via your own limited company, it’s important to establish whether you fall under IR35 rules. These essentially mean you would pay tax and National Insurance under the PAYE scheme, rather than taking a small salary from your own company, and the remainder of your remuneration via dividends which attract less tax.
At the end of your company’s tax year you would need to calculate what is termed the ‘deemed payment’ to establish your tax and NI liability under IR35 rules. This involves deducting allowable expenses, plus 5% for the costs of running your company.
From this figure, any employer NICs and your salary should be deducted. If the resulting figure is higher than zero, you’ll be liable for further tax.
For more information and advice on your accounting responsibilities as a freelancer or contractor, or to deal with IR35 legislative requirements, contact our expert team at Real Business Rescue. We have an extensive network of 77 offices offering confidential director support across the UK.
12th August 2020
The UK economy has officially fallen into recession after suffering the sharpest downturn on record between April and June of this year.Read More
5th August 2020
The British Chambers of Commerce (BCC) has called on the chancellor of the exchequer Rishi Sunak to change his approach to providing support to businesses across the UK economy.Read More