You should check your potential accountant is a contracting expert prior to signing up to their services. James Abbott of contractor accountant Abbott Moore LLP offers ten questions that can help.
“Contractors not only have many requirements that are different from other small businesses, but they are also subject to specific, and highly complex tax legislation,” explains Abbott. “Many high street accountants may not have the expert knowledge of contracting to ensure they deliver the right level of expert service. So it’s important to ensure your accountant ‘gets contracting’ from the start.”
Abbott suggests contractors ask the following ten questions to find out an accountant’s level of expertise:
1. What is IR35 and how might it affect me?
The ‘contractor tax’ impacts on nearly every aspect of how a contractor operates. Although it overlaps into employment law and uses many of the same tests and case law precedents, IR35 is actually tax legislation. That means a contractor accountant must have an in-depth understanding of IR35 to ensure that they understand how best to support contractor clients, either through advising on how to stay outside it, or how to pay a salary if inside.
2. Would I be affected by the settlements legislation Section 624 (ITTOIA) 2005? And if so, what advice would you offer?
The settlements legislation (formerly known as Section 660) ‘family’ or ‘husband and wife’ tax gained notoriety through the Arctic Systems case. There are several measures contractors can take to ensure they don’t fall foul of this and related tax legislation dating back to the 1920s. Understanding the key differences between married couples and civil partners, unmarried partners and other family members means contractors can take advantage of the law as it currently stands whilst keeping a watchful eye on upcoming changes. A contractor accountant should be able to advise on these measures.
3. What payroll advice do you generally offer limited company contractors?
Generally, the most tax efficient way for contractors to take remuneration from their business when outside of IR35 is to take a low salary up to the National Insurance (NI) threshold and extract the remainder as a dividend. But this approach might not suit all contractors, so a contractor accountant should be able to offer contractors tailored advice on how best to take remuneration from their business. A contractor accountant must also have an in-depth knowledge of the National Insurance Contribution (NIC) rules as they relate to limited company directors.
4. Can you advise me on how to ensure I do not fall foul of the Managed Service Company (MSC) legislation?
Since its introduction in 2007, the Managed Service Company (MSC) legislation has redrawn the boundary between limited company owner and professional advisor. Contractors are the decision makers within their businesses, not their accountant, and a contractor-savvy accountant should understand this.
5. Are there other tax efficient routes to extracting earnings from my business?
For most contractors, after taking a low salary and dividends, the most tax efficient method of extracting remuneration from their contractor limited company over the long term is via company pension contributions. There is also a commensurate corporate tax deduction. A contractor accountant will alert a contractor to this option, and also suggest that contractors consult an independent financial advisor for advice.
6. Can you explain how expenses will work if I contract through my own limited company?
Contractors are not self-employed, they are employees of their limited company. This is a subtle distinction missed by many high-street accounts and can cost a contractor dearly as a result. Contractors should ensure their accountant understands the expenses rules, particularly those pertaining to travel and subsistence, as they apply to employees and not the self-employed.
7. Will the Companies Act affect my businesses and how I run it?
Contractors are not sole traders; they are owner managed and employees of their own limited companies. That means the Companies Act applies to much of what they do, and governs bookkeeping and accounting processes. In particular, contractors must adhere to Companies Act requirements for record keeping relating to dividends and board minutes.
8. Can you tell me how much experience you have advising contracting sector clients?
Accountants are often the first business peer a contractor turns to when seeking business advice. That means a contractor accountant must understand how contracting works to be able to offer the best advice. For example, a contractor might have the option of renewing a contract, but they’ll lose the benefit of claiming expenses because the 24-month rule will kick in, so from a tax efficiency perspective, may be better off turning down the renewal. If the market is really tough, though, a contractor accountant in tune with the sector might advise the contractor to sit tight. That’s because having a less tax efficient income is better than having no income.
9. How would you help me decide on my personal financial strategy?
A contractor who has a clear idea of what they want from their contracting career from the outset will have a much greater chance of achieving it. This sounds obvious, but if a contractor’s goal is, for example, early retirement, then their accountant can advise on measures to take, such as timing of dividends, that will put the contractor in the best possible tax position to achieve it.
10. In what ways might you be able to help me develop my contracting business?
Many contracting businesses evolve beyond just a single contractor generating fees from a succession of assignments. Some contractors develop intellectual property in their business, such as new software, and need to consider growth strategies, such as licensing options. Others decide to grow their business through hiring other contractors first on a subcontract basis, and then as employees. A contractor accountant must be able to grow with their client’s business.
Abbot concludes: “An accountant is often a contractor’s only business sounding board, so it is important that the accountant understands the nature of their client’s business.”