Contractor to contractor tips on accounting

Advice from a fellow contractor

This article was written by Graeme, an IT contractor client of Gorilla Accounting.

Over my 8 years of contracting I’ve used different accountants including a local one man band and a large contractor specialist accountant firm but I’m currently with Gorilla Accounting, joining just as they launched. I’ve also listened to many other contractors experiences of running their finances over that time so thought I’d put together a couple of tips to avoid the most common mistakes new, and in some cases, experienced contractors make.
 

1. Make an effort to understand at least the basics of small company finances
Just because you pay an accountant do not expect them to manage everything and run your business for you. Accountants provide a service but ultimately you sign off the company finances which makes you responsible. Read up on ‘wholly and exclusively’ as well as the 24 month rule for expenses, RTI for PAYE, understand VAT and so on. Get the basics so you can have a sensible, informed discussion with your accountant.
 
2. Understand expenses
Expenses are a bit of a minefield as there are so many to consider but make sure you read guides and understand the basics. The magic words are ‘wholly and exclusively for the purpose of the business’ but there are many exceptions and grey areas worth looking in to. There are plenty of guides on the web but try to use ones tailored towards contractors. If it’s not blindingly obvious then run it past your accountant first. Remember also that because the company is paying for it, it doesn’t mean it costs you nothing! If I had a pound for every time I heard someone say ‘I’ll buy the laptop through the company because it’s free’ I’d be writing this from my yacht in Monaco. All you are saving is the Corporation Tax on the item. The rest will eventually end up coming out of your pocket.
 
3. Understand the difference between YOUR money and COMPANY money
One common mistake I hear when talking to contractors is them assuming because money is in the company account, it’s theirs. It’s not! It isn’t yours until is been paid to you via PAYE, dividend, expenses or any other method. A subtle point but one that must be understood. Be aware the company tax year is not the same thing as the personal tax year. It is possible the two may be aligned date wise in some circumstances but that is all. Obvious huh? Not to all unfortunately.
 
4. Never ever take accounting advice from a contractor!
You pay a professional to help you, so make sure the advice you follow comes from them. By all means listen to your colleagues but do your own research. If you have followed the advice in step one you should be able to quickly make a decision as to whether it is something worth looking in to. Weeks in Las Vegas to attend one day conferences, company paying your your home extension because you might use one room as a home office, a company Porsche etc. might all sound like great ideas, but they are not. They are a few of the ones I’ve heard. I’m sure the accountants at Gorilla Accounting have a few tales to tell.
 
5. Don’t understand something? Pick up the phone and speak to your accountant
You pay for a professional service and this should include clear and concise explanations of what is happening to the company money. If you don’t understand, speak to your accountant and make sure you do before you end the call. As mentioned already, you are ultimately responsible so don’t assume the accountant is right. Question them until you are satisfied. If they don’t want to spend the time to explain or brush you off with jargon then it’s on to point 6.
 
6. Poor communication or lack of trust in your accountant?
My advice would be to switch as soon as possible. You must be able to trust your accountant. If that trust has been broken, or they won’t respond to you in a reasonable amount of time, then it’s time to go. The process for changing accountants is pretty straight forward and relatively hassle free. A lot less hassle and and less expensive than getting in to a mess with your current one. Check to see if the new company has SLA’s around call back and email responses for peace of mind. Make sure they meet them when they do!
 
7. Did I say never take accounting advice from a contractor?
That 60 inch 4k Smart TV and surround system for the living room still isn’t going to wash sorry.
 
8. Don’t use the money that belongs to the tax man
So many contractors see their entire balance as money they can use as they see fit. Be aware of what is available and what is ear marked for the tax man. Your VAT for example, and it’s also a good idea to keep the Corporation Tax in the account. So many times I see contractors withdrawing everything in the account thinking their last few payments in the year will cover it and all of a sudden they are out of work with no way to pay. Ending the year with no contract owing 3K VAT and upwards of 20K CT is not a pleasant place to be.
 
9. Build yourself a warchest up as soon as possible
Not quite advice about accountants, but when starting contracting your main goal in your first contract is to get enough money behind you to last a couple of months out of work before your next one. It could be said that could be the main goal of your second, third and so on contracts. It isn’t uncommon to end up out of work for a few months and possibly up to 6 months and more. With that money in the account you can at least breathe easy in dry spells. So many times new contactors will withdraw the lot and then find themselves with no income for a few months or more which can be an awful situation to be in.
 
10. Keep calm and carry on invoicing!!
Your company finances are pretty complex and you will still be finding new things for years to come let alone trying to keep up with changes in legislation, but hopefully I’ve covered enough of the basics to allow you to avoid the common mistakes many new contractors make. I hope it’s been a useful article. Happy invoicing one and all!

2 Comments

  • F_Face says:

    Best thing i ever did was switch to annual vat accounting. With that, it says you pay a fixed estimated 12th every month but, i actually pay the actual vat recieved from every sales invoice the moment the money hits my account.

    And regards CT you can pay in bits during the year. You just put the reference for the year you are paying.

    Consequently i never have a build up of VAT or CT to pay using expected future income. I pay it like our PAYE colleagues – as my company earns

  • Bolshiebastard says:

    Reads like an advert for a certain ‘new’ accountancy group.

    Ive used the same local practice for nearly 20 years. They have a specialist Contractor Department and are very clued up. Personally wouldnt touch the so call ‘big’ internet accountancy firms (those Brothers offices are 7 miles from me) but there you go.

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