Your guide to bookkeeping for contractors

You’ll also know you’re meeting HMRC requirements for record keeping and tax. If you set up a limited company you’ll need to submit regular and accurate annual accounts to Companies House. When your turnover is above £85,000 you’ll also need to register for VAT. 

 

Perhaps more importantly, you’ll also have someone on hand to give you advice and provide useful financial reports. 

 

When you start out as a contractor, it’s quite a change from being an employee. As a business owner you’ll have financial responsibilities whether you’re working as a sole trader or company director. 

 

It’s important to keep your business and personal finances separate, so you’ll need a business bank account. Your bookkeeper can help you review different accounts so you can choose one that suits your business. 

 

Your bookkeeper can also give you advice about your allowable expenses and this will help minimise the tax you have to pay. 

 

Generally, your bookkeeper keeps track of your: 

 

Good records for your business help to keep everything running smoothly. If you use accounting software in the cloud it’s much easier for you and your bookkeeper to share information. 

 

Making Tax Digital (MTD). Making Tax Digital or MTD is intended to make managing taxeasier and more efficient. The plans have been phased in over a number of years, so it isn’t new. Since April 2022 all VAT registered businesses are required to submit their returns digitally using HMRC compatible software. If your turnover is approaching the VAT threshold you’ll need to register using a Government Gateway account. MTD requirements don’t yet apply to income tax or Corporation Tax. 

 

Self Assessment Tax Return (SATR). You can receive a salary from your limited company via payroll, even as a director and only employee. As well as salary and expenses this can include Pay as You Earn (PAYE) tax and National Insurance Contributions (NICs). However, it could be more tax efficient to pay yourself a smaller salary. This minimises your tax and NICs liabilities and you can make up the rest with dividends. If you do this you’ll need to submit an SATR. 

 

Construction Industry Scheme (CIS). If you’re a contractor in the construction sector CIS is likely to apply to you. If you’re a CIS-registered subcontractor then 20% tax is deducted and sent to HMRC for tax purposes. If you aren’t registered, 30% is deducted. CIS doesn’t apply to VAT or the cost of materials. 

 

IR 35. Many sectors, such as IT consulting, for example, are affected by the IR 35 rules. These apply if the business you’re contracted to has control over how your work is completed. This includes your working hours, where you must work and whether you must continue to do work they give you. If these things apply then HMRC argues you’re effectively an employee for tax purposes.