Published on Wednesday, July 6, 2016 in category:
I’m lucky enough to speak to dozens of newbie and early stage contractors each year. Many ask the same questions and make the same mistakes, so here’s our list of the Six Things Every Newbie Contractor MUST Do:
1. Get your contract reviewed
The wording of your contract can have a big effect on how much tax you pay. Many of you will have heard of an IR35-friendly contract, and while the working practices are more important, a well worded contract will go a long way. Just make sure the working practices are reflected in the contract.
With the greatest of respect, very few contractors, especially newbies, are going to have the necessary expertise to properly understand the nuances required when reviewing a contract for IR35 purposes. Do you really understand Mutuality of Obligation, Direction & Control or Right of Substitution? Thought not. Google “IR35 contract review" and get an expert in. At the very worst ask your accountant. Although unlikely to give you a review, they might be able to give you an unofficial opinion. Under no circumstances seek guidance from HMRC. Turkeys tend not to vote for Christmas.
2. Really, carefully consider your trading structure
Make sure the trading vehicle you use makes sense for you, both for financial and non-financial reasons. The limited company route is normally the best financially but there is a fair bit of admin work and responsibility. Weigh up whether this additional burden is worth the additional income. If it is, look at Limited Company. If not, maybe consider Umbrella, or even, shock, a salaried staff position.
If you’re a freelancer, rather than a contractor through an agency, you may also be in a position to consider the sole trader option. If you’re not earning huge amounts, and liability is not too much of a concern, this might be an option.
3. Get an accountant on board. NOW.
Yes, I’m biased. Of course I am. But I really do believe that an accountant should be appointed as soon as possible. If you can, do this before you’ve set up. That way they can offer guidance on the trading structure and perhaps point you in the right direction as far as banking facilities and insurance is concerned.
Remember there are many different types of accountant out there so be careful to pick the right one. The main choices are between: local or nationwide; contractor-specialist or general practice; online or spreadsheet. Think about how you’d like to operate with your accountant, speak to friends or colleagues (who are contractors like you and who operate the way you do), then contact a couple with a list of questions. How they answer and interact with you is almost as important as what the answers are. If you like them, then you’re more likely to have a rewarding experience with them. Remember, location isn’t important. While you probably think it’d be good to have the ability to meet with your accountant whenever you have a problem, the reality is, it really isn’t necessary. I think I’ve met less than 10% of my clients, and probably less than 1% more than once.
There is a new breed of accountant springing up who offer the personalised service of a local accountant with the industry specific expertise of a contractor national. They will often use an accounting app like FreeAgent as their primary tool for client work.
Expect to pay around £100 per month for your accounts.
4. Nail the expenses
Make sure you know what expenses you can, and can’t, claim. It’s also important that you know how to pay for the expenses: some expenses are not allowable unless they are paid directly from the business bank account, and where possible you should arrange for the invoice/contract to be in the company name, rather than your own.
This isn’t the place to explain what you can claim for in your expenses. BroomeAffinity have prepared an Expenses Guide which you can get from us, free, by emailing or calling your local office.
5. Separate business and personal finances separate
This is very important and you need to do this from the start. The company’s money does not belong to you and you shouldn’t treat it like it does. That means you should only use your business bank account for business expenses and you should resist the temptation to dip into the business account when you don’t have any personal funds. Set a realistic drawing strategy for each month, and stick to it. Don’t, whatever you do, withdraw funds which have been reserved for VAT or Corporation Tax. It isn’t your money and you should not spend it.
6. Make sure your payment terms suit you - and are kept to
Be careful of accepting clients or agencies standard terms. Many will try to put you on thirty days, and, if you’re invoicing monthly then you could be looking at two months without payment, that’s assuming payment is made on time. Try to get your terms down to seven days, and then make sure they are stuck to. Invoice as soon as the billing period is over, email the invoice to accounts and on day seven, send a reminder email. On day eight call them. And then be strict about payment terms. Threaten to walk off site if need be. Paying bills late, especially by big companies, is the new normal. If you need to be a pest to get paid, be a pest. Otherwise you might be seen as a soft touch.
Yes, there are a lot of other things you need to consider in your contracting career and these need will evolve over time, but for starters, stick to the above and you won't go far wrong.