Providing accountancy exclusively for contractors, freelancers and small businesses, DNS offer a comprehensive range of value-for-money services across a range of business sectors:
- Computer contractors
- Health professionals
- Freelance consultants
- Management consultants
- Interim managers
- DNS will maximise your income by minimising your taxes;
- DNS will protect you and ensure you comply with IR35 legislation;
- DNS operates “100% satisfaction guarantee” which means you do not pay if you are not satisfied.
I have heard about IR35, do I need to worry? what is it?
As a contractor it is imperative you are aware of IR35 legislation, what it entails and the risks involved. Even if you are relatively new to contracting, you should not ignore IR35, as it affects everyone in the contracting business. In a Nutshell, IR35 legislation tries to tax your company income as employment income meaning that all the tax advantages gained are almost lost.
Who does IR35 legislation affect?
IR35 affects contractors working through a limited company. The Intermediaries Legislation (IR35) came into force in April 2000 and was designed to deal with “disguised employees”, individuals that the government believed were taking advantage of corporate structures when they should have been taxed under employment as any other employee. The rules only apply to “relevant engagements”, that is, where an individual provides services to a client through an intermediary (a limited company) and, but for the existence of the intermediary, the income would be treated as that of an employee if the individual had contracted directly with the client.
What are the implications?
All the income earned is treated as employment income and therefore the tax advantage is lost. It was intended that IR35 legislation would ensure compliance with tax law so that apart from specified deductions, all money received by the intermediary in respect of relevant engagements would subject the individual to Schedule E Income Tax and Class 1 National Insurance, thus all dividend payments and many business expenses were not allowed.
How to determine if I am outside IR35 or Inside IR35?
To determine whether you are inside IR35 or outside IR35 there are three main tests to establish employment status:
- Control: A worker is not an employee unless there is a right to exercise control over the worker. This could be a right to control what work is done, where or when it is done or how it is done. The right of control is what is important and not the actual control.
- The right to get a substitute or assistant to do the job: personal service is an essential element of an employment contract. A self-employed person has the freedom to choose whether to do the job himself or hire someone else to do it for him; he may hire someone else to provide substantial help.
- Mutuality of obligation: There should be various mutual obligations within the contract. The obligation to perform and be paid for performing would form part of any contract – but the mutual obligations needed for a contract of employment consist of more that this, there needs to be obligation to offer, and an obligation to accept, future work.
There are many other factors:
Financial risk: There must be real risk of financial loss. For example, an individual who risks his own money by investing in assets needed for the job and pays their own running costs and overheads is most probably self-employed. Financial risk could also take the form of working on a fixed-price for a job for example, with the risk of bearing the additional costs if the job overruns. However, this will not necessarily mean that the worker is self-employed unless it is clear there is real risk of financial loss.
Right of dismissal: In a service contract there is no right to terminate an engagement by giving notice of a specified length, which is a common feature of an employment contract. A service contract usually ends when the task is complete or if the terms of the contract are breached.
Provision of equipment: the self-employed contractor generally provides all the equipment required for the job. The provision of significant equipment or materials that are fundamental to the engagement is of particular importance. For example, an IT consultant is engaged to undertake a specific project and works exclusively at home using his or her own computer equipment; this will be a strong indicator of self-employed status. But a worker who is provided with office space and computer equipment suggests employment, even if the worker occasionally uses his own computer at home.
Basis of payment: Independent contractors tend to be paid a fixed sum for a particular job. Employees, on the other hand, are paid a fixed wage or salary weekly or monthly and often qualify for additional payments such as overtime, a long-service bonus or profit share.
Intention: The reality of the relationship matters. It is not enough to call a person “self-employed” if all the terms and conditions of the engagement point towards employment. However, if other factors are neutral, the intentions of the parties will then be the deciding factor in employment status.
Profit from sound management: A person whose profit or loss depends on his capacity to reduce overheads and organise his work effectively may well be self-employed. People who are paid by the job will often be in this position.
Part and parcel of the organisation: Establishing whether a person becomes “part and parcel” of a client’s organisation can be a useful indicator in some situations. For example, someone taken on to manage the client’s staff will normally be seen as part and parcel of the client’s organisation and is, therefore, likely to be seen as an employee.
Length of engagement: Long periods working for one client may be typical of employment, but will not stand up as conclusive evidence. It is still necessary to consider all the terms and conditions of each engagement. Regularly working for the same client may indicate that there is a single and continuing contract of employment.
Employee benefits: Employees are often entitled to sick pay, holiday pay, pensions and expenses. The absence of these benefits does not necessarily mean that the worker is self-employed – especially in the case of short-term engagements – where such payments would not normally feature.
When the facts have been established it is appropriate to look at the overall picture: whether it indicates a person in business or one working as an employee. If the evidence is evenly balanced the intention of the parties may then decide the issue.
Having looked at a number of standard agency contracts HMRC has, as expected, suggested that such contracts fail IR35. HMRC will consider only whether specific contracts fail the test and will not give any clearance on standard contracts.
The conclusion, bearing in mind all that is written above, is that if you sign a standard agency contract you are likely to fail IR35 even if you have the contract reworded. HMRC will look at the facts behind the contract. So be warned and beware.
How do I get paid?
Being an employee, director and shareholder of your own company you get paid three elements on a monthly basis.
- As an employee you get paid wages.
- As a director your claim expenses from the company.
- As a Shareholder you take dividends from the company.
- So if you use the DNS online portal you get paid monthly wages, expenses and dividends.
- Obviously, these payments are made over to you after putting aside money for tax in the company accounts.
Should I Register for VAT?
VAT Registration is optional if your turnover is less than £70,000. If your Turnover exceeds £70,000 then VAT registration is mandatory.
VAT may mean additional work for your company, but it is often worth it, as you could save on average £2,000 per year on VAT. With DNS at your side, VAT registration and quarterly VAT returns need cause you no bother whatever.
For Small businesses with a turnover of less than £150,000 you can join the Flat Rate scheme, which allows you to collect VAT at the full standard rate, while paying at a lesser rate.
For Example if you make sales of £10,000 and collect VAT of £2,000, you could save around £300 to £400 depending on your trade classification.
VAT Registration for Contractors provides additional income, so why miss out?
What expenses can I claim?
Some common expenses include the following, but remember you must keep all receipts and have all of them to hand for audit if necessary:
- Company formation
- Accountancy fees
- Business travel and accommodation
- Postage for business
- Stationery for business
- Business telephone calls
- Mobile telephone and calls
- Employer’s NI contributions
- Contributions to an executive pension plan
- Business entertainment
- Equipment purchased for business purposes
- Motoring expenses using fixed-rate allowances
- Computer software
- Technical books and journals
- Certain professional subscriptions
- Use of home as office
- Company bank charges and interest
Ltd Company V/s Umbrella
|Rate*||DNS Ltd Company Avg Contractor
|Umbrella Avg Contractor Returns %|
|£25 per hour||83-85||65-68|
|£30 per hour||82-83||64-66|
|£300 per day||79-80||63-65|
|£400 per day||74-75||62-64|
|£500 per day||71-72||61-63|
|£750 per day||67-70||60-62|
Looking at the table above, it is clear that working through an umbrella company does not deliver the best returns. DNS advise contractors to work through an umbrella company only if they intend to be contracting for less than three months and if, when that contract comes to an end, they have no intention of continuing as a contractor.
Yes, in those circumstances it may be acceptable to use an umbrella company, but otherwise the umbrella solution is akin to throwing away your hard-earned cash.
Why a limited company over an umbrella company?
Is it better to form a limited company or work through an umbrella company?
There is one major reason you should consider working through a limited company – you hold onto more of your hard earned cash if you do; you pay less National Insurance and you can claim more by way of expenses.
If your contracting career is likely to last for less than three months you should continue working through an umbrella company. If you are set on a career in contracting, a limited company is definitely the most tax-efficient way of working.
In short, whether you decide continue working through an umbrella company, or take the plunge and set up your own limited company, depends on your personal circumstances and preferences, but here is some guidance to help you make an informed choice.
The advantages of forming a limited company
Working through a limited company is definitely the most tax efficient way of operating. With careful tax planning you can save on NI and claim a wide range of expenses. Using the Flat Rate scheme makes VAT savings. Limited company status is acceptable to agencies and it gives you full control over your money. A limited company definitely delivers better returns than working through an umbrella company. Typically your return will be between 70 and 80% depending on your circumstances, but can be up to 90%.
The Key is to ensure that you are IR35 Compliant
A limited company is suitable providing you are robust in dealing with figures and take responsibility for your business finances. There is essential monthly administration to be done, and because taxes are payable in the future, not all the company money in the bank is yours. Tight cash control is essential to avoid problems making your tax payments.
Disadvantages of forming a limited company
A contractor working through a limited company is presented with the risk of falling into the IR35 trap, but you can cover this by taking out DNS IR35 insurance cover. We urge you to inform yourself as much as possible about IR35 by visiting our IR35 checklist to ensure you don’t fall foul. Contact us today for a free, no-obligation personal illustration to see whether working through a limited company is a good option for you.
Advantages of working through an umbrella company
Working through an umbrella company is for those who are not particularly interested in better returns, and who for one reason or another do not want to form a limited company. There are two good reasons to work through an umbrella company: one is if you are thinking of contracting for less than three months, the other is if you are quite sure you fall within IR35. Working through an umbrella company is straightforward and popular with agencies; you are paid by submitting a timesheet and claiming expenses to increase your return.
A contractor working through an umbrella company may lessen his or her risk of falling into the IR35 trap. The umbrella option guarantees minimum return for minimum effort.
Disadvantages of working through an umbrella company
Working through an umbrella company you will pay both employer’s and employee’s National Insurance, and, typically, your return will be between 62 and 70% depending on your circumstances. You bolster up your earnings with expenses claims, which can be time consuming, as they need to be submitted on a weekly or monthly basis.
What’s the average return of a DNS contractor working through a limited company?
Are you getting the best return? Below are the average returns of a DNS contractor working through a limited company.
|Rate*||DNS Ltd Company Avg Contractor Returns %|
|£25 per hour||83-85|
|£30 per hour||82-83|
|£300 per day||79-80|
|£400 per day||74-75|
|£500 per day||71-72|
|£750 per day||67-70|
*If you’re receiving less then why not check with DNS how you can enjoy higher returns.
Are you fully satisfied with your accountant or do you want more?
Are you fully satisfied with your accountant, If not, why not? Your accountant is the linchpin of your business success and you should be 100% satisfied with the service you receive. It’s a very simple process for you to change your accountant to DNS as we do all the administration for you. Just fill in the new set-up form and DNS will do the rest.
Take a look at the services DNS provide:
- The DNS online accounting portal: a 15-minute a month therapy session for your business
- Real time control of your accounts so you never get any surprises
- Offering a hassle-free solution
- Quick response to your queries
- Monthly accounts so that you’re never uncertain
- The best in tax-planning solutions
- A guarantee that you will never be penalised for late filing of statutory paperwork
- Dedicated portfolio Manager
- Weekend and late evening meetings
- Regular updates and newsletters
- Value added services such as pension and mortgage advice
Are you receiving anything less than the Contractors/Freelancers Accounting services above? If the answer is yes, change accountant today by filling in the form and DNS will do the rest.