IT Contractors & Freelancers
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Accounting for IT Contractors, Freelancers

IT contractors, are you ready to maximise your earnings for 2016, compliantly?

Working within the IT industry as a freelancer, contractor, or through your own limited company can be a lucrative, interesting, and satisfying career choice. However, it seems that IT contractors in particular have been the target of George Osborne’s recent changes to contractor expenses; ongoing reform to IR35 legislation; and changes to the way dividends are taxed. IT contractors should be hyper-aware of the changes and ideally seek expert advice from their accountant.

The growing contractor market

Recent figures suggest that the contractor market has increased significantly over the last eight years, to date by 35%. Two million independent professionals in the UK work as contractors either through a limited company, through an agency, or as a freelancer or sole trader. It seems strange that the Chancellor appears to be targeting IT contractors in particular even though the IT industry tends to attract the sort of entrepreneurs that the government says it supports. Well, it is said that when the going gets tough the tough get going, so what might IT contractors do in response?

1. IT contractors, working through owner-managed companies should hire an accountant that specialises in IT contractors.

2. IT contractors working through umbrella companies should seek expert advice about whether they would be better off working through their own limited company; but the pros and cons in light of the new changes should be carefully weighed up, so get expert advice from an accountant that specialises in IT contractors.

What two changes affect IT contractors most?

1. Changes to the dividend regime

The dividend regime changed from April 2016, so that the grossing up of dividends and claiming back notional credit is no longer an option. Now all taxpayers get the first £5,000 tax-free and then an increased rate of tax is charged on the balance. A specialist comments, “In practice, even after the £5,000 tax-free allowance, the loss of the tax credit means more tax will be paid overall.” The change will not affect a company making profits under £18,000, but nonetheless some critics argue that the attractiveness of running a limited company is waning.

2. “Disguised employment”

With IR35/supervision, direction, or control (SDC), the balance has shifted and is still shifting. In this climate, you should be even more careful about your employment status.

IR35 still applies, learn more about it, and be aware of the rules. The exchequer still believes “disguised employment” costs around 400 million in lost revenue every year, so this legislation has not gone away although it is in the process of being reformed.

The clamping down on travel expenses for contractors working under “supervision, direction, or control” is significant, affecting IT contractors working through umbrella companies the most. Umbrella contractors, i.e. those working through an agency or “employment intermediary” who formerly claimed as an expense their daily commute to work can no longer do so. The proposal means that anyone who is employed through one company but subject to a (theoretical) right of supervision, direction, or control by another third party will be treated as if employed by the third party for travel expense purposes.

The important point to bear in mind now is that the employer will be responsible for deciding whether SDR applies or not, and if the employer deems your contract falls within the legislation, then the employer must deduct tax and national insurance at source. If it can be shown that the employer neglected to apply the legislation correctly, a fine may result.

Your immediate priorities should be …

Your working practices must be assessed by your employer and there must be evidence: a piece of paper stating that someone is outside SDC is not enough.

Then this is what you should do next …

Having visited the DNS website and seen why hundreds of contractors benefit from the expertise we provide, contact us to learn more about how we can help you to claim all the expenses, benefits, allowances, and other entitlements that are due to you, compliantly.

If you are currently working through an umbrella company, read the article about the advantages of working through a limited company, which we hope may help you make a more informed decision about whether the time has come to change from working through an umbrella company to setting up your own limited company. If you stay working through an umbrella company, it is likely you will not receive the tax relief available to limited company contractors, and if you do claim expenses as an umbrella contractor, you will have to claim via self assessment.

If you contact us and sign up for our expert accountancy services for IT contractors, we will look after all aspects of compliancy on your behalf. In addition, we provide free cloud bookkeeping and accounting software that promotes compliancy while minimising tax liability. DNS will also provide free tax investigation insurance, which covers you against investigation by HMRC, free for one year when you sign up.

Few accountants offer the guarantees, breadth, and quality of service, unlimited advice, expertise, and knowhow that DNS provides its IT contractor clients. We also offer payroll services and can help you set up a workplace pension scheme if you employ people. We can even organise setting up a company for you within 24 hours. An expert accountant is an essential, fully tax deductable business expense for small businesses and contractors working in the IT industry, and IT contractors ready to maximise their earnings compliantly will benefit if they contact us today.