Running a limited company: tax tasks your accountant won’t do

Thanks to the courts, contractors now have it in black and white that they can’t leave it all to their accountant! So what are the tax, book-keeping and accounting tasks of running your own limited company that your accountant won’t do, or that you ought to do yourself?

Running your limited company

Maintaining your company with a dedicated accountant makes your tax and admin duties much more straightforward, but there are still certain areas that, as a company director, you need to keep on top of. Value Added Tax, expenses, book-keeping and invoice management are among the main areas, and let me outline how to manage those areas effectively, writes Christian Hickmott, founder of Integro Accounting.

Income and expenditure

So just how often should you keep on top of invoices? Ensuring you keep track of your sales invoices on a weekly or at least a monthly basis is recommended to ensure no ‘billable’ hours are missed.

The end-client will advise on this more clearly, normally the detail will be in the contract, as payments will need to be in line with their finance department. In some instances, the end-client may require you to complete a timesheet. Don’t fret --  this request is common and can be used as the base for your invoice.

Business Bank Account

As a director of a limited company, you need to ensure you keep a clear trail of your bank statements for the following reasons:

Company invoices

All payments received should be paid directly into the company bank account. Your limited company business is a separate entity to you as a person and if not paid into the company bank account, it would lead to complications and confusion with HMRC.

Company expenses

If an expenditure is ‘wholly’ and solely for the company then it is most likely a company expense and should be managed through the business bank account. We purposefully say ‘most likely’ as we have had some horror stories attempting to be claimed as a business expense! Most credible book-keeping software programmes provide a ‘bank feed’ option which will pull all transactions through automatically, saving you from having to manually enter data. In addition, some software programmes have deployed Ai which will learn over time what the transactions likely relate to, saving you further time. 

Company expenses

How to monitor and record them

With corporation tax being 19%, it is important to make sure all company expenditure is recorded so your company tax bill is only what your company should pay, not what your company could pay.

Logging all business expenses in real-time is a benefit which avoids confusion and saves you time in the long run. This is good practice and means you are unlikely to miss any legitimate company expenses. It seems like a simple suggestion, but many contractors have attempted to log company expenses later in the tax year to no avail. Often information is missed and makes it extremely complicated when attempting to log it!

How to record expenses is up to you. Most people find that an app on their smart phone is the most efficient way. One of the most popular of these being FreeAgent, which we are a platinum partner for and proudly so, not least because of its ease-of-use and simplicity.

Successful book-keeping

There’s no two ways about it, to be a successful contractor you need to keep accurate records. This will always enable you to be on top of your company’s financial situation, avoiding any nasty surprises. 

There are three main elements to book-keeping:

  1. Invoicing
  2. Record of bank transactions
  3. Log of your ‘out of pocket expenses’ i.e. expenses that you pay for personally on behalf of the company.

Some expenses will be clear from the bank statements, for example ‘Integro Accounting’ for accountancy fees, or ‘Vodafone’ for mobile phone costs. Other expenses can be less clear, such as ‘Amazon’ or ‘Paypal’ so you will need to provide clear information as to what these transactions were for, so that they can be categorised correctly.

It can seem complicated at the start. Many accountancy firms offer book-keeping for an additional fee. However, by following the guidance herein, and by taking your accountant’s advice where necessary, book-keeping management can take as little as 30 minutes a month.

It is recommended to keep copies of all your accounting records – be that physically or digitally – for at least six years, as that’s how far HMRC may go should they have any enquiries. There is no fixed rule from HMRC as to how records are kept, so do whatever works best for you.

Spreadsheet vs. Online Book-keeping Software – Pros and Cons

You might find that an excel spreadsheet updated regularly is enough. Or an accounting app may work for you, but consider which platform suits your needs best. 

Spreadsheet

Pros

  • A spreadsheet is easy for you to access as frequently as you need to
  • It’s a format that is mobile and desktop-compatible
  • It’s a cheap, no-nonsense option that most people already have access to.

Cons

  • It can be time-consuming if you’re not familiar with using it or don’t update regularly
  • It’s a manual process, so you will need to fill in all the fields
  • It’s not an accurate tool for monitoring a company position i.e. it will not readily show you how the company is performing overall, or any taxes owed (you’ll have to crunch the numbers yourself), whereas a software platform with online feeds will show ‘available profit,’ among other categories of financial performance.

Online book-keeping software

Pros

  • You can view your profit levels and company status at a glance
  • It will save you time. The majority of online book-keeping programmes will include a feature that pulls through bank feeds. This means all data recorded in your business bank account will be pulled through into your book-keeping where you can then allocate the transactions
  • Both you and your accountant can see the data in real-time, so you’re both always looking at the same position, making it a much smoother process
  • You can often attach digital copies of your receipts to the transaction being logged. This keeps everything together and offers full transparency, should there ever be any discrepancies in the future.

Cons

  • You might have to pay extra for the software
  • Internet access is always required as a lot of features will be cloud-based. However, data can still be downloaded as a file
  • The learning curve from spreadsheet to software can be steep-ish, for some, albeit usually only in the initial few weeks or months.

VAT

As a contractor that works through your own limited company, you may be able to improve your company’s tax efficiency by registering for VAT.

Value Added Tax (VAT) is the tax that applies to almost all goods and services in the UK.

Historically, the Flat Rate Scheme used to be an attractive option for contractors as you could charge your client 20% VAT on your net invoice, but then pay a fixed percentage on the gross invoice to HMRC at a much lower rate. These fixed percentages typically ranged for a contractor between 12% and 14.5%, depending on the business sector. However HMRC introduced a ‘limited cost’ trader category a few years ago, which most contractors now fall into. 

An approach that we take as it works for our clients is to register the company for the flat rate scheme when starting up, utilising the first year of trading’s 1% discount offer. We then review our client’s position every quarter to possibly switch to the standard VAT scheme if it works in their favour!

Deciding whether the flat rate scheme or the standard VAT scheme is best for your business will be dependent on individual circumstances, such as what the likely company expenditure will be and the amount of time you wish to spend on book-keeping. Speaking to your accountant at the start is paramount, as everyone’s circumstances are different, and they will guide you accordingly.

When are VAT payments taken?

Unless you are registered on the annual VAT scheme, payments should be made quarterly.

The easiest way to pay is to set up a Direct Debit. This means that when your accountant submits the VAT return, HMRC will automatically collect the VAT liability a few days after the deadline. If a Direct Debit is not in place, the payment will need to be made and cleared into HMRC’s bank account by the 7th of the month to avoid late payment penalties. For example:

VAT Quarter Manual Payment Deadline HMRC Direct Debit Collection
January 7th March 10th – 12th March
February 7th April 10th – 12th April
March 7th May 10th – 12th May

Payroll and dividends

So how do contractors legitimately and correctly maximise take-home pay?

Deciding the best way to pay yourself from the company will depend on many factors. Whether you have any other income personally -- from outside the limited company, is the main one. Therefore, it’s always best to get bespoke tax planning completed by your accountant and take their advice.

The advantages of paying yourself via salary and dividends

For an individual, with no other income to take into consideration, the most tax-efficient way to pay yourself is through a combination of salary and dividends.

The benefit of paying yourself a salary in line with the National Insurance (NI) threshold is that you are utilising your (tax-free) personal allowance while also receiving corporation tax relief. A salary of this level would also ensure that you meet the minimum requirements needed to secure the qualifying year towards your state pension.

The rest of your income can be taken as dividends. The main benefit of this, compared to taking solely salary, is that there is no employer or employee NI on dividends. There is also a tax-free dividend allowance of £2,000.

The table below provides a comparison of how dividends and salary are taxed.

  Employers NI Employees NI Basic Rate Tax Higher Rate Tax Additional Rate Tax
Salary 13.8% 12% 20% 40% 45%
Dividends N/A N/A 7.5% 32.5% 38.1%

You would need to pay yourself a monthly salary so your accountant can make monthly RTI (Real Time Information) payroll submissions to HMRC. Your dividend payments can be much more flexible and should be based on company profits. These can be taken throughout the year and are reported to HMRC when your accountant completes your personal tax return at the end of each tax year.

A common approach is to pay yourself dividends monthly. This is typically the way many contractors were previously receiving their income before entering the world of contracting, meaning most will have Direct Debits set up for monthly collection. However, dividend payments are at the director’s (or directors’) discretion and can be paid weekly, monthly, quarterly, or annually.

Making sure you have the right support

Throughout my many years working with contractors, I’ve seen the objectives for each PSC vary enormously. Some may want to be as tax-efficient as possible, or work towards a greater pension, or maximise their take-home pay. Or any combination of those objectives! Whatever your goals, by being clear on what you want to achieve with your accountant from the outset, keeping accurate and up-to-date records, and communicating on a regular basis will maximise your chances of success. The better the information you provide, the more efficiently your business will be run.

Tuesday 27th Oct 2020
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Written by Christian Hickmott

Founder and CEO of Integro Accounting, Christian Hickmott has over 20 years of accountancy and working practice knowledge. He understands the wants and needs of contractors, having lead some of the largest accountancy firms in the business before founding Integro Accounting in 2013. A brand based on integrity, trust and loyalty.

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