Tax and accounting for contractors

Regardless of your choice of legal structure, you will still have some responsibilities and liabilities when it comes to tax and accounting.

If you opt to use an umbrella company to take care of your payment arrangements, your responsibilities will be limited. Tax will be deducted at source, so you will generally not be required to complete an annual self assessment. However, your liabilities will be far higher than if you ran your own limited company and had contracts that fell outside IR35.

On the other hand, if you choose to set up your own limited company, you will be faced with a significant paperwork burden. You will need to complete annual company accounts, as well as your own self assessment. Furthermore, you will need to ensure that your books are kept in order. You will be responsible for your own tax payments, and you must therefore keep accurate records of money in and money out.

There is a clear financial benefit to running your own limited company, however. Assuming that you can negotiate IR35-compliant contracts, you will pay considerably less tax than you would under an umbrella company. Furthermore, you can offset the cost of business expenses against your tax liabilities, further lowering your annual tax bill.

Section 660

Along with IR35, Section 660 is one of the most important pieces of legislation that affects contractors. It should be given consideration when you are negotiating contracts and arranging your tax affairs. Luckily, those who are caught by IR35 will not be affected by Section 660.

Section 660 targets individuals who transfer portions of their income to another individual (for example a spouse or partner) through the use of dividends. This technique is frequently used to reduce a tax burden.

Transfers like these are known as “settlements.” They are common; many contractors have set up limited companies with two directors, the second director normally being their spouse or partner. Part of the income derived by the individual who is earning is then allocated to the non-earning partner, normally by way of tax-efficient dividends.

If you currently have an arrangement like this and you are a higher rate taxpayer, you are at risk from a potential HMRC investigation. Worst of all, HMRC can apply the law retrospectively; they can look at your arrangements for the previous six years, and hand you a bill.

If you think you may be caught by Section 660 it is vital that you seek professional advice.

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