Contractor accountants and small businesses could benefit from a new invoicing directive from the Council of the European Union.

The new system, which will simplify VAT invoicing processes, must be in place by 2013. At that time, tax authorities must accept and handle electronic invoices in the same way as the current paper documentation.

Electronic invoicing experts at Deloitte welcomed the announcement saying that computerised financial systems already store invoice documentation securely and so it makes sense to acknowledge the new technology is secure when it comes to tax audits. However, they would prefer to see the directive implemented before 2013 if possible.

The UK and the Netherlands already have a system whereby companies can make arrangements to make sure all the necessary procedures have been followed in order to produce a correct tax return.

The directive also contains anti-fraud measures and deadlines for the issuance of invoices which are aimed at speeding up the exchange of data on intra-EU supplies of goods and services.

The European Union will also need to provide new standardised instructions regarding the archiving of accounting documents. Currently, UK companies and limited company contractors must retain e-documents for at least 6 years but other member states have different retention requirements.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: 088.365 – March 29, 2010 by meddygarnet

The August Inflation Report from the Bank of England, which was published yesterday, was not as optimistic as contractor accountants might have hoped.

Mervyn King, the Governor of the Bank of England, warned that the economy faces a choppy recovery over the next couple of years. The Bank has said they expect inflation will remain higher for longer than they had previously anticipated and this has led to a lowering of the economic growth forecast. The report also suggests that interest rates will remain at their historic low in the immediate future.

Previously, the Bank had expected to see growth of around 3.4% in 2011 but this has now been revised to around 2.5%. The main reason for the revision is the coalition’s decision to increase the VAT rate to 20% as from the beginning of next year.

Mr King pointed out that the continuing economic stimulus measures along with the drop in value of the pound were helping the economy to expand but this is being offset by the lack of lending from the banks, something that affects contractors.

However, King did stress that the cost cutting plans put in place by the government have reduced the risk of a double dip recession.

Economists were quick to comment with some saying the report was more ‘dovish’ than had been anticipated. Howard Archer, from IHS Global Insight, said the report reinforced their view that interest rates will remain at 0.5% until early in 2011. He forecasts that we will not the first rise in rates will until the summer next year.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Gloomy Hippo by r.j.wagner

The FPB has expressed its approval of the business friendly emergency budget, saying that it contained various key victories for small businesses such as smaller contractor accountants.

The 1% reduction in small companies’ tax was a positive measure, as was the £5 million threshold for relief on capital gains tax (CGT) for entrepreneurs and limited company contractors.

The Forum thinks that the government demonstrated its appreciation of the issues relating to small businesses by extending the Enterprise Finance Guarantee scheme, continuing the tax breaks for holiday let properties and abolishing back-dated business rates.

The full budget document pledged to review recruitment and employment law and this was something the FPB had called on them to do. Forum members often cite employment regulations as a major area of concern so any measures to simply the law will be welcomed.

Phil Orford, the FPB chief executive, believes owners of small businesses would have been pleasantly surprised by the budget.

On the subject of the impending VAT rise, Orford said that although this will have an impact, he thinks the majority of Forum members would rather this outcome than an increase in other taxes or a further reduction in public spending.

The FPB will now be calling on the government to give a guarantee that it will provide genuine private sector input to help boost local economic growth, especially in those areas that will suffer from public sector job cuts.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Let it grow by James Jordan

There’s no doubt about it, the wholesale contractor accountancy marketplace is big business and everyone wants a piece of the action.

In recent months, a new wave of online accountants have been hitting the forums and contractor portals hard in the hope of gaining a foothold in what is already a fragmented market. Their message is clear – why pay £130 a month for the ‘old school’ contractor accountants when you can get the same, if not better service for a third of the price?

It’s a pretty compelling argument and their proposition is almost too good to be true.

Lets dig a little deeper.

Was is an online accountant?

An online accountant offers contractors an ‘end-to-end’ accounting service. This usually combines a bespoke web-based accountancy package that is backed up by a team of accountants and personal account managers. The idea here is that the contractor or freelancer is able to create invoices, manage their expenses and calculate a real-time view of their business. This then enables them to work out how much they can pay themselves (in PAYE salary, expenses and dividends) without having to produce in-year accounts or time-consuming reconciliations.

Obviously there is an element of work required by the end-user but certainly no more than you are asked to do when working through a traditional contractor accountant, and in some cases much less. The technology is also impressive. Real-time feeds into HMRC, Companies House and the government Gateway make online accountants the perfect choice for any time-precious contractor.

Of course, the more challenging aspects of accounting are managed by the online accountants who will submit VAT, corporation tax and personal self assessment returns on behalf of their clients. They will also handle the Companies House annual return and accounts as well as advising on complex issues such as IR35, family business tax, ESC 16 and the agency workers directive.

How much does an online accountant cost?

Most online accountants pitch their monthly fees around the £50-£60 mark. This includes all of the above services as well as unlimited telephone support and free company setup.

Why are online accountants so cheap?

One word – volume. Most high street accountants are happy with 100-200 clients and are therefore keen to maximise their return on investment for what is a relatively small client base. By making their business scalable, online accountants on the other hand are able to service more and more contractors without taking an enormous hit to their margins. This is why their fees are way cheaper than some of the more well-known contractor accountants.

Where can I find out more?

We have a selection of online accountants in our top 10 directory although companies such as Crunch and My Accountant Friend are definitely worth a closer look. A quick search in Google will throw up at least another 20 providers at the time of writing so take the time to do your research. My guess is that this is just the start of a new and exciting time for the contractor accountancy marketplace……I shall watch with interest.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Laptop Icon by ichibod

So where was I…? Back refreshed from two weeks of idleness in the sun, and already looking for the next contract. Don’t seem to have missed anything too serious while I was away.

I managed to get back just in time for the Coalition’s first Budget. I watched it live – oh the joys of being on the bench – and for the first time in 13 years I didn’t have an overwhelming urge to throw something heavy at the TV. What a pleasure it was to listen to someone who sounded like they both knew what was going on and was willing to be honest about it.

Of course, the underlying message isn’t very nice, which is not much of a surprise unless you’ve been living in a cave for the last five years, but you have to say that the overall tone was actually surprisingly positive.

Yes, it’s going to hurt, but we knew that anyway. We’ve had the usual suspects leaping up and down in a fury about a return to Dickensian England and the public sector is up in arms about facing the same pain that private industry has been through already, but all in all I thought it was quite well judged. Let’s just hope that it has the desired result!

With my freelance hat on, it was actually pretty much neutral. I’m not planning on opening a new company and employing people so the National Isurance incentives won’t touch me the slightest, but they will help people who do want to build up their businesses. The eventual VAT rise will hurt of course, but it’s only 25p extra on something costing £10, so personally I can live with that.

The personal tax allowances are nice as well, as is the promised reduction in Corporation Tax rates. As a jobbing freelance contractor – well, when I get a job that is – I’m actually quite relaxed about it all.

The other bit of news tucked away in the Red Book (or as Cameron said to Harman at PMQs this week, in her case the “unread” book) was a clear commitment to look hard at IR35. This was backed up by an interview in the Telegraph, where Mark Prisk emphasised the intention to lose IR35 altogether.

Welcome news indeed, although we won’t break out the champagne until we know exactly what is going to come after it.

Elsewhere in the real world I’ve been plunged back in to the chaos and misery of having to deal with agencies offering work that they don’t understand on behalf of clients they don’t know to contractors they don’t want to talk to and whose CVs they utterly fail to understand. I’ve spoken to five this week and have absolutely zero confidence they know what they’re doing.

Call me an old curmudgeon but in my not inconsiderable experience it’s about one in fifty that does the job they way they tell the clients they do, so I guess I’ve a few more pointless and frustrating phone calls to get through yet. Come the revolution, I know who I’ll be putting against the wall first

Still, let’s be positive, if the reaction to the budget is positive, there may actually be some real work out there.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Meet the Knuckles by KayVee.INC

Restraint should be the name of the game if we want to avoid another economic recession. That’s the message accountants are sending to George Osborne in advance of the June 22nd budget.

Although VAT and CGT rises are anticipated, members of MGI UK and Ireland hope there will be some assistance made available to counter any damaging consequences of these rises.

An interesting idea put forward by Andy White of Carter Backer Winter is bound to gain widespread support from employers. He wants to see employers’ national insurance contributions abolished completely; a move he says which would encourage companies to take on more staff. The resulting loss of revenue would be compensated for by an increase in income tax collections and the reduction in the amount of state benefits paid to the unemployed.

Other online accountants say they would like to see a cut in corporation tax rates and an overhaul of IR35.

Meanwhile, government departments are going to have their work cut out in the run up to the summer recess. They need to outline spending plans, which will then be checked against tough criteria, if they want to have funding approved. One of the new criteria that must be met is that projects are essential to help meet government priorities.

Small firms and limited company contractors could benefit from this rule as outsourcing the work could prove the most efficient means of getting projects completed.

George Osborne has said that we face a great national challenge. Government must rethink the way they spend money. Gone are the days of debt, irresponsibility, and waste and we must now find ways to get the country living within its means.

We inherited this terrible economic crisis but if we all work together we can put it right, he added.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Learning to Fall by Sarcasticalious

There are concerns that plans to raise interest rates to 3.5% could have an adverse affect on contractors who operate as limited companies. The OECD urged the Bank of England to urgently implement such a rise at the end of May.

R3, the insolvency trade body, says that if interest rates rise by between 1.5 and 3%, 7% of SMEs believe they would become insolvent. This rises to 18% if rates are set between 4 – 5%. Interest rates are currently 0.5%; an all time low.

Increased interest rates would be a double blow for businesses that rely on consumer spending to repay their business bank account loans. Any increase in the cost of borrowing regardless of whether it’s used as working capital or to enable business growth will pile increased pressure on highly geared businesses.

Research by R3 shows that the sectors most likely to be hit by an increase are retail and hospitality. Almost 33% SMEs in those sectors believe that any interest rate rise could lead to their demise. However, small businesses operating in construction and manufacturing are more confident that they could cope.

The outlook for retailers is already looking shaky as many are expecting the Chancellor to raise the VAT rate to 20%. The BRC recently warned that 163,000 jobs would be lost over the coming four years if this change takes effect.

The chief executive of Kingfisher, Ian Cheshire, has called on the government to increase the range of products that attract VAT, rather than increasing the rate. Books, newspapers, children’s clothes and most food are currently zero-rated.

However, Justin King, the chief executive of J Sainsbury, says that such a move would harm low income families who spend a large proportion of their income on food.

With the emergency budget just two weeks away, it looks like George Osborne has some very tough decisions to make if he’s going to reduce our fiscal deficit.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: 113/365 Drowning by Gibson Claire McGuire Regester

Now the excitement of the promise actually to consider IR35 for a serious reappraisal has died down a little, I’ve been giving some thought to what that might actually mean. What can we expect Son-of-IR35 to look like?

For one thing, I think there will still be something there that looks like IR35. Let us not forget that the original justification was to prevent the Friday-to-Monday syndrome, where a worker would switch from permanent employment to freelance contract doing exactly the same job. Either the worker did this to take advantage of the tax breaks available to a Ltd Co owner or, more often than people would admit, it was the employer divesting himself of assorted legal obligations, not to mention having to pay Employers NICs.

Of course IR35 stops this, by making the cost benefit of doing this unattractive. Snag is, it also gets in the way of the worker who genuinely wants to go freelance. So my suggestion is that IR35 (or whatever the new version is called) should only apply where the freelance’s client is the same as the immediately previous employer for a period of one year.

However, if we assume that some form of IR35 is still out there post review, the best we can hope for is that there are clear rules about when it applies. Most contractors are angrier about the lack of clarity and resultant uncertainty than about paying the taxes, after all. This is here the original “in business” test comes in – you know, the one that Red Dawn prattled on about while simultaneously refusing to accept that any freelance could possibly be in business on their own account.

But how do you demonstrate you’re in business? That’s the question…

One option is if you are VAT registered. There’s no way you can do that as an employee; even if you did, there would be precisely zero things you could legally claim the VAT back from anyway. You could add in the existence of Your Co to make the test a bit firmer, although that might impact the Schedule D Self-Employed workers. Although the Schedule D self-employed worker can’t really be hit by IR35 since there isn’t an intermediary company in the chain anyway.

Another option is to waive your rights to things like employee benefits, JSA, maternity or paternity leave and the rest of the panoply of employee benefits. The logic is that since you are not paying employee-level taxes, why should you expect to get employee-like benefits?

You could be a bit more imaginative and scrap S44-47 ITEPA 2003 (which replaced S134c) which is the one that makes the intermediary liable for unpaid taxes and is why agencies won’t deal with unincorporated (or non-umbrella) contractors in the first place. Which – whisper it quietly – is why we then got IR35…

Or, of course, you simply delete IR35 altogether – with the sole exception I mentioned above to stop the Friday-to-Monday trick. If there’s no law, there can be no uncertainty. Freelances can choose to work through an entirely legal UK Limited Company and operate it just like every other one. A bit like I do right now.

Or is that too simple…?

Anyway, end of contract today so I’m off for two weeks in the sun. Since I refuse point blank to take my laptop on to the beach – and she who must be obeyed would flay me alive if I tried – the next blog will probably be on June 25th. Let’s hope there’ll be something to write about!

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Blue Devil Imp Decal by Duke Yearlook

According to the results of a new survey by online accountants Sage, the UK tax system needs to be radically simplified.

This is the view of over 2,000 self employed contractors and small companies who took part in the survey in March 2010. Overall, the respondents felt that the rules governing PAYE, VAT and Corporation Tax are way too complicated and as many as 80% felt that current legislation was preventing both them and their contractor accountants from seizing tax planning opportunities.

The research found that nearly two thirds of SMEs did not know what tax allowances there are entitled to. Furthermore, over 70% felt that the tax system in this country was actually acting as a barrier for many would be entrepreneurs.

Small businesses are generally regarded as engine room for economic success in the UK and have become a key focus for the main political parties as we enter the final days of the election campaign. The proposed hike in employer’s national insurance contributions is still dominating the political landscape and many experts now feel that this could be the tipping point for a Tory victory.

A spokesperson from Sage said that there is a great deal of confusion in the SME marketplace with regard to the tax system in this country. They suggested that this was the cause of huge frustration amongst small businesses, many of who do not seek the advice of their accountant as much as they should do.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Confused like Green spaghetti by tanakawho

The deadline for online VAT returns is drawing close. As from April 1st this year, it becomes mandatory to file online.

Businesses that do not comply with the new online regulations will face a fine from HMRC.

The Federation of Private Businesses believes there are many benefits to using the online service. These include 24/7 access and an instant acknowledgement of receipt. An initial online error check is performed; businesses can obtain a seven-day return and extension and use the system to nominate an agent or online accountant.

The only disadvantage, according to many contractor accountants, is that direct payment must be made electronically through the BACS system, CHAPS, Bank Giro and internet or telephone banking.

Another change that comes into effect on April 1st this year concerns the receipt of cheques. If paying VAT by cheque, the payment is classed as made when the cheque clears as opposed to when it was received.

Businesses are strongly advised to urgently review their VAT procedures, including contractors using the Flat Rate VAT Scheme, to ensure they comply with the new regulations.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Day 113 by bandita

Once again I’ve got embroiled in the argument about what is a good price to pay for an accountant’s services.

Let’s face it, there isn’t a lot of bookkeeping to be done with the typical nano-business and people begrudge laying out hard earned income to a third party when they can see no need to do so.

Fair enough, but they haven’t thought it through properly. Doing your own books probably takes around an hour a week, plus a chunk of time at year end to do all the statutory reporting and another hour every quarter to sort the VAT. Call it five hours a month.

However you are doing productive work that you aren’t getting paid for, so in effect it is costing you whatever your hourly rate is. Plus, to do it you are using time that is not meant to be work time, so arguably you are doubling the hidden cost, if you want to be really picky.

Now consider that accountancy fees average around £75 a month, which gives you payroll, VAT, Year End and probably the SA form all tidied away, properly and accurately. That’s roughly equivalent to two hours earned income a month at average rates. Except we already figured we would need five to do it yourself.
Add to that the advice even the most mean of accountants makes available to you on tax and related matters and the little bit extra they find at year end to reduce the tax bill a little further…

So even without the added value stuff, good accountants are free.

But before the accountants among us get all smug, so am I, even at my apparently monstrous day rate (well, monstrous in his market, anyway!). I’ve been at my current client for about two months. Apart from kicking off some fairly major reforms in their project management , which will make things a little more efficient, I’ve started a piece of work that will enable them to rein in their planned expenditure on new staff by highlighting which of the ones they have aren’t performing and which are under (or over) utilised. And for good measure I’ve been facilitating a piece of work on a new supplier contract that has taken many tens of thousands of pounds off the purchase price and a 5% reduction on the annual maintenance costs. Considerably more than I’m charging them to do it all,

So there you have it. Interim managers are free as well…

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Syd Barret Visits His Accountant by danmeth

According to research by PricewaterhouseCoopers (PwC), contractors earning an average annual salary of £30,000 will face a difficult year in 2010.

Tomorrow’s Pre-Budget Report is expected to reveal a 2.4 per cent decline in earnings for middle earning households, with mortgage debt and short term credit repayments continuing to bite hard on family finances.

The report also suggests that higher earning individuals will see something like a 9 per cent reduction in their spending power, as the nation as a whole prepares for a dramatic reduction in the standard of living.

As well as the re-introduction of the 17.5% VAT rate, Council tax is also expected to rise by around 3 per cent next year.

According to John Hawksworth, the head of macro-economics at PwC, the most striking result of the report is the “sharp projected squeeze on discretionary spending for a highearner, hit both by higher taxes and a potential marked rise in mortgage interest payments in 2011-12, as well as by higher petrol prices.”

The Conservatives are already labelling the economic situation as Gordon Brown’s “legacy to middle Britain”. Conservative Treasury spokesman Philip Hammond said “His (Brown’s) debt crisis has saddled hard-working families with a huge bill that they and their children will be paying for years to come.”

As well as IT contractor accountants and those that work in the media, middle earners often work in healthcare sectors, as well as nuclear, oil and gas.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: I See Who You Are Now by HckySo