Tag Archive | "business expenses"

If you think a professional accountant is expensive, wait till you hire an amateur!

For some reason I’ve seen a whole raft of questions and complaints about that most retiring of professionals, our friend the humble accountant. What is more, the questions and complaints being raised tend to demonstrate why they need an accountant in the first place.

There are two basic themes, best summarised as “How much?!” and “My accountant won’t let me…”.

The “How much” brigade really amuse me. They usually ask for recommendations for a good accountant who only charges £50 a month. Well look, I used one of them when I started out in contracting, on the recommendation of someone who knows about these things and I was young (ok, youngish) and naïve. After a couple of years, when I’d learned what I was doing, I worked out he’d cost me a few thousand in unnecessary taxes, late filing penalties and generally weak advice. Rather more than I‘d paid him for his services, in fact. So I switched to one of the contractor specialist accountants who recovered that money over the next year or two by giving rather more appropriate advice and stayed with them ever since.

I’ve always said that a good accountant is free anyway. Let’s face it; I do two kinds of stuff. Some stuff is for clients and I get paid for doing it, at an hourly rate well above what my accountant charges. The other is stuff I want to do – well, OK, more usually stuff that She Who Must Be Obeyed wants me to do – and I don’t get paid for it (usually quite the opposite, in fact!). And doing accountancy beyond the bare minimum of logging what money went where does not fit into that category. So as far as I’m concerned the accountant is doing stuff I don’t want to do that has to be done, more accurately and far more cheaply than I could do it. So something of a no-brainer.

On the other hand, the members of the “Won’t let me” brigade are seriously deranged. In the last couple of days I’ve seen someone trying to claim spending £5500 on a single PC (including £2400 on two monitors) as a business expense, someone asking about charging his MBA course as a necessary business cost and someone asking about making his three year old a shareholder to save tax, then having a go at their accountant for asking questions. There are others – just wait a day or two and another one will be along…

OK, the first guy might have a point (he’s certainly got one hell of a home entertainment system …) but the other two not only don’t know the relevant laws, they’re actually complaining that their qualified, expert, paid advisor is telling them why it won’t work. Totally barking.

And just going back to costs again, I was challenged today on why I need to spend any more than £50 a month for a simple business model and can’t I see I’m being ripped off when his high street guy does all he needs doing. Fine, I replied, just ask him about a few contractor-related basics, such as what is the definition of a PSC, what’s IR35 and how it is assessed, what is the tax treatment of training to expand your skill set, how to correctly answer the questions on the P35 and why, and why he isn’t an MSC. He may well know all the answers, in which case well done him, but I know more than a few ACCAs who don’t.

As Red Adair said, “If you think a professional is expensive, wait till you hire an amateur”.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: Cartoon Man by TheNickster

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Do contractor accountants abuse the company mobile?

Research conducted by MDS has shown that SMEs run the risk of breaking the law because they do not monitor staff telecoms usage effectively.

28% of firms struggle to distinguish between personal and business mobile calls when it comes to accounting for VAT. Almost 60% of telecoms managers said that if employees believe they will get away with it, they will let the firm pay for their personal phone calls.

The CEO of MDS, Drew Rockwell, said that businesses that provide mobile phones for their employees could get into trouble with the VAT man if it is found that employees use their work mobile for personal reasons. They are potentially liable if they have been claiming back VAT on a phone bill without first deducting the cost of personal calls.

42% of businesses now provide their employees with mobile phones and this has led to an increase in rogue telephone usage. In many companies there are seen as a perk rather than an asset belonging to the firm and 79% of employers think their staff abuse the privilege by failing to disclose personal calls. Employees are also becoming increasingly choosy over the nature of the perk. 87% want to choose their own handset and 66% want to select a particular network.

Employers must share part of the blame for this situation. Less than 50% have produced a detailed policy document on responsible telecoms usage, 48% have broad guidelines and 5% do not have a policy at all.

The problem doesn’t only exist with mobiles either. 90% of companies also report that employees make personal calls on the firms’ landline phones.

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

Image: You may telephone from here by British Postal Museum & Archive

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Contractor travel & subsistence expenses, HMRC, and a Ford Cortina

On Remembrance Day I had an appointment with senior officials of HMRC in Parliament St London – a stones throw from the Cenotaph. The meeting was concerning the coding of expenses incurred in travelling to temporary workplaces.

This is of major concern to employees who work directly for an end user and have to fund their own travel expenses, either in whole or in part, from their income. This will not normally concern employees who work through umbrellas or via their own companies as their expenses are reimbursed by their employer and as this website is generally aimed at contractors who work in that manner there may be no direct relevance to individuals but what I have to say is more widespread and may affect us all at some stage.

In 2006 I retired after 39 years distinguished (?) service with HMRC. I hired the Council Chamber of Chester Town Hall for my retirement “do” and there were one or two senior members of staff present. Now, your retirement “do” is the only time that you can say what you feel without fear of any come back at a later date. I did the usual thing of saying that the department that I was leaving was not the department that I had joined etc etc but, with the utmost sincerity, I said that the one thing that had upset me more than anything else was the deterioration in the standard of service that was being provided for the general public.

On and off for a number of years I managed the HMRC office in Chester and of particular concern to me was the level of service that we provided to the general public. I was of the opinion that a person could telephone without actually leaving their armchair – to write and post a letter involved considerably more effort but if a person took the time to leave their home, to travel into Chester and to call in at the office then I was of the opinion that the least we could do was to respond promptly by providing that person with the best possible service. Over the years leading up to my retirement in 2006 that standard of public service was in decline.

In my retirement speech I said that my aim had been for Chester to provide a service equivalent to the football Premiership Division but unfortunately the then current standard of service was now Fourth Division – Chester and District Sunday League. Those were my words and they didn’t go down too well with the senior officials present but – tough – unfortunately that is the way it was – my main concern was that the fourth division of the Chester and District Sunday League would accuse me of dragging their reputation down by likening them to the tax office service to the public.

Back to the meeting at Parliament St last Wednesday – it became apparent that a new HMRC computer system (hereinafter referred to as “it”) is being introduced as from 6 April next year and will have, built into “it” certain, but limited, parameters. “It” will not, for example, recognise that a person has changed employment. “It” will know that a change has occurred but “it” will not take that into account when determining the PAYE code.

This can have a serious affect – for example – you work directly for an end user and incur allowable, but non-reimbursed, travel expenses of £10000 in 2009/2010. In September 2010 you submit your 2009/2010 self assessment tax return containing that claim – your 2010/2011 code (the code for the following year) will be amended to include £10000 expenses even though you may have changed jobs and are not incurring travel expenses. Your code will be amended just the same and the onus will be on you to ring the tax office and get them to put it right – except they have already got it wrong. Say you are liable at 40% and the code change happens in October – half way through the tax year – you will get a repayment of £2000 to which you are not entitled. If you let it run throughout the year you will get tax relief of £4000 – you will be £4000 underpaid and HMRC will want it back.HMRC are public servants but this, in my opinion, is not serving the public and when I pointed this out to the HMRC reps present and compared it with what happened years ago when the public were served I was told that HMRC do not provide the Rolls Royce service that they provided in the past.

I was told that HMRC staff have been cut to the extent that standards have had to drop and that the new computer will mean that even more staff can go ……..When I had overall charge of the public counter at Chester I aimed to provide a Rolls Royce service – I think that most of the time we did very well – it was workmanlike and on the whole more than met expected standards – probably a Ford Cortina. What HMRC have now isn’t Rolls Royce – it isn’t a Ford Cortina – it isn’t even a push bike with a motor – it’s a pogo stick..

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

Image: Ford Cortina GT by johnrobertsheperd

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Limited company pre-trading expenses – what contractors can claim

Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

When you are starting out as a freelancer, or transferring from an umbrella to running your own company, you are going to incur some out-of-pocket costs before your company is fully operational, or even before it actually exists. These costs can be reclaimed from the company.

The usual rule applies; business expenses are any that are wholly and exclusively incurred during the operation of the business. The good thing is that any costs you incur personally while setting up that business qualify under that rule, so can be claimed back once the company if up and running and there’s some money in the bank account.

These expenses include:

  • Costs of company formation. This includes initial accountant’s fees, or the costs if using a company formation agent. If you do it all yourself, this still includes the Companies House fees
  • Travel and subsistence costs for attending interviews to get that initial contract
  • Purchase of necessary equipment such as computers, printers and related consumables
  • Costs of advertising material and business stationery
  • Costs of internet access, domain name registration and website design and build
  • Provision of services to the home office, such as phone line, broadband, fax and similar facilities
  • Purchase of professional and equipment insurances and directly related professional membership fees

You will have to keep receipts for any purchases you make when setting up the company to provide a full audit trail (to be fair, you have to do this anyway, so it’s a good habit to get into). When the company can afford it, you then submit an expense claim for the total amount and the company pays it back to you. This is repaying expenditure out of already-taxed income, so it is not earned income nor a Benefit-in-kind, hence there is no further personal tax to pay, and the cost will eventually be offset against the company’s Corporation Tax liability.

Be careful if transferring from an Umbrella that you don’t double claim expenses though; if, for example you put the costs of attending an interview as an expense claim to the umbrella, you can’t claim it again.

Finally, provided you have the relevant VAT receipts you can reclaim any VAT through the company once it is registered.

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

Image: Right on track? by Bohman

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Contractors – Do you know your business?

I was reading the various contractor-related bulletin boards over the weekend (as you do…) and I was struck yet again by the number of people in this game who don’t really understand  the business they’re in.

There’s a lot to understand and nobody expects you to be a combination of chartered accountant, tax barrister and employment law expert, but some idea of the basics would be good.

Open your eyes

It’s not like there isn’t plenty of information out there. I’ve long been a fan of the PCG’s free Guide to Freelancing but there are plenty of others out there on the end of a Google search. However, the key bits that keep coming up are IR35 (gosh!), expenses and opting in or out of the Agency Regulations. I thought a brief overview now might be useful..


IR35 is a total mystery. I’ve been looking into it for ten years and I still don’t have a clue how anyone is supposed to know if they’re in or out: not only is it incredibly wooly, the rules change on almost every case that comes to court. It hinges on three factors – Direction and Control (which is imperfectly defined), Mutuality of Obligation (very basically, does the client have to provide work or pay you if there is none to do) and a Right of Substitution (can you send someone else to do the work).  Minimal D&C, minimal MOO or a definite ROS will theoretically put you outside IR35, but you’ll need an expert to prove it. Equally importantly, these actually have to be in place, not just covered in the contractual wording: cases have been lost when contract clauses have been shown to be unsupported by the client.

Contractor Expenses

Expenses are dead simple. If you spend money that is wholly and exclusively for the execution of your business, then it’s allowable against your personal taxation. If they aren’t, you can still claim them but you pay tax as though they were straight earned income. So travel to work is fine but a 48? plasma screen monitor for the PC isn’t. Nor, oddly enough, is training unless it is directly related to the job you are currently doing. Needless to say there is room for interpretation about “directly related”, but that needs professional advice.

2003 Agency Regulations

The Opt Out causes enormous confusion. The Agency Regulations are there to protect vulnerable temporary staff from exploitation. Sadly they are written so virtually any freelance working through an agency is in scope, so you have the option to say you don’t want them to apply to any given engagement. The thing is, you can’t opt out if the client knows who you are (i.e., you’ve been introduced to them) so most people are opted in regardless. Whether or not that’s a good thing is up for debate; there are some slight commercial benefits, but you’re likely to have a worse contract in IR35 terms. The agencies want you to opt out because it saves them a lot of work, of course.

To summarise

As I said at the beginning, the average freelancer needs a whole gamut of skills if they are going to be certain they fully understand their position and responsibilities. They need to be fairly certain of their position with respect to IR35, if only because you have to make an informed assessment of your tax position if you are to avoid penalties if HMRC manage to prove you wrong. You’ll already be paying a big lump of extra tax plus interest; penalties would be the icing on the cake. So make sure your accountant properly understands IR35 as well as the more usual financial issues; it can make a big difference.

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

Image: I’m starting to crack by 1happysnapper

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  • Switch Accountants for FREE

    Switch Accountants for FREEAt K&B Accountancy Group we have introduced a simple and straightforward approach to changing accountants. We’re offering contractors, consultants and freelancers the opportunity to switch to K&B Accountancy Group for FREE without the need to pay for any ‘catch up’ or retrospective accountancy fees for the previous year’s accounts and corporation tax return* *T&Cs apply

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