Accountants for consultants and contractors

The salary and dividend question

Through a limited company you decide how to take your money out, and the decision is worth real money every year. A modest salary keeps your National Insurance record intact and is deductible against Corporation Tax; dividends carry no National Insurance but come out of profit that has already been taxed.

The right split moves with the thresholds and allowances each year, and with whether you have other income, a spouse who is a shareholder, or a pension you want to fund. This is not a once-and-done decision, and it is one of the few areas where an hour of planning reliably pays for the accountancy fee several times over.

IR35 and off-payroll working

The question is whether, if you took the company out of the picture, you would look like an employee of the client. If you would, the engagement is inside IR35 and most of the income has to be treated as employment income - which removes most of the advantage of the company.

• For work with medium and large private-sector clients and public bodies, the client decides the status and must give you a Status Determination Statement. If they decide inside, the fee payer deducts PAYE before you are paid.
• For work with small private-sector clients, the responsibility remains yours, and you must assess each engagement yourself.
• What decides it: the right of substitution, the level of control over how and when you work, and whether there is mutuality of obligation. The written contract matters, but so does what actually happens day to day.

Keep the determinations, the contracts and anything that evidences how the work really ran. If a status is ever challenged, contemporaneous records are the whole defence.

The Flat Rate Scheme, and the trap in it

The VAT Flat Rate Scheme once suited consultants well. Then the limited cost trader rule arrived: if your spend on goods is very low - which it is for almost any consultant, because your costs are your time, software and travel - you pay a flat rate of 16.5%, which leaves almost nothing. For most people in this trade, standard VAT accounting is now better. If you are still on the flat rate out of habit, it is worth ten minutes of arithmetic.

Expenses worth getting right

• The 24-month rule. Travel to a client site is allowable while you expect to be there under 24 months. Once you know you will exceed it, it becomes an ordinary commute and stops being allowable - from the point you know, not from month 24.
• Working from home - a proportion of the real costs, or the flat rate.
• Equipment and software, including a laptop bought before you incorporated.
• Employer pension contributions paid by the company - usually the single most tax-efficient way to take value out, and routinely overlooked.
• Training that maintains or updates your existing skills.