27 Feb
Basic mistakes made by contractors and how to avoid them?
An insight into the most common mistakes made by contractors
A contractor’s job may seem ideal to many as contractors all over the world enjoy flexible working hours, they are remunerated substantially well and enjoy the perks of being their own boss, however, it’s not always fun and games.
Establishing oneself as a successful contractor can be a challenging journey and requires resilience at every step. In this article, we have discussed some of the most common challenges faced by contractors, the mistakes they make typically along with the best ways you can seek to overcome the challenges.
- Working without a Contract
One of the most common mistakes made by contractors is delaying the process of finalizing a contract. The delay can be due to seeking clarification on the terms of the contract or not being able to get a contract immediately due to the specialist nature of the role. Therefore, in order to keep the cash flow running smoothly, it is important to seek a potential extension to an existing contract early on or looking for a new contract a few months before the current one expires.
A good contractor accountant can ensure that your cash flows are running smoothly. This will make it easier to manage finances and ensure stability.
- Being caught inside IR35
IR35 is tax legislation that is aimed at combating tax avoidance whereby contract workers supply services to clients via an intermediary, but who would otherwise be an employee if this intermediary, such as a limited company, had not been used. This is known as working in ‘disguised employment’ and can lead to being stung by a huge tax bill if you are not careful and have not sought advice from IR35 specialists in London.
You are considered to be working inside IR35 if you are receiving the tax advantages offered by working as a contractor. However, you will also be deemed to receive the benefits of a permanent employee. It is important to understand the implications of working inside IR35. Therefore, make sure to seek the support of the best IR35 Specialists London has to offer.
Good contractor accountants will be able to offer you advice on IR35 insurance, IR35 contract reviews, and help you to defend yourself against any IR35 status issues.
Related: Make sure you are prepared for the new off-payroll working rules being introduced in April 2020.
- Not having enough legal protection
As a contractor, one must always be prepared for the possibility of a client making a claim against you. The claim can be due to a mistake at your end, negligence by a mistake by your supplier which is passed on to a client. However, at times a client may even try to claim from you just so that he doesn’t have to clear his dues.
You can ask your contractor accountant to refer an insurance broker who can help you select the most suitable insurance for your business. An expert insurance broker in London will be able to offer you advice on suitable insurance to help ensure you are protected against a claim. Make sure your adviser advises you on a package with a decent compensation cover as this gives both you and your clients the required security. Our guide to finding insurance can help you learn more.
- Improper record-keeping
A proper record-keeping mechanism is essential for any contractor running his business. Keeping proper records will ensure timely tax submissions, effective tax planning, and swift decision making. Contractors, generally ignore the habit of proper record keeping because of a lack of understanding of the value it adds, which creates delays in tax submissions, increases the amount lost deductions and can create problems if HMRC asks any questions.
Try setting up a strong foundation from day one, use software that can make your life easier and hire specialists, they will save you more than you spend on them in time alone.
- Not contributing to a pension fund
Some contractors do not make contributions towards their pension fund and only realize once it’s too late. Pension contributions can also be used as a measure to reduce tax liabilities. Contributing to a pension fund allows a contractor to save and plan for their retirement while benefiting from an additional ‘tax break’.
Our in-house team has curated a guide to help you with your pension.
Video: IR35 Explained for Contractors
Watch this video to learn how IR35 might impact you, how to determine your IR35 status, and much more.
- Being your own accountant
Many contractors believe that they can save money by managing their own accounts. Contractors who make this mistake, proceed without investing in the services of a contractor accountant. For many reasons, this may seem like the right decision. But, sooner or later it will start to affect day-to-day operations. An expert accountant will help you stay in compliance with the legal obligations surrounding your business and ensure that you are fulfilling the required legal standards.
If you are operating from the UK, a good contractor accountant in London can help you avoid mistakes and fulfil your deadlines. Failing to do so, may land you in risky situations and you may have to face fines and penalties. The worst-case scenario would be if HMRC gets involved. A competitive contractor accountant will be able to save you time and money.
When starting out as a contractor you must find a suitable expert to help you manage your accounts. If you want to set up your contractor business UK wide, then the best way to avoid mistakes is to ensure you are supported by excellent contractor accountants in London.