Bookkeeping for Contractors

Deciding to become a self-employed contractor is a huge step in your career, especially if you’re moving away from the relative comfort of employment. You might feel a bit nervous, but this is such an exciting time with the freedom to set your own hours, focus on projects you feel passionate about, or even decline work. You don’t need to give a reason why. The choice is yours!

So what happens once you decide to start contracting? The industry you work in and how you structure your business can both impact the type of information you need to keep and report to HMRC, so we’ll go over the basic bookkeeping requirements for your new contractor business.

What is a contractor?

Before we get into bookkeeping, let’s discuss what a contractor is. In short, a contractor is just that – someone who ‘contracts’. Clients will normally hire you for a specific purpose or project, for a defined length of time.

A typical contractor will deal with clients for both short-term and long-term projects, and you might even find you have regulars who come back whenever the need arises. This, of course, takes time though. So don’t worry about that too much if you’re just starting!

What type of business is best for a contractor?

Choosing the right structure to set up your contracting business is largely down to your personal preferences and what works best for your needs. So, what are the most common types of business structures?

What are the key differences between a contractor and an employee?

There are some key differences between contractors and employees, and it’s good practice to familiarise yourself with these. This is because tax legislation known as IR35 looks at the way contractors carry out their business in order to clamp down on ‘disguised employment’, where someone who would ordinarily be an employee takes advantage of the tax benefits of working through their own limited company instead.

If a contract is found to be inside IR35 it means the contractor would otherwise be acting as an employee if their company didn’t exist. There are tax implications for this!

What is bookkeeping and why is it important for contractors?

Bookkeeping is a bit like having a diary of the finances in your business. You’ll capture and record every transaction which comes in and goes out. Good bookkeeping is at the heart of every successful business, and it’s especially useful for contractors when you have a variety of different clients, with payments and invoices flying about all over the place.

Using a robust system to record all your financial data in one place makes it much easier to keep track of everything. For instance, you’ll know which customer invoices haven’t been paid yet, or which suppliers you still need to send a payment to. That way you’re less likely to miss a payment and risk tarnishing the relationships you build with your clients.

Can I use my bookkeeping records for my tax return?

You absolutely should! Tax is a major feature of being a self-employed contractor. Recording everything properly in your bookkeeping helps you minimise the risk of penalties for inaccurate or late tax submissions.

Having HMRC breathing down your neck can feel overwhelming, but keeping your accounts up-to-date as you go makes life, and tax, a whole lot easier

What type of tax return do contractors need to submit?

This depends on what type of contractor you are.

Operating as a limited company can be more tax-efficient, which is why it’s crucial to be aware of the IR35 rules we mentioned earlier.

Do you have subcontractors?

If you’re a contractor working in the construction industry and you use subcontractors, you’ll also need to register for the Construction Industry Scheme (CIS) and submit CIS Returns.

You’ll only need to submit a CIS return for the months you use a subcontractor but will still need to let HMRC know why you’re not sending a return the rest of the time. There are lots of resources and guides on this, so don’t worry too much!

Are there any expenses I can claim as a contractor?

Yes… and that’s why bookkeeping is so important! As a contractor, you’re likely to incur business expenses in order to run successfully. Keeping track of all these will help you claim tax relief on any allowable expenses so you don’t end up paying more tax than you need to!

This includes but is not limited to:

Good bookkeeping practices

Great bookkeeping equals a happy contractor! Here are some tips to get you started.

Automate as much as possible

Automating your bookkeeping minimises the risk of errors and helps save heaps of time so you can crack on with your business.

For instance, setting up Bank Feeds means you can automatically enter banking transactions into your bookkeeping, without needing to spend ages typing everything out. You can even create Bank Rules to automate the checking process, or use automated payment reminders to nudge clients to pay on time and avoid disrupting your cashflow.

Use cloud-based software

When running a busy business, you don’t need a to-do list of all the receipts you need to store and invoices to send out looming at the back of your mind until you get back to your desk.

Cloud-based software means you can update your bookkeeping wherever you need to. This ensures accurate, up-to-date records, and no second-guessing when it comes to submitting those tax returns!

Keep your business and personal finances separate

This is a requirement for limited companies, but even if you’re a sole trader this is great practice. It makes life so much easier, so you know exactly what’s what, and you’re never confused about a specific expense or invoice.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.