Contractors’ Questions: Where do limited company directors struggle with self-assessment tax returns?

Contractor’s Question: What do limited company directors struggle with when it comes to self-assessment for the January 31st tax return deadline?

Expert’s Answer: This year, I’ve personally seen PSC directors struggle with what I’d call the usual issues, specifically these nine:

• That they have to pay tax in advance -- based on previous profit and dividends taken,  which to many seems really unfair if they are having a bad year following a good year.
• That they have to pay back child benefit where their earnings are high.
• That over £145,000 in earnings, the tax rate is swingeing.
• That they can’t put through every little personal expense!  
• That there is nowhere to tangibly reduce their liability. Indeed, the only real tax saving is contributing to a pension. And even that gets taxed super heavily once the threshold is hit.
• That the money for VAT doesn’t belong to them.  
• That they should not use a director’s loan account to pay a previous tax bill.
• That as a director they have a lot of very important fiduciary duties and thorough record-keeping is a must.
• That HMRC has the powers to scrutinise what feels like almost everything!
• That they need to be very careful when communicating with HMRC, in terms of what they say or write. Almost needless to say, it’s best to use an expert to correspond with the taxman!

My tax team cited three additional issues that contractor-directors come a cropper with during self-assessment season:

• They think accountants have loads of time in January! So they usually leave it too late to send in their tax return.
• They too often think their limited company is an extension of themselves, and is not a separate legal entity (which it is), hence they get mixed up with whose money is whose. Oh, they still over-use the director’s loan account!  
• They can wrongly think that ‘phoenixing’ is a good way to avoid tax bills!

The expert was Louise Rayner, founder and managing director of contractor accountancy firm NumberMill Accounting.