What is a contractor accountant?

A contractor accountant is an accountant who specialises in providing accountancy services to contractors who operate through their own limited company (often referred to as a Personal Service Company or PSC).

That is not to say that the accountant deals exclusively with contractors, writes chartered accountant Graham Jenner, co-founder of accountancy firm Jenner & Co. But they will have a specialisation in contractors, perhaps having worked with contractors over a number of years and will have dedicated systems for processing contractors and their tax affairs.

Weekly or monthly statement (remittance advice)

A contractor accountant will be able to provide a statement each week or month, depending on your payment frequency, detailing the amounts you (the PSC director) should set aside for tax. Contractor accountants also calculate and relay how much you might pay yourself, with tax-efficiency in mind.

The systems of a contractor accountant will be set up to deal with changes in your contracting circumstances, too. For example, if you decide that you want to pay a higher or lower level of salary part way through the year.

A contractor accountant should have a thorough understanding of IR35

As a contractor running your own limited company, you are probably aware of the term IR35. This refers to legislation that was first introduced in 2000 to combat what was a growing trend for companies to lay off staff, only to hire them back again as a contractor working through a PSC. It was called by HMRC and others the ‘Friday-to-Monday scenario,’ whereby staff were let go on a Friday only for the same individuals to return to the workplace on a Monday, albeit as directors of their own limited companies!

The motivation was tax and national insurance savings, compared to when the contractor was an employee. Since they were performing a similar role for the company they were contracting for, it was considered that the tax and social security were the same as when they were an employee.

The IR35 legislation seeks to do this by requiring the contractor to be taxed like an employee, if they, effectively, look like and operate like an employee.

More recent changes to IR35 have sought to ensure that tax (and National Insurance) is, in certain circumstances, accounted for like an employee, by requiring the end-client to determine the status of the contractor.

Introduced on April 6th 2017 in the public sector, and on April 6th 2021 in the private sector, this change has had a huge impact on the contracting market -- and not necessarily because contractors who should have been taxed like an employee weren’t but because of a reluctance on the part of end-clients to take a risk on getting the IR35 status wrong. The result, nowadays, is that limited company contractors often can’t use their limited company, and instead have to provide their services via an umbrella company.

However, it is important to recognise when a contract (and the working practices) would be outside IR35. A good contractor accountant will be able to identify these circumstances or even help to renegotiate a contract, so that the contract falls outside IR35. The tax differences can be significant – which is why the Intermediaries legislation was introduced in 2000 in the first place. Of course, that doesn’t mean that the benefits shouldn’t be available in the right circumstances! In any event, a good contractor accountant is up to speed on IR35 and can advise you on it with confidence.

A contractor accountant should have a thorough understanding of the Managed Company legislation

The MSC legislation was introduced in 2007 to combat a rise in the number of companies offering a ‘PSC solution’ where the contractor took little or no responsibility for running his or her PSC. In some cases, it was as though the contractor was operating through a limited company in name only.

While there was technically, and legally, nothing wrong with that prior to the introduction of the legislation, the sheer volume of contractors working through that type of structure became so large (and was set to continue increasing) that a stop had to be put to the arrangement because of the significant loss of tax and NI to the Treasury.

A good contractor accountant will be fully aware of the MSC legislation, including the much-disliked MSC debt transfer provisions, and be able to explain why it does not apply to the services they offer.

What do most contract accountants charge?

Most contractor accountants will offer a fixed fee package. This is possible because there are usually relatively few transactions – perhaps only 12 monthly or 52 weekly receipts and two or three payments per week or month.

As well as providing the weekly or monthly statement mentioned above, the accountant will usually prepare the company’s accounts and corporation tax return within the fixed fee.

As the director of the company, you will also need to submit to HMRC a self-assessment tax return, as an individual. Many contractor accountants also include the fee for preparing and submitting this within the fixed fee package – but do check!

If the contractor’s limited company is VAT-registered, completing and submitting the VAT returns may also be included in the package. But again, check the small print of the accountancy package.

A good contractor accountant is abreast of changes in contractor tax legislation

The contracting profession has seen numerous legislative changes over the years and, with ever changing working practices, we are likely to see even more in the future. Remember that a specialist contractor accountant is likely to be more aware of the impact of future legislation changes and be able to advise you accordingly, than a generalist or high street accountant.