Tuesday, 12 June 2018

Contracting - Let's Talk Money

Money.

It's why we do contracting, heck it's why we go to work. I've never understood the shyness we have in the UK about talking about money. Never ask anyone what they earn, how much they have saved, how their pension is going. I get it in the main.

We all struggle day to day just to pay the bills on time every time, pay the mortgage off (a dream for many), have a holiday once in a while and hey maybe even save up towards a pension. Not that anyone is going to retire in the future... It narks me that pulling together even a modest amount is such hard work, even when contracting. The 7-year cycle hits and knocks you down a few pegs. Tough but again, it's part of why we do contracting. To gain an accelerated income and make a better financial life for ourselves and our families.

But how much do YOU make?
To answer the question, £400 to £600 per day on average. That's been my contracting rate for pretty much the entirety of my contracting. I wonder if anyone reading this who knows me is surprised by that. I'd take £400/d  for a sit-in-the-corner doing coding stuff and towards £600 for a management role. There's been higher, but they were outliers.

Now, even though £400/d may seem low for someone with 20+ years of experience, it's still a truck tonne of money. So many contractors lose sight of that. 12 months of 20 days is 240 days, that times £400 is £96,000. That's nothing to complain about. A more typical minimum rate is £450/d, that's £108,000. Even if you don't bill all the days, due to holidays or gaps in contracts, you're still earning a shed load of money (running out of these now...)

Here's a reference to put that in context: (accessed today)

http://www.gq-magazine.co.uk/article/average-uk-salary

Average UK salary: £27,271

Before you start celebrating/consoling yourself, this data was taken by the Office For National Statistics from 21,563,000 people's earnings, with averages broken down for each profession. Topping the charts were brokers, who earned £133,677 on average, followed by chief executives and senior officials (£107,703), aircraft pilotsand flight engineers (£90,146) and marketing and sales directors (£82,962). At the other end of the scale are retail assistants (£10,296), hairdressers and barbers (£10,019), cleaners (£7,919), waitresses (£7,554) and bar staff (£7,404).
Even on the minimum of £450/d you're better paid than just about anyone. OK, no Million ££ bonuses for you but still something to pat yourself on the back for.

But can you manage it?
Gfeat, so you can pull in the revenue, but can you manage it? Let's loop back to the hands-on stuff.

Invoicing
The good stuff! Invoicing is pretty easy. Invoice your client as soon as you can each week or month, whatever has been agreed. Each invoice MUST have a unique ID. I have it as company-month-year-number, so ClientRef-Jan-18-001 for example. Calculate your charge (day rate x days worked) and add VAT @ 20%. Terms of payment are 28 days max, ALWAYS see if you can do weekly or fortnightly invoicing. You have nothing to lose but cash flow by asking!

When you do your monthly accounts, you need to record invoices sent out and paid to you, with the unique invoice number. Guess what? When you send an invoice you become liable for the VAT component even though you don't have the money yet. Yep, HMRC suck. So keep a buffer for covering that month's VAT in your business account.

Managing VAT
As mentioned, if you are on Standard Rate (20%) you can offset paid-out against collected VAT. Put anything that is remotely business like through the business and claim the VAT back.

Expense it!
Above almost anything, managing your expenses and reducing your tax is THE single most important reason you're doing this. It *can* seem like a lot of work, but the cumulative savings are worth it.
Electronics, equipment, computers, stationary, postage, books, subscriptions, training, software, hardware, ink, paper, printing, mobile phone (1 per employee), desks, shelves, pot plants (no, not that type ;p), cables, travel, subsistence - ANYTHING that could be stated as business related.

The above is a fine art, but there's more that can go through the business than you might think. The thing to bear in mind is - who can say what was really a legitimate expense? (caveats below) Do you think Coca Cola Corp don't put through crap like pencils, that odd subscription to the gaming magazine (hey, marketing research, new business idea) or say a training course to increase employee capability? Expense it, but be mindful of WHY.

You'll be able to calculate each month how much of that invoice amount you can take as Dividends/Salary. (Invoice amount, minus the VAT, less corporation tax) Let's say it's 8k. Remember that when you expense the above you're paying for it out of that potential 8k - so it's your money your taking, just that as you take it via expenses a) the company reduces it's overall profit and so the tax it pays, and b) you reduce the amount of Dividends you can take (Dividends can only come from corporation taxable profit that's left after expenses). So, if you expense 1k - the company only has profit that month of 7k so pays less Corp Tax at the end of the year. Of course now you can only take 7k dividends and so pay tax on that reduced amount. Also, if what you spend that 1k on is VAT'able, then you offset that outgoing VAT against the incoming VAT, saving that too.

Replay this - by spending on 'expense' through the business, you just saved the Corporation and Personal tax on that 1k and offset the VAT. Think the other way. You take the full 8k, having paid Corporation tax and personal tax, then buy something you pay VAT on. You just got taxed three times (VAT, Corp tax, personal tax), where you could have avoided it all. That is a powerful way to get a LOT more buying power for your money.

A note on expenses: As mentioned above, you can expense 1 mobile bill per employee (i.e. you.) but oddly also a £150 a year on a Christmas dinner per employee, the dinner is tax free like any other expense. However - note that Corporate Hospitality (lunches for clients, etc.) is classed as spending taxable profit. Get it? You pay £10 on dinner, at the end of the year HMRC say that money is part of the overall profit and you pay Corp tax on it. Odd but true.

Amortisation
Check the current figure but generally any item over £1k has to be amortised over a number of years. For example, buy a £3k computer and you can declare £1k as an expense now (Corp tax free), but the other £2k gets taxed. Next year you write-down the asset by £1k, saving the tax as this is a loss on profit. Same again next year. So you DO save the tax, just not in the same year.

Recapping - Expense it
Let me touch on this again. I'm always shocked how small minded fellow business owners are about what they put through their business. HMRC rule is that whatever goes through the business has to be a legitimate business expense. If you're going to reduce profits and so the tax paid, it has to be on something for the business.

So no, a night out at the cinema isn't a tax deductible, legitimate expense. Nor is that shiny new suit or fancy jacket you've been looking to buy. But it's a fine line. If that suit is a uniform, perhaps with a tailored company logo then it's got a unique use for the business and is a valid expense. If that cinema trip is corporate entertainment it can go through the books, but remember you pay tax on it so HMRC aren't going to panic.

If in doubt, leave it out. Or something like that. You know how I keep going on about not getting on the tax man's radar, this is a good example. Again, I've seen fellow business owners do all sorts of stupid things - just don't. Will a small business like us get queried? Probably not, but if you do then everything is up for investigation. You don't need that in your life.

In closing
Check every year what is and isn't the case with the above. Figures, allowable items, etc. change all the time. However, I hope the above has given you a sense that as you run a business now, you need to shift your mindset to that of a business owner. Be bold!

Until next time,

BTW... see that Mark J Diez, Hannover Game ad at the top right? That's me, I wrote that.
Click it and buy a copy.

Mark




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