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Contractors Tax Planning

How much of your cash belongs to you?

contractors-unexpected-tax-billsYou know the famous old ‘psychology of temptation’ test? The one where a person is left in a room with a button saying ‘do not press’ and eventually they simply cannot resist seeing what happens if they do! Then there is the idea that the best way to beat an addiction is to avoid ever seeing it… For example, if you are on a diet or going dry for a month the worst places to hang out would be sweet shops or wine bars.

The same principle applies to why so many contractors get caught out with their cash flow, accounting and tax liabilities. Simply put, when all of the cash that comes into your account is sat there at one time, in one place, it is tempting to think it is all yours. Somewhere in the back of your mind, often deliberately ignored in a kind of optimistic fog, you are aware that some of it may belong to the taxman. But the fact that your bank balance tells you it is there, you have bills to pay, and there are exciting things that you and the family want to do takes precedence over business sense.

Notice that I didn’t say ‘common’ sense, because being able to control this indiscipline is not very common among freelancers and contractors. And it costs them dearly when the demands come in and the money has already been spent.

But, how do you know what is yours and what isn’t?

Back in the late 1800’s the famous department store pioneer, John Wanamaker, was quoted as saying, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half”. In those days, it was almost impossible to tell, but as any modern-day entrepreneur will tell you, today you can measure absolutely everything.

It is exactly the same with the money in your bank account. Old-fashioned accountancy (and by that, I mean around five years ago), would deliver statements and accounts long after or just before the deadline. Everything was a mad rush; your accounts, your VAT, and the running total on your cash flow was guesswork in real-time, and often a nasty surprise when the bill was finally calculated. But not anymore!

Today, there is no excuse for not knowing!

The thing about burying your head in the sand is that you cannot see clearly enough to plan your escape. The other advantage to being kept informed and forewarned is that you never need to get into trouble in the first place. Using cloud accounting systems like FreeAgent (we can’t speak highly enough of this product for contractors), means that you have up to date information at your fingertips every moment of every day.

FreeAgent tells you exactly how much of the money in your account belongs to you, how much should be put aside for VAT and how much needs to be kept safe for your other bills and tax liabilities. It does this in real-time, all of the time: and it is easy to use, abundantly clear, and supremely accurate.

There is no longer any need for you to push the ‘tax returns’ button in fear, feel compelled to spend money that isn’t even yours, or wonder if what you are doing is creating a good return for you. There is no longer any need for financial ignorance.

Give me a call if you would like to know how FreeAgent can help free your head from the financial sand.