Between Contracts? The Tax and Accounting Things You Shouldn’t Ignore
Being between contracts is a normal part of life for many contractors. You might finish one role with another lined up ready to start, or you could find yourself with a few weeks or even months to fill before the right opportunity comes along.
During that quieter period, it can be easy to put your limited company to one side while you concentrate on finding your next contract. However, even if there’s no new income coming in, the company is still running and there are a few things worth keeping an eye on.
From ongoing expenses and VAT returns to dividends and upcoming tax bills, here’s what you need to think about while you’re between contracts.
You can still have business expenses
Having no income for a while doesn’t mean your company can’t have any expenses.
There are plenty of costs that may continue while you’re between contracts, such as accountancy fees, business insurance, software subscriptions, professional memberships, bank charges and website costs. You might also spend money on training or other costs connected with keeping your skills up to date and preparing for your next role.
The important thing is that the expense still genuinely relates to the business. A company doesn’t need to be generating income every single month for its legitimate business costs to be allowable.
What about costs involved in finding your next contract?
You may also incur additional costs while looking for your next role. Perhaps you’re travelling to a meeting, attending a networking event or paying for something that helps you secure new business.
The fact that you’re between contracts doesn’t automatically prevent these from being business expenses, but there still needs to be a genuine business purpose.
It’s a good idea to keep a record of what the cost related to at the time. A quick note against the transaction can be much easier than trying to remember the reason for a particular train ticket, hotel or event six months later.
Your VAT returns don't stop
If your limited company is VAT registered, you’ll normally need to continue submitting VAT returns even if you haven’t raised any sales invoices during the quarter.
You may actually find yourself in a VAT repayment position if the company has continued to incur qualifying expenses and has VAT available to reclaim.
The usual VAT rules still apply, though. The fact that the company isn’t currently earning income doesn’t mean that VAT can automatically be reclaimed on everything it pays for.
If you’re expecting the break from contracting to be much longer term, it may also be worth speaking to your accountant about whether remaining VAT registered is still appropriate.
Don't automatically carry on taking the same dividends
This is one area where you need to be particularly careful.
When you’re used to taking regular dividends from your company, it’s easy to continue withdrawing these while you’re waiting for your next contract to start. But dividends can only be paid where the company has sufficient profits available to support them.
You may have enough retained profits from previous years to continue taking dividends during a quiet period, but those reserves can gradually reduce if the company is continuing to pay expenses without bringing in new income.
It’s also worth remembering that the balance showing in your business bank account isn’t necessarily the amount you have available to take personally. Some of that money may already be needed for tax bills or other company liabilities.
Remember the tax bills you've already built up
Corporation Tax, VAT and PAYE don’t disappear because your latest contract has finished.
Your company could have a Corporation Tax bill relating to a previous accounting year that isn’t due for several months, or a VAT payment relating to income you’ve already received. If you’re using company reserves to support yourself while you’re between contracts, make sure those future liabilities have been allowed for first.
A healthy-looking bank balance can quickly become much less healthy once you take the company’s upcoming tax bills into account.
Do you need to stop your salary?
Not necessarily.
If you’re already paying yourself a regular director’s salary through payroll, you don’t automatically need to stop it as soon as a contract ends.
Whether it makes sense to continue will depend on the company’s financial position and your own circumstances. If you’re only expecting a short gap and the company has plenty of funds available, there may be no reason to change anything.
If the break becomes longer or cash starts getting tighter, speak to your accountant before making changes so you can look at the position as a whole.
Be careful about taking extra money from the company
When personal income drops, you might naturally need to rely more heavily on money you’ve built up in the company. This is where it’s particularly important to know what you’re actually withdrawing.
Money taken from the company might be salary, a dividend or repayment of money the company already owes you. But if it doesn’t fall into one of those categories, you could end up borrowing money from the company through your Director’s Loan Account.
An overdrawn Director’s Loan Account can have tax consequences for both you and the company, so it’s much better to keep track of the position as you go rather than discover a problem when the year-end accounts are prepared.
What if the company makes a loss?
If your company continues paying business expenses while little or no income is coming in, it may make a loss for the year.
That isn’t automatically a problem. Businesses don’t have to make a profit every year, and a temporary loss during a gap between contracts can be perfectly understandable.
Depending on the circumstances, trading losses can potentially be used against profits from other periods, which could reduce Corporation Tax or result in tax previously paid being repaid.
Your accountant can look at the options available once the company’s overall position for the year is clearer.
Should you keep the company open?
A few months without a contract doesn’t usually mean you need to start thinking about closing your company. If you’re actively looking for your next role and expect to continue contracting, keeping everything running may be the simplest option.
The position is different if your plans have changed. For example, if you’ve moved into permanent employment and don’t expect to return to contracting, it might not make sense to keep the company open indefinitely.
Even a company with very little activity still has ongoing responsibilities, including annual accounts, Corporation Tax returns and confirmation statements. Depending on your circumstances, making the company dormant or closing it may eventually be worth considering.
A quiet period doesn't have to cause problems
Being between contracts is often just part of contracting, and a short gap doesn’t usually require any major changes to the way your limited company is run.
The main thing is to keep an eye on what’s happening rather than ignoring the company until your next contract starts. Make sure you’ve allowed for upcoming tax bills, check that you still have sufficient profits before taking dividends and continue keeping your records up to date.
And if that short break starts turning into a much longer one, have a chat with your accountant. A few small adjustments along the way can be much easier than trying to sort everything out months later.
At PaperRocket Accounting, we work with contractors at every stage, including those inevitable gaps between contracts. If you’re unsure what you should be paying, claiming or taking from your company while things are quiet, just get in touch.
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