Contractor accounting software: what we actually look for

A contractor’s limited company does a short and very repetitive list of jobs. Raise an invoice, usually one a month against a timesheet. Record what hits the bank. Run payroll for one director. File a VAT return every quarter once you are registered. Produce enough of a record that the year-end accounts and the corporation tax return can be built without a forensic exercise in January.

Any of the main cloud packages will do all of that. What we want to see is whether it does the boring parts without being nagged: a live bank feed, invoice templates that carry your VAT number, and VAT returns filed under Making Tax Digital straight from the software rather than retyped into a VAT return form.

Two things usually sit outside the software and get forgotten. One is the dividend paperwork, because taking money out of a company properly means minutes and vouchers rather than a bank transfer labelled “me”. The other is the tax put aside. A good package will show you a running estimate of what the company owes. It will not stop you spending it.

Both are included in our fee, set up and shown to you, so we have no reason to push either. The honest position is that for a single-director contracting company they are close enough that the decision comes down to three questions.

• Are you on your own, or will there be staff? One director invoicing one client a month is comfortable territory for FreeAgent, which is built around UK tax rules and shows a running estimate of what the company and the director are likely to owe. Once there are a few people, foreign currency, or a separate bookkeeper in the mix, Xero handles the extra moving parts more comfortably.
• What does your bank offer? If your business account is with NatWest, RBS or Mettle, FreeAgent comes with it, which removes a decision rather than a cost.
• What are you already using? Moving a set of books mid-year is possible, and it is rarely worth doing just to change the colour of the buttons.

What we will not tell you is that one is the right answer for everyone. The contractors we look after are split roughly down the middle, and nobody has ever rung us because they chose the wrong one of those two.

This causes more confusion among contractors than anything else in the software question, so it is worth being precise.

Making Tax Digital for Income Tax started on 6 April 2026 for people with self-employment or property income over £50,000. It applies to individuals, so if you trade in your own name, or you have a sole trade running alongside the company, you are keeping digital records and sending HMRC quarterly updates. Those updates are summaries, and the return itself is still due by the usual self assessment deadline at the end of January. If that is your situation, our page for sole trader accountants covers what changes.

Your limited company’s profits are not in that regime. The company pays corporation tax and files accounts, which is a different set of rules entirely. What your company does have is Making Tax Digital for VAT, which bites as soon as you are registered, whether you crossed the registration threshold of £90,000 or registered voluntarily on day one because your client is a VAT-registered business anyway.

So the software question for a contracting company is mostly a VAT question, plus payroll, plus keeping the records in a state somebody can work from.

A fair number of contractors arrive with a licence they did not know they had, because the business account came with FreeAgent attached. Others have found a free tier somewhere and are running the company on it quite happily.

We have no objection to either. The licence is the least interesting part of the arrangement. What decides whether a set of books is usable in nine months’ time is whether someone set the VAT scheme correctly, mapped the bank account, told the software that the director is on payroll, and sat with you for half an hour so you know where the invoice button is.

Where free arrangements come unstuck is support. When the bank feed breaks, or a client pays two invoices in one lump and the software cannot match it, there is a difference between a help centre article and someone who already knows how your company is set up. That is the bit we put in the fee: the software, the set-up, and the questions afterwards, with no separate bill for the conversation.

In our experience the faults we unpick almost never come from the package itself. They come from the first fortnight of using it.

The flat rate VAT scheme gets selected when standard rating would suit the company better, or the other way round, and every quarterly return after that quietly carries the error forward. Dividends get posted as wages, which makes the payroll look wrong and the director’s own return harder than it needs to be. Personal spending sits in a holding account for a year because nobody asked what it was. The bank feed drops out after a password change and is noticed in October.

There is one more that matters for contractors specifically. Software has no view on whether a contract sits inside or outside the off-payroll working rules. That is a judgement about the contract and the working arrangement, and it changes how you are paid. It is the sort of thing we look at before the first invoice goes out, alongside everything else on our page for contractor accountants.