1. Register for Self Assessment:
You must notify HMRC that you are self-employed and register online with HMRC for self-assessment, to ensures payment of income tax. When registering online, a Government Gateway user ID is created, essential for all HMRC dealings. A letter from HMRC will detail your Unique Taxpayer Reference (UTR) – necessary to file tax returns and pay tax.
2. Choose a name for your sole trader business:
Sole traders are not allowed to use: Limited (Ltd), Limited Liability Partnership (LLP) or Public limited company (Plc) in the name, as they mislead on the business legal status. The company name shouldn’t be offensive or contain sensitive words. E.g. names suggesting a government connection or of national importance.
Protecting and registering your company name:
A company may evolve to a limited company as it grows. Research if any sole traders (or current limited companies) are using the business name. Companies House register details existing company’s names. You cannot register a limited company name if it is the same/similar to another registered company. A sole trader name can be registered (even if not trading as a limited company initially) protecting the name for future use.
Trading as:
You can use a ‘trading as’ (t/a) if the name is different from your own. If you choose this, you will need to use a ‘trading as’ name on official documentation (invoices and bank statements). This should also be shared with HMRC via Self-Assessment returns.
3. Keep good records for your sole trader business:
It is not necessary to send records to HMRC when submitting your tax return. Detailed records should be kept of business expenses and income (both before and during trading). These enable you to: work out profit or loss and submit them to HMRC if asked or investigated.You need to keep records of: sales and income, business expenses, VAT (if registered), PAYE records, personal and any business grants. and any business grants.
4. Submit a self-assessment tax return every year:
Self-employed sole traders must submit a self-assessment tax return once a year, by midnight on the 31st January. This declares income, enabling income tax calculations.
5. Pay your tax bill:
Tax is on profit of the income earned in a financial year (6th April - 5th April). Payable once income exceeds the tax-free personal allowance threshold (from 2022/23 to 2026 this is £12,570).Payments on account (POA) are advance payments on the next year’s tax bill. They are split equally into two payments, due on the 31st January and 31st July. If the POA paid is less than the return, the balance is payable. If the POA is overpaid, a refund is issued.Midnight on 31st January is the deadline for filing and paying your self-assessment tax return. If payment is not made there are penalties.
6. National Insurance:
National Insurance contributions (NICs) also need to be paid. Class 2 NIC for profits less than £11,908 a year and Class 4 for profits more than £11,909 a year. These are paid through the self-assessment return.
7. Register for VAT voluntarily or compulsory:
If income is near or greater than £85,000 you must register for VAT (Value Added Tax) with HMRC. Once registered a VAT registration certificate, confirms the VAT number, the VAT return, payment dates and date of registration. Registration is voluntarily, if turnover is less than £85,000, except if all sales are VAT exempt. There are advantages to VAT registration:· VAT Is reclaimable on most goods/services.· If VAT registered, customers can reclaim VAT and prices remain competitive as VAT is recoverable.· Bigger, established businesses are more appealing to customers, lenders, investors, and suppliers. With the assumption that turnover exceeds the VAT registration threshold.· VAT-registered businesses have a VAT number, to use on business stationery.· Voluntary registration can be backdated up to four years.· VAT registration needs accurate records, beneficial to any business.
8. Employing people:
Register with HMRC as an official employer and sign up to Pay As You Earn (PAYE) - at least five working days before your business’s first payday. Other Legalities include: Employers’ Liability Insurance, employment contract, statement of employment particulars and salary above the National Minimum Wage.
9. GDPR:
The General Data Protection Regulations (GDPR), May 2018 govern how individuals/customer’s date is collected and stored. Noncompliance risks fines of up to 4% of annual turnover.
10. Insurance:
Insurance is essential and often a legal requirement. The insurance required depends on the business, e.g., car/vehicle insurance, public liability insurance, employers’ liability insurance, professional indemnity insurance, building/contents cover, goods in transit insurance and business assets and equipment cover.
11. The Construction Industry Scheme (CIS):
Necessary in the construction industry as a subcontractor or contractor. Contractors deduct advanced payments to HMRC from the subcontractors. Contractors must register for the scheme.
Becoming a sole trader is quicker and simpler than running a limited company.
There are still legal requirements and responsibilities. Please do not hesitate to contact AnZ Accountancy for personal help and advice.
