Am I a Sole Trader or Self Employed?

Chances are you’re both, The term sole trader is how HMRC classifies your business structure. Sole trader status will allow you to trade as a business and not an individual.  There are over 2.8 million sole traders in the UK, one of the reasons why it’s so popular is you own 100% of your business and you can employ staff.

Your business and personal taxes are considered the same for tax purposes as a sole trader and you will need to register with HMRC but you won’t have to do so straight away. You must register by the 5h October the second year of trading. You will have to pay both PAYE and NIC contributions on your business profits. Once your business reaches annual turnovers exceeding £83,000 you will be required to register for Value Added Tax (VAT).

Many businesses register for VAT before they reach the £83,000 threshold because it is possible to claim back and VAT tax paid on business expenses if you have a VAT number in place. It also adds confidence to your business for customers when they can see that you have thought about compliance.

It is important to remember that if anything goes wrong with your business, as a sole trader you will be responsible for paying any debts incurred by the business.

There is more great information below but if you’d like to talk to us about your accounting need then please call us on 01229 440184  or click the button.

Setting up in business as a sole trader

Setting up as a sole trader is very easy with a few industry specific requirements such as licenses or insurance for some business, the overall process is quite straightforward. Being a sole trader allows for the highest level of control and flexibility, but there are still ongoing requirements with HMRC to stay in good business compliance.

Personal and business finances are considered the same for sole traders so the most important fact to remember is that you will be personally liable for any debts that accrue by the business should it fail to work out as planned. It is still the easiest route to go, with no requirement to register with Companies House, and a recommendation to register with HMRC at the beginning. Sole traders also do not have any of the ongoing accounting or administrative requirements that limited companies do, so it is the easiest way to start a business in which you are central to the operations. By the 5th October in the second year of trading HMRC requires that you are registered with them should you choose not to register at the outset.

Different Ways to Register as Self Employed

There are 3 different ways in which a person can register as self-employed

  1. If you are going self-employed and never filed a self-assessment tax return, you can register online with HMRC and will be registered for Class 2 contributions at the same time.
  2. If you are going self-employed and have completed a tax form previously you can register an income which isn’t taxed at source and Class 2 contributions by completing the CWF1 form.
  3. If you registered as a sole trader previously you should fill out the CWF1 form.

For tax and national insurance purposes a sole trader’s income is counted as a whole and tax is calculated on your profits. If a loss is made there can be an offset of tax.  Sole traders must be £2.85 per week for Class 2 NI contributions that should be done through the self-assessment function. This is set to be abolished in April 2018.

VAT

Value Added Tax (VAT) must be registered separately and needs to be paid and charged whenever there is turnover greater than £85.000 with the current standard VAT rate at 20%. Once you register for VAT you will need to charge VAT to all customers. Being VAT-registered means that you will be able to claim back the VAT you have paid on work-related costs.

It is possible that you will be better off if you register for VAT even if your annual turnover is below the annual threshold. This is most likely if the majority of your customers are VAT-registered businesses, so can reclaim the VAT you have charged them.

The Flat Rate VAT scheme might be the better option which prides a simple way of accounting for VAT through an annual percentage depending on your industry type. It is always recommended to consult your accountant, like Simplex, if you have any questions on tax and VAT matters.

Business Insurance

Sole traders must have different types of insurance such as Employer’s Liability if there are any employees; with other types of insurance being preferred such as public liability insurance and employer’s liability cover. There might also be industry specific insurance which is required.

Bank Account

It is better for a sole trader to have a designated business bank account and not mix personal and business accounts. The account name can be in the person’s name with ‘t/a XX Company’ after it, denoting the name of the business the person trades under. Although there is no legal requirement to do so it is easier to keep track of the accounts at the end of the year. Shopping around will ensure that you find a good deal for a starter account which might include 12-24 months of no fee transactions, which would represent immediate savings.