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    Sole trader guide

    content

    03 Operating as a sole trader

    04Registering as a sole trader

    06Completing your bookkeeping

    08Claiming your business expenses

    11Income tax and NI

    13Completing your accounts

    17Business insurance

    What is a sole trader?


    A sole trader business (or being self-employed as its
    commonly known) is the simplest type of business, as
    it's the easiest to set up and run.


    A sole trader is defined by the fact that one person is
    solely responsible for the business.

    Operating as a sole trader

    The business will be set up under your name and you are entitled to keep all of the profits.

    But this means you are also responsible for the tax owed, along with any debts incurred by the business. In essence, as a sole trader, you are the business.

    Advantages

    • Cheap and simple to operate
    • You don't have to worry about salary and dividends
    • You don't have to deal with Companies House, only HMRC
    • Easy to set up and close down

    Disadvantages

    • Your are personally liable for the debts of the business
    • If your profits are over £20,000 it can be less tax efficient
    • Customers, suppliers and competitor will see you're a small business

    Registering as a sole trader

    If you decide to start working for yourself, you must inform HMRC of your decision, regardless of whether you already complete a Self Assessment tax return.

    It is best to register with HMRC as soon as you start trading. The latest you can register is by the 5th October in your business' second tax year.

    HMRC can issue penalties for late registration, so it's in your best interests to do this on time!

    Registering with HMRC is very straight forward, you simply need to complete a CWF1 form, which can be found be clicking here.

    If you need any help then please call us on +44 20 8480 1098

    What is a UTR number?


    A Unique Tax Reference (UTR) is a number assigned by HMRC to identify your company as a tax payer.


    This number is assigned automatically after the company is registered with Companies House (usually within 28 days).

    If you're a director, you will also have a personal UTR number, which relates to your personal tax affairs.

    Completing your bookkeeping

    Bookkeeping is the recording of your day-to-day transactions on some kind of system, such as a spreadsheet or accounting software.

    These transactions are then used as a basis for completing your accounts and tax returns.

    No matter how big or small your business is you will need to ensure you keep accurate bookkeeping records, to manage your overall finances and get a view of everyday expenses

    How often should I complete my bookkeeping?

    We recommend completing your bookkeeping as
    often as possible, on a weekly or monthly basis.

    Doing your bookkeeping regulary reduces the
    chance of errors and allows you to clearly
    understand how your business is performing

    Claiming your business expenses

    Different types of business will have different types of expenditure. But as a general rule the vast majority of business expenditure is allowable, even expenses you have incurred personally for business purposes.

    The most common business expenses are:

    • Motor expenses
    • Staff costs and wages
    • Use of home as an office (rent, rates and utility bills)
    • Materials or goods you sell
    • Admin costs (telephone and internet)
    • Advertising and marketing costs
    • Business insurances
    • Repairs and renewals
    • Work clothing
    • Staff training
    • Professional fees (accountants and lawyers etc.)
    • Travel and subsistence
    • Bank charges and interest
    • Capital expenditure (equipment or furniture etc.)
    • Entertaining costs
    • Membership and subscription fees

    What is the tax year?

    The tax year is the period in which you are taxed by HMRC. In the UK, it is the 6th - 5th April each year.

    A sole trader's financial year can be different. usually
    due to the sole trader starting to trade part way
    through a tax year and opting for their year-end to be
    one year from the date of commencement.

    However, most sole traders will set their period end
    as the bth April so that it falls in line with the tax vear.
    This is the more straight forward option.

    Income tax and NI

    Every person in the UK is entitled to a tax free allowance.

    This is the amount of profit than can be earned before any tax is payable. Over the allowances, the rates are 20% tax, increasing to 40% above another threshold, and 9% national insurance.

    These rates can change so please use the following links to see the current sole trader income tax and national insurance rates.

    Paying your tax bill

    Your tax is due before the 31st January, following the tax year end If your tax bill is over £1,000, then you must make payments on account. This means that HMRC will collect your tax plus the current year's tax in two payments; one payment before 31st lanuary and the second before 31st luly.

    You can pay your tax bill using the following methods:

    • Faster payment (bank transfer direct to HMRC)
    • Direct debit
    • Billpay (pay online with debit/credit card)
    • Bank giro
    • Post office

    Deadlines and penalties for late submission

    The tax return deadline is 31st January following the tax year end.

    One day

    Failure to submit your accounts on time will result in a £100 penalty from HMRC.

    This penalty will rise incrementally until the return is submitted

    Three months

    Daily penalties of £10 per day will be incurred for up to three months.

    Six months

    An additional £300 penalty or 5% of the tax due will become payable

    The same penalty will be applied again every six months until the accounts and tax return are submitted.

    Accounts approval

    We are unable to submit your accounts to HMRC until we have received your approval.

    So to avoid any unnecessary penalties, please keep an eye out for emails from your accountant requesting this approval.

    How do I take money from my business?

    As a sole trader, the profits generated from the
    business belong to you.

    You can simply take money from your business as
    and when you need it.

    When do I need to register for VAT?

    You must register for VAT if your turnover exceeds £85,000 (2019/20) in any given twelve months.

    However, if your customers are also VAT registered it could be beneficial to register for VAT voluntarily before you reach this threshold.

    What is a HMRC tax investigation?

    Every year HMRC selects returns either at random
    or because the submitted figures do not look right.

    It is unlikely that you would be selected, but if you are,
    you would be asked to show your paperwork
    to back up the figures submitted to HMRC.

    If you're chosen for an inspection, then we would
    represent you at no extra cost.

    What happens if I start employing someone?

    If you take on an employee, you will need to register as an employer with HMRC straight away and start running payroll.

    We can complete payroll for you, or you can complete it ourself. If vou would like to discuss this with us, then call us on +44 20 8480 1098.

    Business insurance

    When you start a business you must make sure you have the correct insurances in place. Here are the three main types of business insurance you need to consider:

    • Employer's liability insurance (if you have employees)
    • Public liability insurance (if a customer suffers loss or injury)
    • Professional indemnity insurance (if you sell your skills or knowledge)

    Professional indemnity insurance protects your business against claims for damage or loss made by a customer or third party if you make mistakes or are negligent with the services you provide.

    Looking for more advice on limited companies?


    If you have any further questions simply call us on
    +44 20 8480 1098 and one of our friendly
    accountancy advisors will be happy to help.