Sole Trader
Fundamentals
This is possibly the simplest way in which to operate your business. As a Sole Trader you are the proprietor of the business. As such you have complete control and make all the business decisions as to how this is run.
You will however be personally liable for any debts of the business and you will be liable to tax and National Insurance Contributions (NIC) on net profits.
View our Sole Trader Services or read on for more detail.
Being a sole trader is the simplest way to run a business. It does not involve paying any registration fees and keeping records and accounting is straightforward. You keep all the profits. You are however taxed on these profits at your marginal rate of income tax and, perhaps more importantly you are personally liable for any debts that your business runs up. This makes being a sole trader a risky option for a business that needs a lot of investment.
If you operate your business as a sole trader you will have certain responsibilities and duties to be aware of.
As a sole trader you have three months from the date you commence to register your business with HM Revenue & Customs (HMRC). We will do this for you once we receive notification that you have commenced trading. You will make all the decisions on how to manage your business. You will also be responsible for raising money for the business out of your own assets and/or with loans from banks or other lenders.
Trading as a Sole Trader
Having commenced trading you have to keep comprehensive records of your business income and all expenses incurred in running the business. Business expenses must be incurred “wholly and exclusively” for the purposes of the business. Where there is a duality of purpose of the item purchased the test will not be met and the expenditure will not be allowable. The records you must keep include bank/credit card statements, purchase invoices, sales invoices and details of all business mileage. The records must be kept for six years.
As a self-employed individual your profits are taxed as income. The income will be liable to tax at your marginal rate. You also have to pay NIC. The fixed rate Class 2 NIC of £2.65 a week, is payable to HMRC on demand. Following the registration of your business HMRC will send you a bill for the payment. Demands have been issued on a quarterly basis; however Class 2 NIC is payable on 31 July and 31 January each year in line with payments on account and final payments due under Self Assessment. Class 4 NIC is also payable. The amount of Class 4 is based on your annual profit.
You have to submit an annual Self-Assessment Tax Return to HM Revenue & Customs by 31 January. At this stage you will have to pay your income tax and Class 4 NIC liabilities.
After the end of each tax year (5 April) we will send you a checklist for completion. This checklist requests details of all your income and expenditure, including income and expenses from your business and any other relevant details to complete your Tax Return (see Personal Tax section).
As a Sole Trader, you are personally responsible for any debts run up by your business. This means your home or other assets may be at risk if your business runs into trouble.
VAT
You may chose to register your business for VAT. Businesses with a turnover of more than £77,000 (from 1 April 2012) must be VAT registered.
As a VAT-registered business you have to complete a VAT return form for each tax period, usually every three months. This details how much VAT you:
- Have charged your customers
- have been charged by your suppliers; and
- how much you owe HM Revenue & Customs or are owed by them.
You will be sent your VAT return form towards the end of your tax period. You must return the form and payment (if appropriate), normally no later than one month after the end of your tax period.
Pay As You Earn (PAYE ) and NIC Deductions
If you employ and pay staff you will have additional responsibilities as an employer which could include a number of returns needed to be made to HMRC each month/quarter and at the end of the year. These include:
- P35 Employer’s End Of Year Return
- P60 End of Year summary (for each employee)
- P14 Employer’s End of Year summary (for each employee)
- P11D or P9D Return of Expenses and Benefits (for each employee)
- P11D(b) Employer Declaration of Return of Expenses and Benefits
If the business pays deductions for PAYE and NIC to HMRC of more than £1,500 per month you must make your payments monthly. If the business pays less than £1,500 per month to HMRC, you may make payments on a quarterly basis. You should use form P31 to tell HMRC you want to pay every three months.
IMS can take care of all of the required tax and accounting responsibilities for a sole trader. We provide a full range of services to cover all areas. Please refer to our Sole Trader Services Fees List and contact us to register for our support services.
For more information please refer to our FAQ’s. In addition please refer to the publication on the HMRC website “Working for Yourself ”.
If you have any questions please do not hesitate to contact one of our tax specialists here.
