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.

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.

It should be noted that sole traders/self employed have been subject to scrutiny by HMRC in recent years and in the 2014 Finance Act amendments were made to the legislation designed to tackle what they call ‘False Self-Employment.’ These new measures are designed to prevent employment intermediaries being used to avoid employment taxes including income tax and National Insurance Contributions by disguising employment as self-employment.

Previously a number of criteria existed whereby a worker would be caught and treated as an employee which included an obligation for the worker to be providing personal services. With effect from 6 April 2014 revisions were made and now workers who are provided through an intermediary and who are subject to Supervision Direction or Control by the end client will be treated as employees.

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 purpose 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 (current) fixed rate Class 2 NIC of £2.80 a week, is payable to HMRC on profits of currently £5,965 or over per annum. Following the registration of your business Class 2 NIC is currently 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.

With effect from 6 April 2018 Class ” NIC will be abolished and only the new reformed Class 4 NIC will be due.

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 £83,000 (from 1 April 2016) 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 operating under Real Time Information (RTI), a number of returns needed to be made to HMRC each month/quarter and at the end of the year. These include:

  • P60 End of Year summary (for each employee)
  • P11D 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.

For more information please refer to our FAQ’s. In addition please refer to the publication on the HMRC website “Working for Yourself ”.