Setting up a Business As a Sole Trader
Most people who start their own business do so as Sole Traders. This legal status is the most popular and effective for the majority of start ups. This is mainly because the legal and accounting requirements are not as costly or time-consuming as those of
As a sole trader you do not need to register your business with Companies House before you start trading and you can start trading very quickly. Setting up as a sole trader will give you complete control over your business and you will make all the decisions and take all the profits. A sole trader has no separate legal identity and has unlimited liability.
If your business depends on you and the skills you have (Plumber, Gardener) setting up as sole trader may be the most appropriate option.
As soon as you start trading you should inform HM Revenue & Customs (HMRC). As a sole trader you are regarded as self employed, which means you are responsible for paying your own income tax and National Insurance (NI) contributions. HMRC will give you the information you need about when and how to pay tax and NI. You can also find this information on its website www.hmrc.gov.uk/selfemployed.
If you fail to register with HMRC you could be liable for a penalty of £100. You may also face additional penalties for trading illegally and not paying tax.
If your annual turnover reaches a certain level (currently £70,000 for 2010/11), you will also be required to charge Value Added Tax (VAT) on whatever you sell. You may, however, register your business voluntarily if your turnover is lower than this threshold. This can have advantages, particularly if you are selling mainly to VAT registered businesses, for example allowing your business to claim back VAT on purchases. If you are liable for VAT, payments are generally made every three months though you may be eligible to join the Annual Accounting Scheme which allows you to do one VAT return at the end of the year and to pay VAT that you owe in nine monthly or four quarterly instalments.
As a self-employed person, you are required to fill in tax returns under the self-assessment tax return scheme. At the beginning of April each year, HMRC will send you a self-assessment tax return form. You will have to fill in details of all sources of income, tax allowances, relief or gains.
The deadline for returning your self-assessment tax return is 31 October for paper forms and 31 January for online forms. Through the self-assessment tax return scheme, income tax is paid in two instalments during the year (on 31 January and 31 July).
All profit, even if it is reinvested in the business, is classed as personal income and is taxable. This is an important point to remember when it comes to planning your income tax payments. Make sure that you put enough money aside each month to pay your tax bill by the required deadlines, as cash flow fluctuations in your business can sometimes make it difficult to come up with the required sum. You should also be aware that if you do not pay on time, you will have to pay penalties and interest.