If you are considering starting your own small business, you may well choose to act as a sole trader rather than a limited company. Before you set up as a sole trader, you should find out about the legal requirements. Legal requirements as a sole trader include choosing and protecting your business name, registering with HM Revenue and Customs (HMRC) for self-assessment, keeping accurate records, and ensuring you pay your personal income tax and National Insurance on time. In this blog, we will cover some of the legal obligations that you as a sole trader need to be aware of.
What is a Sole Trader?
A sole trader is a self-employed person where, in the eyes of HMRC, you and your business are treated as a single legal entity. On the other hand, there are limited companies, which are regarded as separate legal entities and therefore have limited liability if the company gets into financial difficulties. If you are a self-employed sole trader in the UK and earning over £1,000 per tax year you are required by law to register with HMRC.
What are the Legal and Financial Requirements to be a Sole Trader?
While sole trader legislation is less complex than other legal structures, there are still some obligations that you need to consider when starting out. You are the sole beneficiary of your company's achievements, so you are solely responsible for complying with legal obligations and deadlines. There's definitely more personal risk and responsibility to ensure your business is up to par, but when you're the only employee it ultimately becomes easier to manage.
1) Register for the Self-Assessment
If you are considering becoming self-employed you must take steps to notify HMRC of your employment status. You should tell HMRC that you are self-employed and register for self-assessment to ensure you pay the correct amount of income tax. If you have never been self-employed or have never completed a self-assessment tax return, you will need to register online with HMRC if you decide to become self-employed. By registering online you will be able to create a Government Gateway user ID which you will need for all future dealings with HMRC. After registration you will receive a letter with your Unique Taxpayer Reference (UTR) - keep this safe as you will need it or your accountant will need it to file a tax return and pay taxes.
2) Keep Records of Your Company's Sales and Expenses
Because the law requires you to keep a record of all of your company's income and expenses, you should carefully consider how you do this. Accounting software is ideal for this task, with a wealth of features to help you keep track of your day-to-day finances with minimal fuss. The accounting software allows you to automate your bills and track all your expenses through the mobile app, keeping your accounts up to date without the worry of being investigated by HMRC.
3) Choose a Name for Your Sole Proprietorship
Naming your business can be difficult but fun when setting up and starting out. However, before you find what you think is the perfect sole trader name, it's important to know that, Sole traders may not use the following terms in their name as this would be misleading as to the legal status of the business. So, as a sole proprietor, you cannot use:
● Limited (Ltd)
● Limited Liability Partnership (LLP)
● Public limited company (Plc)
Your company name must not be offensive and should not contain any mandatory sensitive words. This includes names suggesting that your company is government-affiliated or of national importance (e.g. UK or international) unless you have specific permission to use them.
4) Comply with HMRC VAT Regulations
If you expect to have a turnover of £85,000 or more over a 12-month period you will need to register for VAT. Once registered you will need to charge your customers for VAT and submit a VAT return to HMRC online using compatible accounting software. VAT can be tricky, but don't worry! PTA manages the UK VAT system so you can keep your business on track and file VAT returns directly with HMRC.
5) National Insurance
As a sole trader, you must pay National Insurance Contributions (NICs) on your income, but unlike full-time employees, who only pay Class 1 National Insurance, you must pay Class 2 National Insurance and Class 4 National Insurance contributions. While Class 4 is calculated automatically and included in your taxes, Class 2 is calculated weekly.
6) File a Self-Assessment Tax Return Every Year
HMRC normally collects income tax from employees directly through their employer's payroll system. However, if you are a self-employed sole proprietor and run your own business, you must submit a tax return to HMRC once a year to declare your income and allow HMRC to calculate the tax you owe. You must report your annual income and expenses to HMRC each year via a self-assessment tax return. This must be submitted by midnight on January 31st each year. HMRC uses this tax return information to calculate how much income tax you owe.
7) Pay Your Tax Bill
January 31 at midnight is also the deadline for paying your self-assessment tax bill. It's a good idea to file your tax return well in advance to ensure you can pay on time - you could face a £100 fine if you miss it! Don't forget that on January 31, you may also have to pay a deposit on next year's tax bill that's half of the previous year's bill. For example, if the total bill for your first year of the business tax year is £2,000, you must pay that amount by 31 January plus an additional payment of £1,000 for next year's bill. After that, another payment on the account is due on July 31st.
8) GDPR
The General Data Protection Regulation (GDPR) came into force in May 2018. General Data Protection Regulations regulate how companies collect, store and handle an individual's/customer's data and set out the penalties for those who do not comply. Any company that holds personal information about an individual/customer, whether electronically or on paper, must ensure that it can demonstrate that it has obtained consent to the storage/use of that personal information. In contrast to large companies, sole traders and the self-employed do not have to appoint a data protection officer. However, they could be fined up to 4% of their annual turnover for not obtaining sufficient consent to collect, store and use an individual's data.
Final Thoughts
Starting your own business in the UK, with all the legal and financial requirements involved, can be as daunting as it is exciting. However, if you choose to start this journey as a sole trader, it simplifies the legal requirements into just a few steps so you can focus on your business. Just remember to keep detailed records for yourself and HMRC and to file your tax returns on time to avoid fines. For personal help and advice on becoming a sole trader and legal obligations for sole proprietors, contact our team at 07985689912 or email info@protaxaccountant.co.uk