When setting up as self-employed, one of the likely operating structures you’ll discover is becoming a sole trader.
Whether or not this is the ideal route for you will depend on your personal circumstances, and you should ensure you know exactly what’s involved in being a self-employed sole trader. Here are the key things you need to be aware of.
When to set up as a sole trader
Becoming a sole trader means you run your own business exclusively and are self-employed, even if you don’t consider yourself to be. The term ‘sole trader’ can encompass a range of earning income models, from fully established businesses and contractors to landlords and those just doing a bit of freelance work on the side. Agency workers, however, aren’t able to set up as a sole trader.
It might be that, although you’re self-employed, you don’t need to register as a sole trader. If your income for the given tax year doesn’t total more than £1,000, then it isn’t necessary. You may still want to
though, if for any reason you need to verify that you’re self-employed or you’d like to pay voluntary Class 2 National Insurance Contributions to help you become eligible for benefits.
As a sole trader, you’re legally responsible for any losses made, and this could have an impact on your personal assets. Having an expert accountant helping with your finances may reduce the risk. They can also help you determine if this operating structure is the best way forward for you.
Registering yourself as a sole trader
To set yourself up as a sole trader, you’ll need to register for Self-Assessment. This is very simple, and can be easily done online, or post
if preferable. You should tell HMRC that you’re self-employed by the 5th October of your business’ second tax year so they’re aware you need to complete a return the following year. If this isn’t done in time, you could potentially be fined, so it’s best to do it as soon as possible to avoid any penalty.
Part of the registration process will require you to name your business, although you can trade under your own name if you wish. If you decide on a distinct name, then it must be displayed on business documentation such as invoices. Whilst the name doesn’t need to be registered, you must ensure it’s not the same as one that’s trademarked, and you should consider trademarking it yourself if you don’t want others using it. There are other rules around naming your business too, like avoiding any sensitive words or phrases.
Running your business
There are many administration requirements involved in being a sole trader, such as handling the invoicing process. Clients will need to be invoiced and followed up with if they haven’t paid on time – this helps ensure your cash flow is stable.
The invoices should charge for VAT if you’re a VAT-registered business. You will need to do this if your sole trader VAT taxable turnover totals £85,000 per annum or more (as of 2018/19). There’s also an option to register voluntarily – this may be a good idea if you have VAT that can be reclaimed on your costs and the businesses you sell to are VAT registered, and can reclaim the VAT.
If you are close to the threshold, it’s best to register early. If you haven’t done so after 30 days of surpassing the £85,000 figure, then you may receive a fine from HMRC. Some companies won’t do business with those that aren’t VAT registered, so there is also a potential to widen your client base and build up a better reputation for your business. Whilst this will result in extra tasks on your to-do list, like submitting VAT returns, a good accountant can take them off your plate.
Dealing with your accounting
On top of the administration, there will also be accountancy duties. One such task is offsetting your expenses from income and working out the taxable profits. This will require you to keep track of any income and outgoings. Cloud accounting software, such as FreeAgent, allows you to upload your evidence of expenditure on the go. You will also have the facility to file VAT returns through Freeagent.
With Making Tax Digital coming into force by 2020, it is likely that you’ll need to be using cloud accounting software by then, even as a sole trader. If you’re VAT registered, then you will need to submit your VAT returns digitally too, and soon – the roll-out date is April 2019. You can use an accountant to help you get to grips with the software, as well as sort out the other accounting necessities.
Choosing an accountant
Understandably, the accounting requirements involved in being a sole trader may not be what you signed up for. Many decide to outsource their tax and accounting, so they can feel safe in the knowledge that an accountant with relevant knowledge and experience will be looking after their tax affairs.
At Gorilla Accounting we keep sole traders compliant with legislation, ensuring they’re correctly advised on tax, and assisting with their tax bill calculations. On top of this, we’re Self-Assessment experts, removing the fear of the tax return deadline for our clients.
We can also advise and help with overall tax planning, guaranteeing your business is as efficient as possible. You’ll have a dedicated accountant who you can contact as much as you like, and you can prepare for Making Tax Digital with access to FreeAgent.
To find out further information about how we could assist with your sole trader finances, speak to a member of our team today.