What is a sole trader?
A sole trader is someone who is the exclusive owner of a business (also known as ‘self-employed’ or ‘sole proprietor’) and who is entitled to all profits after tax has been paid. They are also solely liable for business losses.
‘I want to run my own business, how do I set up as self-employed?’
‘What are some of the advantages and disadvantages to being a sole trader?’
‘What are the tax obligations of a sole trader?’
What is a partnership?
A partnership is when two or more people form a business together and who share the profits and losses of that business.
How do I tell if I am ‘employed’ or ‘self-employed’?
If you are unsure about your employment status, HMRC has put together some helpful guidelines here:
Generally speaking, a self-employed person will work for themself as a business owner, contractor or freelancer, and their earnings will usually come straight from that business or contracting, whereas an employed person will receive a regular salary from a company (from which the employer deducts income tax and national insurance contributions).
Note, you can be both employed and self-employed at the same time. For example you could have a part-time job where you get a regular wage from an employer, but also run your own business the rest of the time, taking on freelance work or contracts.
In this case you will pay tax and national insurance on both income streams in different ways. From your regular wage, your employer will automatically deduct both tax and national insurnace through PAYE (Pay As You Earn),and from your own business you will need to pay Class 2 and Class 4 national insurance, as well as completing a Self Assessment tax return each year declaring all your income, and pay tax on any income you have received that has not already been taxed.
A handy tip is to keep a separate savings account, and each time you get paid for your self-employed work, put a proportion of that money over into your savings, so you can cover the tax and national insurance due on those earnings.
HMRC have introduced anti-avoidance measures to tax companies and individuals who may try and use the wrong employment status to avoid tax. Contact us for advice or if you would like to know more on this.
I want to run my own business, how do I set up as self-employed?
The good news is there is very little paperwork when getting started as a ‘sole trader’ (another term for becoming self-employed).
First you will need your National Insurance number. You can find this on your payslip, P60, or letters about tax, pensions and benefits. Then you need to contact HM Revenue & Customs to register with them.
The HMRC registration page can be found here: https://www.gov.uk/working-for-yourself
HMRC will then send you your Unique Taxpayer Reference (UTR),which is a 10-digit number that will be your reference code for all things relating to your tax obligations (such as when doing your Self Assessment tax return). Keep it somewhere safe.
Then you will need to consider things like whether or not you have to register for VAT, what kind of business insurance to get (some policies are required by law),what financial records to keep, and opening a business bank account.
If you would like help with doing any of these things, get in touch.
What are the tax obligations of a sole trader?
A sole trader is required by law to pay tax on business profits, after expenses.
They must also pay Class 2 of National Insurance (£3 per week when profits exceed £6,365) and Class 4 National Insurance (9% of profits between £8,632 and £46,350 and 2% of profits above £50,00) per year.
Profits are presently taxed at income tax rates of:
20% for taxable incomes between £1 - £37,500 (not including your personal allowance of £12,500 for 2019/2020)
40% for taxable incomes between £37,501 and £150,000
45% for taxable incomes over £150,000
I’m not sure if I should be a sole-trader, partnership, LLP, or Limited Company
Choosing the right business structure is one of the key steps to setting up a successful company. How your company is legally structured impacts what kind of tax opportunities are available to you, and therefore impacts profitability.
Companies House have published a post on choosing between different types of business, which lay out some simple advantages and disadvantages, here:
There are key differences in tax you will pay personally and through the business depending on which structure you choose. See our Incorporation Calculator in the tax section to give you a guide on which option would mean less tax for you.
If you’d like to discuss anything in more detail, or would like help going through the set-up and specifics for your type and size of business, give us a call and we’d be happy to help.
What are some of the advantages and disadvantages to being a sole trader?
• Simple to set up and establish your business
• Low start-up costs
• Complete control over your business and how you run it
• All profits are yours to keep
• You are not required by law to file annual reports
(Note: you are required to prepare annual accounts for tax returns)
• Unrestricted amount of borrowings
• Corporate tax not applicable
• Losses may be set against other income or profit from previous years
• If you decide to close your business later, the procedure is easy and straightforward
• Unlimited liability for debts and all business expenses
• You are not eligible for business loans
• Can be difficult to gain investors
• Potentially a sense of unprofessionalism by some customers (when compared to structured, formal businesses)
I have started earning money from making things/doing odd jobs here and there, but am unsure if I need to pay tax on it, or even where to start. Can you help?
Of course! We understand that tax and accountancy can seem like learning a second language, but a lot of it (especially when you are just starting out) is very straightforward. Get in touch and we can see where you are at, draw up an tax estimate, and go through your tax obligations with you.
Also see: I want to run my own business, how do I set up as self-employed?
How much for an initial consultation?
Our initial consultations with prospective clients are always free.
If you would prefer to call us instead of meeting in person, or simply to ask for more details, we’d be happy to help, our number is 01920 872148.
How much do you charge for tax advice?
This will depend on the amount of time needed to review your records and prepare the required accounts/returns. We deal with companies of all sizes and types of business, so we tailor our services to suit individual needs. After gathering a few details from you we can give you a quote on what our services will cost.
How do I employ someone?
After you have decided what kind of employee your company needs, and that your company can afford to take them on (while being assessable and safe for them to work),then you must register as an employer and set up a PAYE.
We can do this for you, or you can do this yourself by registering as an employer here:
The PAYE (Pay As You Earn) system is a method of paying income tax and national insurance contributions, where you as an employer deduct these contributions before your employees receive their wages or pension. See our Payroll Calculator for an estimate of how much an employee will cost in taxes.
We can take you through the setting up process as well as other requirements, such as
• How to run a payroll
• Standard and enhanced DBS checks (Disclosure and Barring Service, so essentially checking the criminal record of a prospective employee)
• Your responsibilities around workplace pensions
• Setting up Employers’ Liability (EL) insurance, which is mandatory as soon as you become an employer. You can be fined £2,500 every day you are not properly insured!
Do I need to register for VAT?
As of April 2018, if your business has an annual turnover of £85,000 or more, you have to register for VAT.
However, if your annual turnover exceeds this threshold only temporarily, and is usually under £85,000, then you can apply for exception from registration.
Some people decide to register for VAT even though they do not exceed the £85,000 threshold. Reasons for doing this include being able to claim VAT back on eligible purchases your business makes.
If you need to register for VAT, then it is worth looking at the options available, either the Flat Rate or standard VAT schemes. Your accountant will be able to advise you which scheme you would be better off on.
What is the VAT Flat Rate Scheme?
Generally, the amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.
With the Flat Rate Scheme:
• you pay a fixed rate of VAT to HMRC
• you keep the difference between what you charge your customers and pay to HMRC
• you can’t reclaim the VAT on your purchases - except for certain capital assets over £2000
To join the VAT Flat Rate Scheme your turnover must be £150,000 or less (excluding VAT),and you must apply to HMRC.
If you would like advice on whether the Flat Rate Scheme is right for you and your business, give us a call.
Can I register for VAT even if my annual turnover is below the threshold for registration?
Yes you can. See ‘Do I need to register for VAT?’
What is Capital Gains Tax?
Capital Gains Tax (CGT) is the tax you are required to pay on the profit you make when you sell something or give something away (known as an asset) that has increased in value. Examples of taxable assets would be property, shares, artwork, etc.
It is the profit that is taxed, not the total amount. So, for example, if you buy shares for £7,000 and later sell them for £17,000, the profit you have made on it is £10,000. So it would be £10,000 of the £17,000 you receive that is affected by Capital Gains Tax. Or, if you give an asset away, the profit is calculated as the market value less the amount you paid for it. Some possessions are exempt from Capital Gains Tax, such as cars, furniture and electrical items.
You only need to pay CGT on your chargeable assets when your total gains add up to be more than your tax-free allowance (currently £12,000 per year). There are also some additional reliefs that you may qualify for.
You do not generally pay CGT on gifts to your wife, husband, civil partner, or a charity.
There are certain types of tax relief you may be eligible for that would reduce the amount of Capital Gains Tax you are required to pay, such as ‘Entrepreneurs’ Relief’, and ‘Business Asset Rollover Relief’, and several more. These of course depend on your specific circumstances but are certainly worth discussing with your accountant to make sure you are not paying tax unnecessarily. If you don’t claim for a relief you are entitled to, HMRC will not query it!
Do I pay tax differently if I work in construction? What is CIS?
CIS (which stands for Construction Industry Scheme) is a tax deduction arrangement that involves contractors automatically deducting money from payments to subcontractors, and sending that money to HMRC towards the subcontractor’s tax and National Insurance contributions.
This affects payments that relate to construction work.
CIS does not apply to payments made to employees, as payments to your employees are covered under the PAYE system.
Contractors must register for CIS, whereas subcontractors don’t have to. However, it is beneficial for the subcontractor to register also, as deductions will be taken at a lower rate.
If your business has payments that are linked to construction, and you’d like to discuss this further, give us a call.
How do I tell if my business comes under CIS criteria?
In summary, if your business either:
- pays subcontractors for construction work
- does not do construction work but spends more than £1million per year on construction in any three year period
then your business will fall under CIS.
There are exceptions, including surveying, architecture, scaffolding hire (with no labour),delivery of materials, carpet fitting, certain site facilities that are not directly construction (such as running a canteen),making materials used in construction (including plant or machinery),and so on.
If there is any link with construction, it is always advisable to check with HMRC or with your accountant to be certain that your work is exempt from this scheme.
HMRC have put together a full guide to the duties of both contractors and subcontractors within the Construction Industry Scheme, which you can find here: https://www.gov.uk/government/publications/construction-industry-scheme-cis-340
What is the IR35 rule and am I complaint?
IR35 is a piece of government legislation introduced in 2000 designed to tackle tax avoidance.
Some contractors work for companies as ‘employees’, but are paid as ‘sub-contractors’, which means the employer does not pay the correct employer’s national insurance, and the employee/sub-contractor does not contribute PAYE or employee’s national insurance, as they would do if they were on the payroll like other employees.
Also known as ‘intermediaries legislation’, IR35 will be replaced in the private sector by the new Off-Payroll Tax in April 2020. (This has already been introduced back in April 2017 to the public sector.)
Knowing if one falls inside or outside of IR35 legislation can be tricky to determine, as it is decided on a case by case basis, and is therefore best reviewed by a specialist to make sure you are compliant.
What is a Tax Compliance Check?
It is a formal investigation carried out by HMRC to determine whether your tax return is correct and all is in order with regards to company payments, any tax relief and allowances.
What is a dividend payment?
A dividend is an amount paid to the company shareholders from the profits of that business, after corporation tax and other financial obligations have been met.
Is it possible I can take a loan out through my company?
Yes, however there are tax implications in doing so. The size of loan, duration of borrowing, and how it is withdrawn through your company are just some of the factors to be taken into consideration.
This is definitely something to discuss on case-by-case basis, as there may be other options open to you.
What is the deadline to submit my self-assessment tax return?
There are two ways to submit your self-assessment tax return, and there is a different deadline for each. You decide which one best suits you.
1) Paper tax return: deadline is 31st October
2) Online tax return: deadline is 31st January of the following year
So, for example, your tax return for the year 6 April 2018 to 5 April 2019 needs to be submitted either on paper by 31 October 2019, or online by 31 January 2020.
Late tax returns will incur fines by HMRC.
Being late by one day is an automatic £100 fine, then it is £10 for each additional day, up to a maximum of £1,000 (90 days plus the initial £100 fine).
Being between three and six months late incurs either £300 or 5% of the tax due (whichever if higher),in addition to the penalties above.
Lastly, being 12 months late is a further £300 or 5% of the tax due, in addition to all the above. In some cases the tax due has been doubled, meaning a 100% fine.
These fines are easily avoidable. We can go over your financial situation with you and timetable your assessment to best suit your personal schedule.
Can I claim expenses?
You may be able to claim tax relief on certain types of payments, such as travel and overnight expenses (if it is to a temporary place of work),professional fees/subscriptions, vehicles used for work, uniforms/work clothing, tools or other types of necessary equipment, working at home, mobile phone, and so on. These are easy to go over with you, to make sure your business is not out any unnecessary expense.
How long do I legally have to keep business documents?
HM Revenue and Customs (HMRC) can check your records in order to ensure you are paying the right amount of tax.
There are a few exceptions, but generally speaking companies in the UK are required to keep their records for a minimum of six years, from the end of the last financial period to which they relate.
Where you will need to keep your documents longer are in cases such as when the company has purchased something it expects to last beyond six years, such as equipment or machinery.
Private individuals (who do not run a business) are recommended to keep their financial documents for a minimum of 22 months, after the end of the tax year they relate to.
There are other types of business documents to consider: records about the company (directors, shareholders, transactions when someone buys shares in the company); a register of ‘people with significant control’ (PSC); loans or mortgages secured against the company’s assets, and so on. You accountant will be able to go over all of these with you so nothing gets misplaced or lost.
HMRC have published a general guide to keeping records for your tax return:
If you keep these records somewhere other than your company’s registered office address you must inform Companies House. A link for doing this is below:
What do accountants actually do?
Many people simply use their accountants for bookkeeping, VAT, payroll and preparation of annual accounts so these are considered ‘core services’.
However, in our opinion, our primary role is to get to know and understand our clients and their businesses so we can offer the most appropriate professional advice. Qualified accountants will have knowledge in all aspects of running a business so we become our client’s advisor when making major business decisions. This can be particularly useful with sole traders/sole director companies who value a second opinion.
We also look at your future aspirations for your business - and yourself personally - so we can ensure matters such as income and ownership are structured in the most tax efficient way. This is especially important when planning for exit strategies, succession planning and retirement.
Do I legally need to hire an accountant for a small business? Shall I do it myself?
The only time a company is legally required to have an accountant is if it is large enough to necessitate an audit. This is when the company reaches a certain threshold of annual turnover, assets, and number of employees.
Otherwise, there are no legal requirements for having one. Of course, there are a huge number of benefits in doing so.
Bookkeeping, tax assessments, filing returns, calculating an even spread of costs, keeping an eye on key changes in financial trends in your business and industry, these can all be time consuming to a business owner who does everything themselves.
We believe that when you hire a good accountant you are getting more for your money than merely what is on the printed page. You are buying time for yourself to focus on other priorities, peace of mind that all legal business obligations are met, as well as knowing there are professionals looking out for your company’s best financial interests.
When you weigh the cost of a qualified accountant against how much they can help you save, and their informed business suggestions, we believe the balance is more than worth it.
There seems to be so many accountants out there, how do I pick the right one? Are accountants all basically the same?
The term ‘accountant’ is not regulated in the UK. Alarmingly, this means that someone who has no professional qualifications, experience, or training, can set up and begin referring to themselves as an accountant, without any legal implications. In other words, there is no legal obligation to be of any standard.
Of course, there is likely to be many legal implications for their poor clients if they are given unsound advice.
An important distinction is with Chartered Accountants.
Chartered Accountants are members of official organisations such as the following:
• The Institute of Chartered Accountants in England and Wales (ICAEW)
• The Association of Chartered Certified Accountants (ACCA)
• The Institute of Chartered Accountants of Scotland (ICAS)
• Chartered Accountants Ireland
All these organisations were founded well over a century ago and have strict entry requirements.
In order to be a member of these trusted communities, a qualified Chartered Accountant must:
• pass a rigorous examination pathway which includes fifteen exams at Certificate, Professional and Advanced levels which encompass all aspects of accountancy and tax
• evidence to the ICAEW that they have undertaken sufficient practical work experience expected in the profession
• maintain a record of Continuous Professional Development which evidences the training undertaken each year to keep their skills and knowledge up to date
Only once the above high standards have been met and approval given by their professional body (in our case the ICAEW),will a practicing certificate (PC) be issued.
Here at Hall & Co. we believe an accountant should meet these high standards and be a trusted advisor of your business.
What sort of questions should I ask a new accountant to know they are the right one for me?
Here is some advice given by two financial experts (from ICAEW and ACCA) on the right questions to ask, to help you make an informed decision:
What are some examples of business sectors you have experience in?
We have a diverse range of clients that include:
- Letting Agents
- Property companies
- Service Charge companies
- IT companies
- Recruitment companies
- Service industry (hospitality/entertainment/media)
- Sole traders (such as plumbers, electricians, builders, etc.)
Do I need to sign a contract with you? / Is there a minimum contract period with Hall & Co.?
In accordance with our regulatory body, the ICAEW, we are required to issue a Letter of Engagement to all clients detailing the services we have agreed to provide and from what date they will commence. The letter also acts as a contract in that it details our responsibilities as your advisors and your responsibilities to us regarding the information you need to provide. We will ask you to sign this letter to confirm you wish to engage us. There is no minimum contract period, no tie-ins or anything else, and the client can easily terminate the engagement at any time.
Do you offer advice on pensions?
We do not. If you require recommendations on pensions or other types of financial products, we recommend speaking with someone who is regulated by the Financial Conduct Authority (FCA),as they will be professional financial advisors and you are protected by the Financial Services Compensation Scheme (FSCS).
We have numerous contacts with FCA regulated financial advisors in the local area and would be happy to put you in touch.
The FCA website can be found here: https://www.fca.org.uk/
I’m not satisfied with my present accountant, how easy is it to switch to you?
Switching accountants is simple and straightforward.
All that is required is for you to email your current accountant, informing them of your new accountants, and advising them that this new firm will shortly be in touch to receive your business records. If you like, we can even draft the email for you.
We will then take care of everything else, including informing the HMRC and other official offices that your business dealings are being looked after by Hall & Co.