With nearly half a million sole traders in the UK at the end of 2018, this is one of the growth sectors of the economy. Up to 40% of those will fail within five years, with the top reasons being cashflow, and taxation problems. In both cases awareness is vital if you are to avoid setbacks. Working with Spectrum Accountancy Solutions is a good first step to having the basics covered. In this blog we will look at HMRC’s requirements.
When you start working for yourself, you’re automatically classed as a sole trader, even if you haven’t yet told HMRC. You will need to register for self-assessment if you earned more than £1,000 from working for yourself in the previous tax year. You will to register in order to prove you are self-employed, for example to claim tax-free childcare or if you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits. You can set up as a sole trader while still being employed full-time. Your tax situation will become more complex and you should certainly talk to Spectrum on this point so as not to be left with a sudden and surprising tax bill. You may also want to check that you are not breaching your contract of employment by doing other work.
Taxation and VAT
As a sole trader, you will have to pay income tax on any profits your business makes. You must fill in a self-assessment tax return detailing your income and expenses. One area that often catches sole traders unawares is HMRC’s payment on account scheme. This means that as well as paying your previous year’s tax bill you must pay up to half of the current year. From HMRC’s point of view this is to stop people from falling into arrears. The result for many, newly self-employed people is that they typically face a tax bill which is roughly 50% higher than they had been expecting. Once you are over the initial hurdle, payments on account simply spread your tax bill across the year and can make it easier to budget. If your business is likely to turn over more than £85,000 (in the 2018/19 tax year) then you will need to register for VAT. This, and the new Making Tax Digital requirements we have talked about in other blogs, is best handled in conjunction with Spectrum Accountancy Solutions.
National insurance & Employees
Remember you will have national insurance to pay for yourself and anyone you employ. Sole traders can take on employees just like any other business. Therefore, you will need contracts of employment and collect income tax and NICs from them and pay these to HMRC. You will therefore need to operate a Pay As You Earn (PAYE) payroll system. You will also have to look at pension provision. Again, check what is required with Spectrum Accountancy Solutions.
You will need to keep all the financial records required to fill in your tax returns. It is a good idea to store all your receipts and transaction records in a safe place and in date order. The more organised you are with your paperwork, the easier it will be to complete your tax return. With Making Tax Digital’s requirement for online records looming Spectrum will be happy to advise on a suitable system to keep you clear and compliant.
The vast majority of HMRC compliance checks take place because there are some concerns about the validity of a company’s tax return. They don’t have the resources to conduct routine tax inspections anymore. So, if you receive notice from HMRC that it wants to check your tax position, it is safe to assume HMRC has grounds for believing your business has underpaid its tax. Working with Spectrum Accountancy Solutions will go a long way to making sure you stay compliant with HMRC’s requirements. One of the important points for us is that your accounts don’t become a compliance burden for you. They should provide you with the essential information on the performance of your business, enabling you to make better informed decisions about your business future. Spectrum Accountancy Solutions will be happy to talk about your situation and pans. Get in touch to discuss them with us.
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This post was written by Daisy Vowles