The legal requirements of becoming a sole trader
People dream of being their own boss for many different reasons. Some of those reasons include the freedom to work for themselves, run their affairs as they wish and the ability to ensure a healthy work / life balance. All whilst, maintaining financial security via the running of a business curated and loved by them.…
People dream of being their own boss for many different reasons. Some of those reasons include the freedom to work for themselves, run their affairs as they wish and the ability to ensure a healthy work / life balance. All whilst, maintaining financial security via the running of a business curated and loved by them. Often referred to as sole traders, small business owners are usually driven and passionate about what they do.
Although the benefits of being a sole trader seem glorified, there are pitfalls and risks that one must be aware of. Nothing comes easy nor without sacrifice, being a sole trader produces responsibilities and risks that are often overlooked. With a heavily reliant decision-making process now on one’s shoulders, it is of the utmost importance that sole traders do their research before embarking on the new venture. It is the sole trader who will be responsible for the day to day business operations, profit maximization and even debt incurring abilities.
In the eyes of the law, the sole trader and business do not have separate legal existence. The business owner and the business itself are the same, this means that the sole trader is personally liable for any debts or losses incurred by the business.
Here are some tips in order toput you in good stead when thinking about becoming a sole trader. There are legal obligations that you must fulfil as a sole trader whilst also ensuring compliance with HMRC. Here are some of the legal responsibilities that a sole trader must fulfil to remain compliant:
Register your self-assessment
Any income earned as sole trader is subject to tax, after deducting tax deductible expenses. It is your responsibility to inform HMRC that a tax return is due. There are specific conditions that must be met in order to register yourself as a sole trader, if any of the below apply:
- You earn more than £1,000 as a self-employed person in any relevant tax year.
- You prove yourself as a self-employed person. For example – to claim tax free childcare.
- If you want to make Class 2 National insurance voluntary payments to help you qualify for benefits.
Choosing the right name for your business
Choosing the right name for a business is not an easy task but couldbe great fun as well. There arecertain rules and guidelines that a sole trader must adhere to when registering their company name:
- The business name shouldn't be offensive.
- It should not be same as an existing trademark.
- It should not include words like "Ltd", "Limited", "LLP", "Limited liability partnership", "PLC", Public limited company".
- It should not contain any "sensitive words" or "expressions" unless you get permission.
- It should also not indicate any connection with the government or local authorities unless permission is granted.
Keep a record of your businesses sales and expenses
The recording of your businesses sales and expenditure is imperative, not only for the tax man, but it is one of the most importantcomponents that a business should consider and should be handled with care and accuracy. As a sole trader, it is your responsibility to minimize your workload and maximize your output, this is possible when using a cloud accounting software like Nomisma. Software like Nomisma, helps to track business sales and expenditure – but also automate the process of chasing invoices and calculating taxes. With features like our mobile receipt capture app, it’s now possible to upload and track any business-related finance in real time and without missing data.
Filing your tax returns
The deadline for the annual reporting of your income and expenses to HMRC, is the 31st January.Your tax returns should be submitted way before the deadlineif you want to avoid any fines or penalties. It is during this period, that most sole traders will feel stressed and panic when it comes to filing their tax returns. Again, by using HMRC compliant software, it is possible to eradicate the unnecessary stress which will give you peace of mind and allows productivity efficiency when it comes to the running of your business and remaining compliant – penalty free.
Pay your tax bill
The deadline for paying your self-assessment tax bill, is the same as the deadline for filing your tax return – 31st of January. In a scenario where you miss or fail to make payment before the deadline, you could face a penalty of £100.
HMRC VAT compliance
VAT registration is also a mandatory requirement for sole traderswith sales exceeding a turnover of £85000 or more in any 12-month period. Once VAT registered, you need to charge VAT to your customers, in order to file you VAT returns to HMRC online. This can be done within Nomisma.
Consider the construction industry scheme
If you are working in the construction industry as a contractor or a sub-contractor, you should be awareof what your duties and responsibilities are concerning the construction industry scheme (CIS). As per CIS rules, contractors must deduct money from sub-contractors’ payments and submit the deductions to HMRC. Deductions made by the contractors are counted as advance tax payments towards the sub-contractor's tax and national insurance.
Hence, if you are working as a contractor in the construction industry, you must register under CIS. Deductions are taken from sub-contractors’ payments if they are registered under the CIS or not.If any of sub-contractors are not registered, thenthe deductions will be charged at a higher rate.
How can Nomisma help?
Nomisma is an MTD ready and HMRC compliant accounting software which can help sole traders with the management of all the accounting aspects within their business. Nomisma will calculate your self-assessment tax bill as per your annual records and by giving access to your accountant it can even be submitted directly to HMRC as a result of your bookkeeping.