Setting up as a sole trader is the easiest way to start a business. Minimum paperwork, least legal complications, pretty straightforward accounting, and taxation, and… You get to be your own Boss (sounds exciting, right!). You need to follow a few simple steps and then you’re good to go:
1. Choosing the right form of business structure
First and foremost, make sure that being a sole trader is the right decision for you. If you’re of two minds about choosing a company or sole trader form of business organisation, we’ve prepared a blog to make this decision easier for you.
Blog on Sole trader versus limited company
Blog on Limited Liability Partnership versus Limited Company
2. Deciding a name
The bread and butter of signing up as a sole trader are to decide on a "suitable" name for your business. Most commonly, your business name can be your first and last name. However, you can still carry on your business activities under a different name which is known as a "trading name". The point to be noted here is that your name and business name need to be mentioned on all your invoices, letters, and other official paperwork. Other requirements with regards to naming the business are:
- The name should not include words like ‘ltd.’, ‘limited’, ‘plc.’, ‘public limited company, ‘LLP’, ‘limited liability partnership’.
- It should not be offensive.
- It should not be the same or similar to any existing trademark.
- It should not contain a ‘sensitive’ word, expression, or suggest a connection with government and/or local authorities unless you obtain permission.
- If you want to stop people from trading under your business name, then you’ll need to register your name as a trademark.
3. Registering as a sole trader with HMRC
You need to register as a sole trader for self-assessment and Class 2 and Class 4 National Insurance if:
- You sell regularly to make profits
- You make items to sell for profit
- You sell online, at car boot sales, or through classified adverts on a regular basis
- You earn a commission from selling goods for other people
- You’re paid for the service you provide
You should ideally be registered as soon as you start trading, the latest by 5 October in the second year of your business. Click here to know how to register for self-assessment as a sole trader.
If you sell some unwanted items occasionally or you don’t plan to make a profit from selling, then it will not be called "trading" and you won’t be called self-employed. So, in such cases, you don`t need to register as a sole trader.
4. Core responsibilities
Besides being responsible for the business as a sole trader, you’ll also be responsible to carry out the following responsibilities:
- Keeping proper records of the business’s sales and expenditure
- Annual filing of self-assessment return
- Payment of income tax and Class 2 and Class 4 National Insurance
5. Record keeping
As a sole trader, you need to keep records of:
- All sales and income
- All business expenses
- If a VAT is registered, then VAT records
- If you employ people, then PAYE records
- Records about your personal income
6. Filing of returns and payment of taxes
You need to file your self-assessment tax return by 31 October if you file a paper tax return and 31 January of the following year if you file the return online. The tax bill needs to be paid by 31 January of the following year.
For example, for the tax year 6 April 2018 to 5 April 2019, if you want to file a paper tax return then it needs to be filed before midnight of 31 October 2019 and if you wish to file an online tax return then it can be filed up to mid-night of 31 January 2020. Also, the tax payment in both the cases needs to be made by 31 January 2020
7. Other Registrations
- National Insurance Number
If you’re a sole trader, then you’ll be required to pay National Insurance if you’re:
- 16 years old or older
- Self-employed and making a profit of £6,365 or more within a tax year (for 2019/20)
To pay National Insurance contributions, one needs to have a National Insurance number. You need to call the National Insurance number application line at 0800 141 2075 to apply for NI number.
- PAYE Registration
Once you start employing staff, you need to register as an employer with HMRC. You need to be registered before the first payday. Once you apply for registration, it usually takes up to 5 days to get employer PAYE reference number.
- VAT Registration
You’ll need to register for VAT if the VAT taxable turnover is more than £85,000. Once you’re registered for VAT you’ll have to charge the right amount of VAT, pay any VAT due to HMRC, submit VAT return, keep VAT account and VAT records. Making Tax Digital (MTD) is one of the major initiatives taken by Government in the VAT regime. To know more about MTD Click Here
- Construction Industry Scheme
- You have UTR: You can register for CIS online. You just need Government Gateway user ID and password you used when you registered for self-assessment or any other government service.
- You do not have UTR: You need to register as a new business for self- assessment and then choose ‘working as a subcontractor’. You’ll be registered for both self-assessment and CIS. You can also call CIS helpline on 0300 200 3210 to register.
READY, STEADY, GO…
Through this article, we’ve tried to lay down a bold outline of the legal requirements you need to carry out while setting up as a sole trader. Commencing business as a sole trader is relatively easy when compared to other forms of it, only a few legal requirements and you will be ready to roll…
Where ever you get stuck, feel free to contact us. Our team would love to assist you!