Sole Traders - You're Not Alone

As the deadline draws near for filing self assessed tax returns in the UK, and only days after a family member secured her first order for her new business, I thought it might be useful to summarise the key requirements of a sole trader.

For many, the very thought of tax returns and record keeping can be daunting enough to put them off following their dreams, but it's important for people to realise that there are plenty of ways to get answers to your questions and that with a bit of organisation you can easily manage the financial aspects of your business.

Registration

You are required to inform HMR&C when you have become self-employed within 3 months of starting your new business. You will be asked to provide the details laid out in form CWF1 either over the phone (0845 9 15 45 15) or by post.

Filing Requirements

Once registered, you will be required to file an annual self-assessed tax return. The tax year runs from April to the following March ie. the current tax year runs from 01/04/2007-31/03/2008 (2007/08).

If you were registered before the end of the tax year, you have to file the return no later than the end of January following the tax year, in this case 31/01/2009. If however, you wish to simply submit your documentation and ask the revenue to do your calculation for you, the deadline is the end of September in this case 30/09/2008.

While this may sound like a long way off, I would strongly advise tackling this important step as soon as possible while events are still fresh in your mind and before the pile of invoices gets even bigger!

Don't forget, a late filing will result in a fine of GBP100.

National Insurance Contributions

As a self-employed person, you may be required to pay two different types of NIC:

(i) Class 2:

This is a fixed weekly amount that can be paid monthly or quarterly through a direct debit. The current amount is GBP2.20 and this will go up to GBP2.30 from April 2008.

NB - if you earn less than GBP4,635 in this tax year (GBP 4,825 in the next tax year), you are entitled to apply for a Small Earnings Exception (SEE). See form CF10. However, be mindful that any gaps in your contributions could reduce the pension amounts you are entitled to upon retirement - see blog entry "Bridging The Gap".

(ii) Class 4:

This is a variable that is determined by the amount of annual taxable profit you make.

• If you make less than GBP5,225 in this tax year (GBP5,435 in the next tax year), you are exempt from this tax.
• You must pay 8% on taxable profits between GBP5,225 - GBP34,840 in this tax year (between GBP 5,435 - GBP40,040 in the next tax year).

Example: if you make a taxable profit of GBP 20,000 this year, you will pay 8%*(20,000-5,225) = GBP1,182.

• Any taxable profits above GBP34,840 (GBP40,040) are taxed at 1% for class 4 contributions.

VAT

For VAT requirements see blog entry "VAT as easy as ABC"

Keeping Records

As a sole trader, you are now responsible for your tax returns and the basis upon which your tax liability is calculated.

To ensure you pay the correct amount of tax and don't risk paying fines, it is essential that you keep clear and well organised records of everything occurring in your business.

A good approach is to set up a file with the following sections, where you should file documents as you receive them in chronological order:

1. Correspondence and forms sent to/from HMR&C
2. Bank statements
3. Receipts for business expenses
4. Invoices received
5. Invoices issued
6. Business bills - electricity/telephone/heating etc

I would also advise setting up an excel spreadsheet with a separate worksheet for income and expenses, where you should input the details of each invoice and receipt. This will make filing your annual return a much less stressful experience.

Records should be kept up to 5 years after you have filed the related tax return, you never know when you might be asked to justify something you put in an old return.

Additional Support

For more information, take a look at the excellent guide provided by HMR&C - "Working for yourself - the guide" .

All that remains to be said is good luck with your new ventures and don't be afraid to ask for help...