As a sole trader, your tax requirements will be relatively simple. You'll have to pay income tax, National Insurance and (if your sales warrant it) register for VAT.
From the perspective of HMRC as soon as you start to earn money by selling goods or services (either on a full-time or part time basis) your income from that activity is potentially taxable.
You must inform your tax office and they will send you a self-employment tax return form or give you the option of filing the figures online. Within that form, you will be required to state your income from self-employment along with any business expenses. The taxable amount will be based on profits (sales minus expenses) with any additional allowances factored in.
If you're also working as an employee and paying tax through PAYE, that's all you have to do. However, if you work for yourself full time, you will also have to register with the Contributions Agency, the body responsible for issuing quarterly National Insurance bills. You have a month to do this once you become full-time self-employed.
Key dates for sole traders:
- The tax year ends on 5 April. All paper tax returns must be delivered to HMRC by 30 September
- Deadline for online returns and payment is 31 January the following year
- So if you're earning money on a self-employed basis for the first time and you supply figures for the tax year April 2009-April 2010, you won't have anything to pay until 30 January 2011
However, there's a possible sting in the tail. If your tax liability exceeds £1000 you will also have to make an advance payment for the 2010-2011 tax year. This will be based on half the previous year's bill with a second payment that will be due on 31 July.
For instance, if your tax bill for 2011/2012 comes to £4000 that will be payable on 31 January 2013, but you will also pay an additional £2000 on account for the 2011/2012 year. You will subsequently make two payments every year based on the previous year's earnings.
If you are planning on going into business with a partner you have three options: form a partnership, a Limited Liability Partnership, or establish a limited company with you and your partners as directors.
If you are a partner in either a partnership or limited partnership, you retain self-employment status and must fill in an annual tax return, just as though you were a sole trader. The deadlines remain the same.
However, if your partnership employs staff, you are responsible for administering their tax and National Insurance payments (as well as employers' tax and National Insurance through the Pay As You Earn (PAYE) system.
As such, you will have to deduct the correct amount of income tax every month, and make a payment to HMRC by the 19th of the same month or the 22nd if paying electronically.
If the average monthly totals come in below a certain threshold, currently £1500, you have the option of paying quarterly. Tax becomes due on the 5th of July, October, January and April.
Limited company directors are taxed on salary in the same way as staff. In other words, as a director you are employed rather than self-employed and your tax is paid through PAYE. However, a limited company must also pay corporation tax on profits.
Key dates for limited companies
- If your sales amount to less than £1.5million per annum, corporation tax is payable nine months and one day after the end of your company's accounting period
- That period may coincide with the tax year or - as is often the case - it may run from January to December.
- Corporation tax returns must be delivered within 12 months of the end of your accounting period.
- If you establish a company and intend to trade, you must inform HMRC within three months.
- Larger companies have to pay their corporation tax in four instalments, based on an estimated tax liability formulated from profits in previous years.
VAT is charged on a comprehensive range of business transactions. You must register to pay VAT if your turnover exceeds, or if you expect it to exceed, a certain threshold, currently £67,000.
There are advantages in registering to pay VAT. While you must charge customers the appropriate VAT rate on any goods or services sold to them (output tax) and pass that charge on to HMRC, you can also claim back VAT charged to you (input tax) by suppliers. Therefore, good book-keeping is essential.
Products fall into three VAT categories: zero rate, reduced rate and full rate. You quantify which categories your products and services are in. VAT returns are filed on a quarterly basis to HMRC.
If you run a partnership or limited company, you must file accounts at Companies House each year. Each set of annual accounts relates to a financial year. This varies from company to company.
In the case of newly established businesses the financial year starts from the point at which the venture was incorporated or the partnership established. This can be changed at a later date.
Under normal circumstances, private limited companies must file their accounts 10 months after the end of their financial year. However, new companies have a 22-month window in which to file their first set of accounts. The rules are slightly different for public companies, those listed on stock exchanges, with the windows coming in at seven months (ongoing) and 19 months (new).
All companies must provide a balance sheet and a profit and loss account.
- Notify the necessary authorities - HMRC, Companies House and so on - that you are in business.
- Make a note of key dates for submitting documents.
- Establish processes for gathering the information you need. For instance, in order to fill in a tax return, you will need figures for income, allowable expenses and capital spending, plus documentary evidence to support that information in the event of a query. You should ensure that your accounting system is picking up all the data and that it is easily to hand.
- Speak to your business banking specialists and advisers for guidance on funding.
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