Sole Traders and Tax

What information do I need to notify to the authorities if I intend to start my own business or become self employed?

The day you become self employed

The day you become self employed will bring with it various requirements which you must adhere to. The first of which is that you must notify the HMRC the Inland Revenue within three months after the month that you became self employed of your change of circumstances.

Self employed people operating as sole traders are subject to the same rules of taxation as the rest of the workforce operating under the pay as you earn regulations. As a consequence you will have to pay both income tax and national insurance on your earnings.

Tax Return and Tax Liability

Being self employed as a sole trader in the UK will mean that you are required to complete a tax return each year and calculate your tax liability paying it to HMRC the Inland Revenue.

What Regulations apply to sole traders?

If you start and run your own business you will be required to adhere to various Government Regulations which will require you to keep various records pertaining to your business and fill out various forms.

The following two forms of regulations are the most important regulations for sole traders:

  • VAT Regulations
  • PAYE Regulations, tax and national insurance

VAT Regulations

It is your sole responsibility to register your company for VAT. You will be required to register for VAT if one of the following conditions is met:

  • At the end of any month the total value of the taxable supplies you have made in the past twelve months or less is more than the current VAT threshold
  • At any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold in the next thirty days alone

What is the current VAT registration threshold?

The current VAT registration threshold is set at £64,000.

What is the case if I take over a business run by someone else?

These above rules will also apply when you take over a business run by another individual regardless of whether that individual had registered for VAT. If the business is above the required threshold then you must register.

If I take over a business what will be my date of registration?

Your date of registration for VAT when you take over a business shall be the day in which you took over the business.

What happens if my business is below the threshold?

If your business is below the threshold you do not have to register although the option is open to voluntarily register which may have certain advantages for your business.

How do I register?

In order to register for VAT you will be required to complete Form VAT 1 which you must then send to Customs and Excise within 30 days of the above registration requirements.

PAYE Regulations, tax and national insurance

If you employ other people as part of your business then you will need to comply with PAYE Regulations, tax and national insurance.

PAYE (Pay As You Earn) is the system run by the Inland Revenue in order to collect income tax from the pay of employees as they earn it. This system is also used in relation to directors pay. You will be required to run this payroll aspect of your own company. As a consequence of this many business owners require a private accountant to run this aspect of the business.

You will also be required, as an employer, to deduct income tax and National Insurance contributions (NICs) from your employees’ pay and provide the deductions to the Inland Revenue.