Tax guidance on working for yourself
QUESTION: I'm starting my own business from June 1. Until now I have always been an employee and I am unsure about what records I need to keep, what taxes I need to register for and when I need to fill in an income tax return. Can you advise?
ANSWER: If you start working for yourself, you're classed as a sole trader - even if you haven't yet told HM Revenue and Customs (HMRC). You must register and follow the rules for self-employed tax and national insurance.
If you set up a limited company, you're not classed as self-employed but as both an owner and employee of your company. You'll follow different rules on tax and national insurance.
As a sole trader, you run your own business as an individual and are self-employed. You can take on staff - being a sole trader means you're responsible for the business, not that you have to work alone.
As a self-employed person you are responsible for:
• keeping records of your business's sales and expenses;
• completing and filing a Self-Assessment tax return every year;
• paying income tax on your profits and Class 2 and Class 4 national insurance;
• your business debts;
• bills for anything you buy for your business;
• registering for VAT if your turnover reaches the VAT threshold;
• registering with the Construction Industry Scheme (CIS) if you're a contractor or sub-contractor in the construction industry;
You're probably self-employed if you:
• run your business for yourself and take responsibility for its success or failure;
• have several customers at the same time;
• can decide how, where and when you do your work;
• can hire other people at your own expense to help you or to do the work for you;
• provide the main items of equipment to do your work;
• are responsible for finishing any unsatisfactory work in your own time;
• charge an agreed fixed price for your work;
• sell goods or services to make a profit (including through websites or apps).
You can be both employed and self-employed at the same time, eg if you work for an employer during the day and run your own business in the evenings.
To become a sole trader, you'll need to:
• register as self-employed with HM Revenue and Customs (HMRC) to make sure you pay the correct Income Tax and National Insurance;
• keep records of your business income and outgoings;
• pay your tax each year, usually in two payments on January 31 and July 31.
You must register for VAT if your business turnover is over £83,000. You can register voluntarily if it suits your business, eg you sell to other VAT-registered businesses and want to reclaim the VAT.
It is extremely important that you keep accurate records from the date you start to trade. Generally the types of records that need to be kept are details of sales receipts, invoices, cheque stubs, bank statements, stock records, PAYE records if you have any employees and VAT records if you are registered for VAT.
You also are required to keep other records regarding your debtors -money that is owed to your business, creditors -money that your business owes to other people, amounts that you have invested into your business and amounts that you have extracted personally.
The types of records to be retained will vary between each type of trade and can be kept manually, digitally or on a software programme. It is important that records are retained in a safe place for a period of six years.
If you're self-employed, your business will have various running costs. You can deduct some of these costs to work out your taxable profit as long as they're allowable expenses.
Costs you can claim as allowable expenses include office costs (such as stationery or phone bills), travel costs (fuel, parking, train or bus fares), clothing expenses (uniforms), staff costs (salaries or subcontractor costs), things you buy to sell on (stock or raw materials, financial costs (insurance or bank charges), costs of your business premises (heating, lighting, business rates) or advertising or marketing/website costs.
Once you become self-employed you need to register with HMRC as a self-employed individual. You are also required to register for the payment of Class 2 national insurance contributions with HMRC. You might also need to register for PAYE if you have any employees and VAT.
:: Paddy Harty (p.harty@ pkffpm.com) is director at PKF-FPM Accountants (www. pkffpm.com)