A person will be considered self-employed if they run a business for themselves and they take all the responsibility for its failure or success. Self-employed workers do not have the rights and obligations of an employee and they are not paid through PAYE.
When a person starts working for himself (self-employed), he becomes a sole trader and he needs to follow the following steps:
- He should check whether the self-employed status is right for him.
- Choose a name under which he wants to trade.
- Check the records needed to be kept.
- Register for tax.
1. Self-employment status:
A person will be considered self-employed while running a business if:
- He runs the business for himself and takes all the responsibility for profit or loss.
- Can hire other people at his own expense.
- Can decide the timing, place, and way of how he works.
- Is responsible for finishing the work on his own time.
- Sells services or goods for profit.
- Charge agreed fixed price for work.
Some of these can also be applied in the case of limited company owned. But instead of classifying as self-employed, HMRC classifies the person as the owner as well as the employee of the company.
Self-employment and employed status can be met at the same time for example if the person is working as an employee under an employer during the day and is running his own business in the evenings.
If a person sells goods or services, he could be classified as a trader. And a trader is considered self-employed.
A person is said to be trading if:
- He sells regularly for profit.
- Prepare/make items to sell on profit.
- Earns commission from selling goods.
- Is paid for the services he provides.
- Sell items regularly.
If someone sells items or rents property occasionally, he should check if he needs to tell HMRC about this income. A person can also contact HMRC if he is unable to decide whether he is trading or not.
2. Record Keeping:
The following records should be kept:
- Income and sales.
- All expenses related to business.
- If registered for VAT, then VAT records.
- If employe persons, then PAYE records.
- Grants if claimed through Self-employment Income Support Scheme.
3. Registration for Tax:
For tax purposes, a person will need to register for Self-Assessment. The person will need his National insurance number, and address history while registering. A person might be needed to register differently if he works in construction industry or he is a self-employed fisherman.
If a person is going to be a sole trader, then he should register himself to HMRC if:
- He earns more than 1000 from self-employment.
- He proves that he is self-employed, for example, to claim tax-free services.
- He wants to make voluntary Class 2 National Insurance payments to help him qualify for benefits.
How to set up as a sole trader:
To set up as a sole trader, you need to tell HMRC that you pay tax through Self-Assessment. You’ll need to file a tax return every year. A self-assessment tax return should be sent to HMRC every year. A sole trader should register for VAT if the turnover is over £85,000 and if it suits the business, voluntary registration can also happen, i.e. if you want to reclaim the VAT.
There are other business structures also apart from sole trader to work for your own. For example:
- Being a partner in a business partnership.
- Setting up your own private limited company.
The partner or the person who is nominated for accountancy responsibilities needs to register the partnership with HMRC. All partners are needed to be registered for self-assessment, so they will be able to pay NI and tax on their profit share.
The limited company should register itself at Companies House and give a date to HMRC when the business has officially started running. And if the company is expecting to take more than £85,000 per year, it will need to register for VAT also. Each year, the company should provide statutory accounts to HMRC that comply with UK GAAP or IRFS’s. Confirmation Statement should also be sent to Companies House and Company Tax Return must be received by HMRC.