Sole traders, also called sole proprietors, are individuals who have set up their own business. Sole traders own the business and are solely responsible for growing the business. The ultimate onus of the success or failure of the business also lies with them. They may hire other people but are the sole beneficiaries of the business profit and own all the assets. This type of business is one of the most popular and common structures in the UK.
It is important to remember that sole trading is completely different from a company setup. The latter exists as a separate legal entity and has to be registered as a limited company, whereas sole traders are self-employed individuals who are the sole owners of their business.
How to register as a sole trader?
Sole traders don’t have to register the company or business, but that doesn’t mean that they don’t need to inform the government about it. They have to inform the HMRC about the intent of being self-employed, i.e. start working for themselves. A name can also be selected for the business, but care must be taken that the name is not already being used by some other business and doesn’t have words that might offend or mislead people. Then the HMRC sends a Unique Tax Reference (UTR) number in around 9-10 days from the date of registration.
This UTR number is the only proof that the business will have of being registered as a sole trader. There is no other paperwork or documentation involved. For registering with the HMRC, individuals will have to provide basic information such as their name, date of birth, National Insurance Number (NINO), address and postcode and UK residency status, among others. Business information such as the date of starting business or the intended date of starting business, type and nature of work, full address of business and business contact number, will also be needed to register with the HMRC.
Who are required to register as sole trader?
This is a frequently asked question. Some people set up a business as a hobby or are simply trying out a new business venture, unsure if it will work or not. Is it necessary to register in such cases? The HMRC suggests that individuals register as sole traders if they
- Make regular sales to earn a profit
- Manufacture or make products and sell them to earn a profit
- Get commission from the sales of products or services
- Get paid in return for a product or service they deliver
The HMRC proposes that individuals and people register as a sole trader business if any of the above instances apply to them. The HMRC recommends that individuals register as soon as they start trading. However, they have time till the 5th October of the second tax year to register with HMRC. If this timeline is not abided by, sole traders may have to face penalties and fines.
When can I start trading?
Individuals can start trading as soon as they complete their application for sole trader; they don’t have to wait for the arrival of their UTR number. Once trading starts, individuals then become legally liable to maintain accurate business records right away. Complete records of every business spending and earning have to be maintained. Some people use spreadsheets to maintain their records, but as the business starts expanding, individuals can consider using an efficient bookkeeping software.
Taxes and Compliances
All sole traders are required to pay income tax on the profits made by their business. They have to pay 20% tax on the profits they make after all business expenses have been taken into account. They are also required to file a self-assessment tax return with the HMRC at the end of each tax year. The self-assessment tax return should entail complete details of the total expenses and income of the business. Moreover, it is the sole responsibility of the sole traders to file their returns on time or else they will be penalised. Therefore, individuals need to look out regularly for tax dates and deadlines so that they don’t miss one. The deadline for tax returns is usually the 31st January of each year.
Sole traders who have made or expect to make a turnover that exceeds £85,000 per year, are required to send in an application for a VAT number, charge their customers for VAT, process the required VAT returns as well as send the VAT payments. They also are supposed to pay National Insurance contributions subject to the profits they make.
Benefits of sole trader
A few of the major benefits of sole trader are compiled here.
- Absolute control over the business: Sole traders have complete control over their daily business operations and how big their business can grow. There is no external pressure. They can work at will and set up their own business procedures as required.
- Less regulations: Sole traders do not have to deal with as much paperwork and regulations as compared to limited companies. Therefore, there is always less red taping. Sole traders are only required to file their self-assessment every year to declare profits and losses with the HMRC.
- No burden for staff management: Since there aren’t any employees involved, there is no need for staff management. All the profits belong to the owner, and all financial data remains private. This also means more savings due to the absence of employee benefits and remunerations.
- Faster decision-making: Decision-making is always faster in sole trading because there is only one business owner who is responsible for making all the decisions, including how much work to take, when to take work, where is the business headed, etc. Sole traders have a more personalised relationship with their customers, as only one person is communicating with all customers.
- Lower accounting costs: Accountants usually charge sole traders less because they don’t have to do a lot of work for sole trader accounts. They simply have to prepare a profit and loss statement rather than the complete balance sheet and cash flow. However, it is advisable to prepare these two a regular basis for maintaining the company records.