Registering as a sole trader is a great way to start a business quickly and conveniently. A sole trader is simply an individual who is self-employed and running their own business. You get to keep any profits you earn (after tax, of course), but you will have to personally take the hit of any losses.
The other common option for people looking to start a business is to set up a private limited company, which would protect you personally from any financial trouble with the company. However, limited companies are trickier to set up and maintain, giving sole trading a wide appeal, from part time hobbyists to full time businesses and tradespeople.
As a sole trader, you will be responsible for registering the business with HMRC within three months of starting up, and there are a few other responsibilities that we will discuss in this post.
Choosing a name for your business
Unlike limited companies, you don’t need to register your business name with Companies House, but you do need a confirmed business name that you can use for your HMRC registration, and for all official paperwork.
One of the main restrictions on your business name is that it can’t contain any of the suffixes used for other types of register company, such as Ltd, LLP and PLC. There are also certain words, such as ‘accredited’, that you need to have a license to use.
You also need to bear in mind that you need to get your name trademarked if you don’t want it to be used by anyone else.
How to register
You will need to register your business with HMRC within three months of starting trading. The most important things that this does is register you for a self-assessed tax return, which will be used to calculate your business’s tax. The simplest way to do this, if you haven’t registered for self-assessment before, is to complete HMRC’s online registration process. If you’ve registered before, you need to fill out the CWF1 form instead.
The online registration process will give you a Unique Taxpayer Reference number (UTR) in the post, and enrol you for the full online service.
You can also register by filling out and posting this form, or by phoning 0300 200 3504.
However you register, you will need the following information to hand:
- Your name
- Your date of birth
- Your business address (this doesn’t have to be your home address, it could be a postal address or an office address if you have one)
- Your business telephone number
- Your National Insurance number
- The date you started trading
- The name of your business
- The nature of the business activities that you are involved in
If you are a contractor in the construction industry, you also need to register for the Construction Industry Scheme, which regulates tax deductions from the payment between contractors and subcontractors. Subcontractors are not required to register, but more money is taken from them if they don’t.
Address considerations for sole traders
It’s not uncommon for sole traders to work from home and therefore to use their home address to register their company.
A key consideration around this is security of that address. By registering with your home address, you are putting that address into the public domain – and opening yourself up to junk mail spam or worse.
There’s also an element of positioning when thinking about your address. Using a home address may mean your business is seen as less ‘professional’ and can affect how you’re perceived.
Instead, many sole traders choose to use an address which they purchase from a provider like Company Address. Take a look at our registered addresses in London, Edinburgh and Dublin, available for you to buy from just £30 per year.
Going on as a sole trader
Registering correctly is the most important thing for you to do as a new sole trader, but there are a number of responsibilities that it is important to be aware of as you go on with your business.
As you buy and sell, you will need to keep a full record of all of your business income and expenditures. If you are not sure of the best way to do this, it might be worth looking for accountancy software or firms that can help you stay on top of it all.
You will need to complete a self-assessment tax return every year, from which HMRC will calculate how much tax you owe. You should factor the following taxes into your budget:
- National Insurance (Class 2, which is a flat rate of £2.80 a week and will stop in April 2018, and Class 4, which means you pay 9% on annual profits between £8,060 and £43,000, and 11% on profits above £43,000).
- Income tax
- VAT (if your income is over £83,000).
If your business is eligible for VAT, or you want to be able to reclaim VAT paid to suppliers, you need to register online as well as registering with HMRC.
If you employ people now or further down the line, you have the same responsibility as any other employer to deduct National Insurance and income tax from their salaries, and to operate a PAYE payroll scheme.