Limited Company or Sole Trader or Partnership
So you’ve decided on the name of your business and the design for your logo is underway. The question is now what sort of organisation are you going to start trading as and what difference does it make. In this blog we will look at sole traders with the others to follow later.
(Please remember that the comments in this blog give general guidelines and are not intended as specific advice to any individual or group. Neither is it intended to be totally comprehensive. Should you wish to check your own personal circumstances then please seek individual professional advice.)
This is the easiest form of trading, you are on your own and you can just get going. Buy something from someone, sell to someone else and there you are trading. Alternatively you provide a service to someone and charge them you’re in business.
Please understand that even if you are buying and selling things on ebay with the intention of making a profit this will be considered trading by HMRC so it is a good idea to check use the link or see your local accountant for help.
The safest thing to do is keep your receipts and a note of your income in any event, an excel spreadsheet will do. None the less if have gone to the trouble of giving your business a name then the chances are you are trading and liable to tax.
Many individuals start their business slowly and they say that they are not making a profit so there is no need to make a declaration to the tax man. This is poor thinking:
- If you are carrying out a business even if it is not profitable there is likely to be class 2 national insurance contributions to make see HMRC website.
- If you make tax losses when you start trading, not many people realise that these losses can be used to reclaim tax against income when you were actually employed. (potentially up to 3 years ago.) Or if you are just starting and are still working too then these losses can be used to reduce your current tax liability.
Potentially then in the beginning there maybe a tax refund due to you so don’t think that because you haven’t made a profit there’s no need to make a self assessment return. When you do make a profit it is the trading profit
When you start trading whenever it is in the year, you’ll need to pick a year end date. This can be no longer than 18 months after you start trading. Don’t just leave it and hope it’ll go away, discuss it with an adviser and actually even if the date has passed your first set of accounts can be made up to a time that actually suits your business.
Whenever your first accounting end date, though in your first period of trading you are always assessed for tax purposes up to the 5th April (31st March by concession) so in the beginning especially if you are not profitable there maybe some advantages to just picking the 31st March as your year end this certainly keeps things simple.
Again HMRC can be of great help here but as a general rule you are allowed expenses that are wholly, exclusively and necessarily for the performance of the trade. Depreciation on fixed assets is not allowed, instead this is replaced by the tax mans version called capital allowances. There are some tricky little rules around this, so you may need advice. For most small businesses now unless they have very big capital expenditure it will mostly all be allowable for tax covered by the Annual Investment Allowance.
Cars are not well liked by the tax authorities and require special treatment. A quick chat with an accountant ought to sort this out for you.
HMRC have actually got good software, which guides you through the self assessment process and for the simplest of cases you may not need an accountant. Here are a few considerations, when you start trading:
- You need to notify HMRC that you are potentially liable for tax by 5th October following the tax year (6th April-5th April) in which you start your trade.
- When submitting on line the dead line for submission and payment of tax is the 31st January following the tax year. You may also need to make a payment on account for the next tax year.
- A second payment on account is due on the 31st July.
- Never ever ignore correspondence from HMRC especially if they are asking for something. (Information, returns, tax)
- Before you can submit on line you need to register with HMRC and for this you need logins and codes and your Unique Tax Reference (UTR). This can TAKE TIME and should never in the first instance be left until after christmas, there is always too much to do in the time.
- Get organised well before, have your sales total, expenses break down, an idea of capital allowances, and some personal information about, pension contributions and investment income and you maybe able to do it yourself. Otherwise you need to get some help, remember your local accountant, or find an adviser that can be trusted through a body like the ICAEW.
To be continued with partnerships and Ltd considered in the following blogs……..