Sole traders

 April 2017

Fact sheet no. BDL17 EW Sole traders

This fact sheet tells you about being self-employed as a sole trader. It explains how you can approach your business, the important bills you have to pay and what options you may have to deal with debts.

Use this fact sheet to:

  • understand how to register as self-employed;
  • find out what a business plan is;
  • get practical tips to run your business successfully;
  • find out how to deal with your debts if your business makes a profit; and
  • find out how to deal with your debts if your business does not make a profit.

This fact sheet includes some useful contacts and links for you to get further help.   

What is a sole trader?

If you are an individual and you work for yourself, you are classed as a sole trader.  You may also have people working for you. Common examples of sole traders include builders, plumbers, electricians, painters and decorators, taxi drivers and window cleaners.

As a sole trader, you are personally liable for your business debts. This means that you have to pay these debts out of your own income. If you do not pay, the creditors you owe money to could take further action against you personally. If this happens, both your business and personal assets could be at risk. In this fact sheet, we describe some important things to consider when you are a sole trader, including:

  • how to approach your business;
  • important types of bills you have to pay; and
  • the main options available to deal with your debts.

Registering as self-employed

See our fact sheet:

Income tax debt.

You should tell HM Revenue & Customs (HMRC) that you are self-employed as soon as possible. The latest you can tell them is by 5 October after the end of the tax year in which you started trading. For more information on income tax returns, see the later section Income tax. The tax year runs from 6 April in one year to 5 April the following year. For example, if you start your self-employment in July 2016, the latest you can tell HMRC that you are self-employed is 5 October 2017.

You should use form CWF1 to notify HMRC. This is available from the HMRC website www.gov.uk/government/organisations/hm-revenue-customs. Alternatively, call the Newly Self-Employed Helpline on 0300 200 3504.

Business plan

It is important that your business has a business plan. This should describe:

  • your intentions for the business;
  • what products or services you sell;
  • your skills and the skills of any staff who work for you;
  • the research you have done about demand for your products and services; and
  • the research you have done about other similar businesses who may be in competition with you.

Advice:

review your progress

Review the progress of your business against your business plan regularly and update it if necessary.

The business plan is important when you apply for finance. It is also helpful when you set up your business and whilst you continue to trade.

Cash flow

One of the main problems you may face in running your own business is how regularly money comes in (cash flow). It is very important to plan ahead by doing a cash flow forecast. This will allow you to estimate your income and outgoings for the future. When you complete a forecast, you should be able to see the times when you are likely to experience financial difficulty. For example, there may be particular times of the year when you do not have any income coming in. You can then look at ways to compensate for this, for example by setting up an overdraft with your bank.  Filling in the cashflow forecaster provided by Start Up Loans Company will help you estimate your income and outgoings for the future.

Funding

Warning:

secured overdrafts

Be careful about taking out a secured overdraft against an asset such as your home. This is because if the bank calls in the overdraft and you are unable to pay, your home would be at risk.

Once you have done a cash flow forecast, think about what funding you may need. You can try your own bank for this or shop around other banks for the best deals. Where possible, it is a good idea to set up a business account with a bank that you do not have any existing debts with. This will help to strengthen your position if you later find it difficult to pay your creditors. If you produce a good business plan and cash flow forecast, you stand a better chance of getting an overdraft.

Credit control

See our fact sheet:

Credit control. 

‘Credit control’ is a term used to describe how your business:

  • provides credit; and
  • collects money from your customers.

Good credit control procedures are very important to help make your business successful. For example, if you do not ask for customer references, or you do not have a proper procedure to collect money when customers do not pay, there may be a long delay in you getting paid for the work you have done.

Stock control

Keep good records of your stock. You can do this either on paper records or by using a computer. Don’t buy too much stock as this will mean your money is tied up for long periods of time. However, it is still important to have enough stock to meet the demand of your customers. Use your cash flow forecast to help you to budget for your purchases.

Business leases

A lease is a legal agreement, drawn up in writing, which allows you to occupy and use a property for a certain length of time. The terms and conditions of the lease describe the rights and duties that you and the owner of the property have. For example, the lease should state how much rent you have to pay. It should also state what services the owner should provide to you.

See our fact sheet:

Business property leases. 

Warning:

considering a lease?

If you are considering taking on a business lease, be careful. You may be committing yourself to the agreement for a long time. Seek specialist advice before taking on a lease. Business Debtline can help you to find the right type of help. Contact us for advice.

Income tax

As a sole trader, you are required to complete income tax returns each year and send them to HMRC. The information on your returns helps HMRC work out how much income tax you owe. The process of completing and sending in your income tax return is known as ‘self assessment’. You should keep proper trading records, such as receipts and invoices. You do not have to send HMRC detailed accounts, but you will need them to complete your income tax return.

The income tax year runs from 6 April each year to the following 5 April. You have to complete and send HMRC your income tax return by a set deadline. The deadline depends on how you send your tax return in. If you send it in by post, the deadline is usually 31 October each year. If you send in your income tax return over the internet, the deadline is usually 31 January each year.

For more information about completing your tax return online, see www.gov.uk/log-in-file-self-assessment-tax-return.

Your income tax bill has to be paid by 31 January following the end of the tax year that it relates to. If you do not pay on time, interest and penalties can be added to your bill.

See our fact sheet:

Income tax debt.

If your income tax liability for the previous tax year was higher than £1,000, you will need to make two ‘payments on account’ (POA) towards your next tax bill. These are payments in advance. You need to make these payments by 31 January and 31 July following the end of the previous tax year. Each payment is half of the tax due for the previous year.

Information:

overpayments

Payments on account are paid in advance so you may end up paying more than you owe when your tax return is put in for that year. However, this will be balanced out in later years as your business tax liability varies.

For example, in 2014 - 2015, if your income tax liability was £5,000, the payments on account for the following tax year will be £2,500 by 31 Jan 2016 and £2,500 by 31 July 2016.

If you know that your income for the current tax year will be lower than your income for the last tax year, you can ask to reduce your payments on account. You can do this on form SA303. See www.gov.uk/government/organisations/hm-revenue-customs.

How long do I need to keep my records for?

You do not have to send HMRC any documents apart from your income tax return. However, you must keep all supporting records in case HMRC start an enquiry.

As a sole trader, you must keep your business records for five years after the deadline of 31 January following the relevant tax year. This applies whether you sent in a paper return or completed it online. For example, for a 2011 – 2012 tax return sent in on or before 31 January 2014, you must keep your records until 31 January 2019.

In certain limited circumstances, you may need to keep your records for longer. For example, if HMRC have already started to check your records. In this case you will need to keep your records until HMRC writes and tells you they've finished the check. You may also need to keep your records for longer if you sent in your income tax return very late.  Contact us for advice.

Under self-assessment, your income tax return must include information about your business on the self-employed supplement pages. You do not have to send HMRC separate accounts. However if you choose to send HMRC separate accounts, it can help them to get a full picture of your business. You can use the extra space on your return to do this.

For more information on income tax returns and self-assessment, see the HMRC website www.gov.uk/government/organisations/hm-revenue-customs. Alternatively, there is an independent organisation called Taxaid. Taxaid is a charity that offers free advice on tax issues if you are on a low income. See Useful contacts at the end of this fact sheet.

The Construction Industry Scheme (CIS)

There are special rules for handling payments that contractors make to subcontractors for construction work. These rules are known as the ‘Construction Industry Scheme’ (CIS).

You may need to register with HMRC as either a contractor or subcontractor under CIS if you are:

  • working in the construction industry; or
  • doing other construction-related work.

For more information about CIS, see the HMRC website www.gov.uk/government/organisations/hm-revenue-customs.

If you are unsure about whether CIS applies to the work you are doing, contact the HMRC Construction Industry Scheme Helpline on 0300 200 3210.

National Insurance contributions (NICs)

As a sole trader, you are liable to pay two classes of NICs.

  • Class 2 NICs are currently payable at a set rate. For the 2017 – 2018 tax year the rate is £2.85 per week. HMRC usually calculate and collect your class 2 NICs as part of your self-assessment return. If you earn less than the 'small earnings exemption' then you do not have to pay class 2 NICs, although you may choose to. For the tax year 2017 – 2018 the small earnings exemption limit is £6,025 per year. If you do not pay class 2 NICs, you may not be entitled to certain contribution-based benefits. Your state pension may also be reduced. Contact us for advice.
  • See our fact sheet:

    Tax information sheet.

  • If you earn above £8,164 per year, class 4 NICs are payable as well as class 2 NICs. They are payable as a percentage of your earnings along with your income tax.

VAT

VAT is a tax that is charged on most goods and services that certain businesses provide. If your gross turnover for the tax year is bigger than (or is likely to be bigger than) £85,000, you must register for VAT. Gross turnover means the income coming into your business before any deductions are made. You may also voluntarily register for VAT if you feel you would benefit from this. Discuss this with your accountant or contact us for advice.

VAT on the purchases you make is known as ‘input tax’. The VAT you charge on the sales that you make is known as ‘output tax’.

You will need to send HMRC a VAT return either monthly, quarterly or annually. You must give details of your input and output tax.

  • If the output tax is greater than the input tax, you will have to pay the difference to HMRC.
  • If input tax is greater than the output tax, HMRC should refund you the difference.

For more information on VAT, go to HMRC’s website www.gov.uk/government/organisations/hm-revenue-customs.

Debt options

If you are struggling to pay your business and personal debts, consider whether you can trade through your financial difficulties and negotiate with your creditors. To do this you will need to complete a business and household budget sheet. You will need to work out the average income and outgoings for your business (normally over a period of the last 3 to 12 months). You may need help from your accountant. You may also need to budget for VAT and income tax on your profits.

The options available to you to deal with your business and personal debts depend on whether your business makes a profit.

Options if your business makes a profit

Informal negotiation

Extra advice:

self-help pack

Our self-help pack includes further information on types of debt, guidance on completing a business and household budget sheet and how to negotiate with creditors. Contact us for a copy.

You can use your business and household budget sheet to show your creditors how much money you have available after your essential outgoings. This is known as your ‘surplus’ income. You can use your surplus income to make affordable offers to your creditors. Some creditors are priority and others are non-priority. Priority creditors have stronger powers to recover their money. You will usually need to treat them differently to your non-priority creditors.

Free debt-management plan (DMP)

A DMP is an affordable repayment programme that we can help you to set up. It is managed by an independent debt-management company. We help you work out what you can afford to pay each month. You pay this amount to the debt-management company. The debt-management company then pays your money to all your creditors for you. Your creditors do not have to accept your offers or freeze interest and charges. However, the DMP company we refer you to will try their best to get this to happen. Also, they do not make any charges for managing your plan, so all of your payments go towards your debts.

Information:

exempt debts

You may not be able to include certain business debts, such as supplier accounts that you are still using, in your DMP. Contact us for advice.

See our fact sheet:

Debt management plans.

Individual voluntary arrangement (IVA)

There is an alternative to bankruptcy called an individual voluntary arrangement (IVA). This is a formal arrangement to pay an agreed amount off your debts over a shorter period, such as five years. Any unpaid parts of debts included in the IVA are written off at the end of the arrangement. The IVA will be set up by an insolvency practitioner whose fees can be very high. Creditors can stop the IVA going ahead by voting against it. It is usually only worth considering if you have a lot of money available every month to pay your creditors, or you have a lump sum or assets that you can include. Your home may also be affected by an IVA. Contact us for advice.

Options if your business does not make a profit

Debt-relief orders

You may be able to apply for a debt-relief order (DRO) to end liability for your debts.

You may be eligible to apply if you:

  • have total debts of £20,000 or less;
  • can’t afford to pay more than £50 a month to your creditors; and
  • you have total assets of £1,000 or less and a car worth less than £1000.

See our fact sheet:

Debt relief orders.

If you get a DRO, debts included in the order are written off after 12 months.

You will need help from an approved advice agency such as a money advice centre, citizens advice bureau or Business Debtline to fill in an on-line application (you will have to pay a fee). Contact us for advice.

Bankruptcy

Bankruptcy is an official order which ends liability for most debts after a certain period of time. Bankruptcy might be a good option if you:

  • owe a lot of money;
  • cannot see a way out of your debt; and
  • have no assets or are prepared to lose your assets and possibly your business.

See our fact sheet:

Bankruptcy.

You can apply to make yourself bankrupt but the fees are high. A creditor can petition for your bankruptcy if you owe them at least £5,000. Also, a group of creditors can ‘club together’ to make you bankrupt.

Bankruptcy may mean that any assets you own could be sold to raise money to pay to your creditors. This means that if you own your own home or business premises and you go bankrupt, they could be sold.

If you are self-employed your business is likely to close. You may be able to start trading again but you will have to follow certain rules, for example you cannot borrow more than £500 without telling the lender you are bankrupt. This can make it difficult for some small businesses to trade.

A bankruptcy order will be recorded on your credit reference file for six years. This will make it more difficult and expensive to get further credit.

Bankruptcy is a serious option. If you are considering making yourself bankrupt, contact us for advice.

Information:

further options

This is not a complete list of all your options. Contact us for advice about the options that you may be able to consider in your individual circumstances.

Ceasing to trade

See our fact sheet:

Ceasing to trade.

'Ceasing to trade' is the term used to describe the process of your business closing. If you do decide to cease trading, you will need to take certain steps, such as letting HMRC, your local council and any suppliers know. This will help to make sure that your final bills are accurate. If you are considering ceasing trading, contact us for advice.

Useful contacts

Chamber of Commerce
You can join your local Chamber of Commerce. This may help you to get in contact with other businesses. They also provide seminars and useful ideas.
Phone: 020 7654 5800
 
Federation of small businesses
Membership offers benefits such as a legal helpline for matters such as employment law. 
Phone: 0808 202 0888 
 
Taxaid
This is a charity that offers free advice on tax issues if you are on a low income. 
Phone: 0345 120 3779 (Monday to Friday between 10am and 12pm)