Becoming a sole trader is exciting, but before you start it’s important to understand what being one actually means, as well as the legal obligations that come with it. We’ve gone through everything you need to know, so you’ll be ready to run your business and take care of your financial compliance.

How do I choose a legal business structure?

Choosing a legal business structure is possibly one of the hardest decisions you initially have to make. How businesses make this decision is largely based on things like how much they expect to earn, the type of industry they’re in, and the number of people they’re going into business with.

There are other huge factors to consider too, like your liability and tax obligations – we discuss this in greater detail in our blog, what type of legal structure should I choose.

Am I a sole trader or self-employed?

Being ‘self-employed’ isn’t actually classed as a legal business structure. It’s a blanket term for someone who owns their own business. So, it’s correct to say you’re self-employed if you run your own business – but you need to choose a legal business structure such as a sole trader, partnership or limited company.

A sole trader is an individual who runs their own business without any legal distinctions between them and the business itself. This can be beneficial. For instance, you can keep all the profits you make after tax and have the autonomy to run your business how you see fit. But there are potential downsides, because you’re fully liable if anything were to go wrong within your business.

How do I register as a sole trader?

You can register as a sole trader by logging into your Government Gateway account. Don’t worry if you don’t have one – they’re easy to create!

What responsibilities do I have if I’m a sole trader?

The responsibilities of a sole trader include:

• Keeping accurate, up to date business records
• Filing a Self Assessment tax return to report your earnings
• Paying income tax and National Insurance on your profits
• Submitting VAT returns if your annual turnover exceeds the VAT taxable turnover threshold

Sole traders and tax

If you’re a sole trader, you’ll need to make Self Assessment submissions to report your earnings, and pay income tax and National Insurance on your taxable profits. The amount of tax you pay depends on how much profit you make, which is why it’s so important to keep good records! This will also help you estimate your tax bill so you can put money aside for it.

You can check out the current income tax rates here.

Is bookkeeping important for sole traders?

Absolutely – not only is it a legal requirement, but it also gives you a deeper insight into what is really happening in your business. If you’re unfamiliar with what bookkeeping is – don’t worry. It’s basically the process of recording the transactions in your business. Every purchase, invoice, transfer, employee payment, and asset is logged so you know whether you’re making a profit or loss, what the business is worth, what expenses you can claim, and where you’re potentially overspending.

It’s important to remember all legal and financial responsibility falls on you since you are the business. So, making bookkeeping a part of your every day is crucial – because if HMRC finds you have inaccurate records and these lead to tax return errors, you may incur penalties.

Records you must keep as a sole trader

Keeping accurate, up to date records is vital. While you don’t need to submit them with your Self Assessment tax return, HMRC can ask to see them at any point – so you’ll want them to be correct!

You should keep records of:

• Your sales and income (this includes invoices and receipts)
• Your business expenses
• Any PAYE records if you employ anyone (sole traders can have employees)
• VAT records if you’re VAT registered

Do sole traders need to register for VAT?

Like any business, sole traders must register for VAT if their VAT taxable turnover (the total amount of everything you sell that isn’t exempt from VAT) reaches or exceeds the £90,000 threshold. Yes, it’s another reason why you need to keep good financial records! It’s the only way you’ll know if you’ve reached the mandatory registration threshold. You can voluntarily register for VAT, but we’d recommend speaking to an accountant first to make sure it’s tax efficient for you (and yes, they will ask about your bookkeeping records to work this out).

What expenses can sole traders claim for?

Running your own business means you can claim expenses against your tax bill, and it’s easy to do as part of the whole bookkeeping process. You can snap or record receipts and invoices to ensure you never miss an expense. But what can you actually claim for?

There’s no clear-cut answer, but HMRC’s rule is anything ‘wholly and exclusively’ for your business. (As long as you can actually prove it’s for business use). Some common ones include:

• Business premises
• Office costs
• Travel
• Clothing
• Marketing and advertising
• Items bought to sell on

 
It might help to have a separate bank account so you don’t get your business and personal transactions mixed up, but you can use the same bank account if you’d prefer.

Do sole traders need bookkeeping software?

For most people, using bookkeeping software isn’t a legal requirement – but with the continuing roll out of Making Tax Digital (MTD), it’s best to get ahead. Not only that, but bookkeeping software is excellent for keeping accurate records, getting paid faster, and submitting VAT returns straight to HMRC.

 
Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.