Skip to main content Legal requirements of becoming a sole trader
Whether it’s doing a job you love, spending more time with your favourite people or being your own boss, it’s unlikely that you chose to become a sole trader to spend more time fretting about finances!
With reliable accounting software like FreeAgent (and possibly a dependable, software-savvy accountant if you choose to use one) it’s relatively easy to avoid this situation. However, there are some basic legal responsibilities that you must keep on top of in your new life as a sole trader.
Jump to a section or read on to take in the full list:
- Register for Self Assessment
- Choose a name that won’t get you in trouble
- Keep records of your business’s sales and expenses
- Send a tax return every year
- Pay your tax bill
- Comply with HMRC’s VAT rules
- Consider CIS if you work in the construction industry
1. Register for Self Assessment
If you plan to earn income as a sole trader, it’s likely that you’ll need to pay tax on it. To do this you’ll need to tell HMRC to expect a tax return from you. Check out our guide on registering as a sole trader to find out everything you need to do.
2. Choose a name that won’t get you in trouble
Choosing a business name as a sole trader can be great fun! However, there are certain rules you have to follow in order to make sure your name won’t land you in hot water. Here’s a guide on how to choose a name for your new business to help you get it right.
3. Keep records of your business’s sales and expenses
As it’s a legal requirement to record all your business’s income and expenses, you should think carefully about how you do this. FreeAgent’s accounting software is ideal for this task, with a wealth of features to help you track your day-to-day finances with minimal hassle. With FreeAgent you can automate your invoices and track all your expenses from the mobile app so your accounts will be kept up to date without you having to worry about being investigated by HMRC.
4. Send a tax return every year
You need to report your yearly income and expenses to HMRC every year by midnight on 31st January. FreeAgent saves time and stress here too by calculating your Self Assessment tax bill from the records you keep throughout the year. Parts of the sole trader Self Employment form are filled in automatically, allowing you to simply check it over, fill in the blanks and then click a button to submit your tax return directly to HMRC.
5. Pay your tax bill
Midnight on 31st January is also the deadline for paying your Self Assessment tax bill. It’s a good idea to get your tax return in well ahead of time to ensure you are also able to pay by the deadline - you could face a £100 fine for missing it!
Don’t forget that on 31st January you may also have to make a payment on account towards next year’s tax bill, which works out as half of the previous year’s bill. For example, if the total bill for your first year of trading tax year is £2,000, you have to pay this amount by 31st January plus an additional £1,000 payment towards next year’s bill. Following that, another payment on account is due on 31st July. Confused? Find out more about payments on account in this simple guide.
6. Comply with HMRC’s VAT rules
If you expect to make sales of £90,000 or more in a 12-month period, you need to register for VAT. Once you’ve registered you need to charge VAT to your customers and submit a VAT return online to HMRC using compatible accounting software.
VAT can be tricky but don’t worry! FreeAgent handles the UK’s VAT system for you to keep your business on track and enable you to submit VAT returns directly to HMRC.
7. Consider the Construction Industry Scheme (CIS)
If you work in the construction industry as a subcontractor or contractor you should know your responsibilities in relation to the Construction Industry Scheme (CIS). Under CIS rules contractors must deduct money from payments to subcontractors and submit these to HMRC as advance payments towards the subcontractor’s tax and National Insurance.
If you’re a contractor in the construction industry, you must register for the scheme. Find out more in this guide to CIS from HMRC.
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Disclaimer:The content included in this guide is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.
