Sole Trader

Your helpful guide to running your business as a sole trader

Not just your everyday accountant |
Setting yourself up as a sole trader can be a great way to start up in
business. There is not much administration and there are no set up costs
for registering at Companies House. It is the quickest and simplest way
to get your business up and running. As with setting up any business
however, working as a sole trader is still a commitment. You make all the
decisions and you are responsible for the administration. There is always
help when you need it, but it is important to remember that ultimately,
the responsibility sits with you to manage your business efciently and
in compliance with legislation. Choosing to operate as a sole trader offers
great freedom and high degree of exibility, but it is not the best route
for everyone. You should consider your options carefully. This guide has
been written to help you understand the benets, responsibilities and
commitment needed and also the steps you need to take to running your
business as a sole trader. If you are thinking of setting up a sole trader,
or would just like to know a little more about what the process involves,
have a read through. In simple terms it will explain what you need to
do to get up and running, and once your are up and running, what you
ongoing responsibilities will be.
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Heres the content
What is a sole trader? pg 2
Here are the benets pg 3
There are other considerations too pg 4
Setting up as a sole trader pg 5
Your responsibilities pg 6
Do I need to register for VAT? pg 8
A few words on business insurance pg 9
Time to start trading pg 10
Dont forget the administration pg 12
Heres a little bit about Brookson pg 13
And heres how we can help you pg 14
Thinking of setting up
as a Sole Trader?
What is a sole trader?
Pg 2 |
In simple terms, a sole trader is a business that is owned by one person, although you
can also have people working for you. As a sole trader, you are personally trading as your
business. It is different to operating as a limited company where the business is its own
legal entity. As a sole trader, you and the business are treated as a single entity for tax and
administrative purposes.
This has some advantages, in that it is much easier to set up and manage, but there are
also some considerations in terms of tax efciencies and exposure to liability. We will
cover these later in the guide.
In brief, as a sole trader:

You are self-employed and you must register your self-employed status with HMRC.

You have complete control over your business and your nances it is your responsibility.

There is no distinction made between your personal and your business nances.

Your business prots are subject to Income Tax and National Insurance rules.

You are ultimately liable for any business losses in the event of anything going wrong.

You must maintain accurate business accounts and records for HMRC.

You must comply with legal requirements that concern the protection of the customer.
The sole trader route is the most popular way of starting up in business in the UK as it
often seen as the quickest and cheapest route.
It is also a great way to try working for yourself for the rst time if you want to test the
water before deciding to set up a limited company. You can always choose to take this
route at a later date. Going the other way, changing from a limited company to a sole
trader, is a much more complicated process.
Once you register as a sole trader, you are making a professional commitment. There are
people to help, so you should be careful to choose an accountancy partner who can be on
hand to help through each of the stages, from registering as self-employed to helping with
the ongoing business administration.
The ease with which a sole trader business can be set up presents a number of advantages.
Total control
As a sole trader you are your business, and you are in full control. You are responsible for
all decisions without having to consult other directors or shareholders, so you can develop
the business exactly how you choose.
No set up costs
There is no need to register your business at Companies House, so the paperwork is very
simple, you do not require the services of a solicitor or a formation agent so there are no
fees to pay. Simply inform HMRC that you are self-employed.
Privacy
Unlike a limited company, where all information concerning the business, including
directors details and annual accounts are made public, information about sole traders
is kept totally private.
Capital allowances
If you need to purchase equipment for your business, for example vehicles, tools, IT
equipment or business furniture, you may be able to claim tax relief on these purchases in
the form of capital allowances.
Flexibility
Because you are the sole decision maker, it is much simpler to adapt your business to the
changing demands within the market you serve. You can change prices and vary services,
making decisions quickly and acting on them swiftly, keeping you agile and competitive.
Simple accounting
Although you must maintain detailed records of invoices, expenses and accounts and le an
annual tax return, the actual accounting process is much simpler for a sole trader than that
for a limited company.
Prot retention
As a sole trader you retain all the prots of the business.
So, whilst setting up a limited company may ultimately be a more tax efcient means of
operating, setting up as a sole trader is much simpler, requires a lot less administration, and
costs less to run.
Here are the benets
| Pg 3
Setting up your own business is a very exciting time, and, depending upon your
circumstances, starting out as a sole trader may well prove to be your best option. However,
before you decide, there are some other important factors to bear in mind.
Liability
As we have already established unlike limited companies, sole traders are not seen as a separate
entity by the law. This means they are subject to unlimited liability. In other words, if the
business falls into debt, the business owner ie the sole trader, is fully liable for those losses. In
the worst case, this could mean that your home, personal savings and any other assets you may
have, both in and outside of the business may well be at risk.
Professional credibility
Whilst some businesses are open to the idea of doing business with a person as opposed to
a company, there are also many businesses who choose to deal only with other registered
companies. In some industries, operating as a limited company may even be mandatory
as they will not deal at all with sole traders. It is worth researching your market and
potential customer base thoroughly to see whether this is the case.
Financial support
The process of securing nancial support has become progressively difcult over recent
years. However, sole traders may nd it even more difcult to raise nance to help fund
their business. The banks may consider the accounting transparency of a limited company
as opposed to the more private status of a sole trader.
There are a lot of things to consider when deciding upon which may be the best business
structure for you. At the end of the day, its a personal matter, the best option for you comes
down to your own individual circumstances and your plans and objectives for the future.
Either way, you should always seek professional advice before starting up in business.
There are other considerations too
Pg 4 |
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Setting yourself up as a sole trader is a very simple process. There are no complicated
forms to ll in, there are no formal directors responsibilities to dene and you do not have
to register your business with Companies House.
Registering as self-employed
To operate as a sole trader, you MUST register as self-employed with HMRC. You should
do this as soon as you start trading. If you fail to inform HMRC of you becoming
self-employed, you risk incurring a ne of 100.
You can do this a number of ways

If you do not have an accountant, you can register online.

You can call the Self-Employed Helpline on 0845 915 4515.

If you are using an accountant you can ll in form CWF1 and send it to HMRC.
Using the services of an accountant
It is strongly advised that you appoint an accountant or adviser to help manage your
nances. We will cover this in more detail later in the guide. If you do choose to do this,
then you should authorise them to act on your behalf at the same time as you register as
self-employed.

You can do this using form 64-8.
Once you have informed HMRC of your intention to become self-employed, you can start
trading immediately (subject to any specic industry licences you may need).
A note on registering your business name
As a sole trader, you are under no obligation to register your business name. This means
in effect you can choose to trade under any name you like. It is worth bearing in mind
however that if you are considering changing to a limited company status at some point
in the the future, then you might want to register your name at this time, to protect it for if
you need it in the future.
There are some restrictions imposed by Companies House on naming companies. If this is
of interest you can read about them in our Guide to Setting up a Limited Company.
Whilst registering as self-employed is a very simple and straightforward process, it is a
commitment. The following section explains your responsibilities as a sole trader. If at any
stage you have any questions, it is best to seek advice and Brookson would be happy to help.
Setting up as a sole trader
Pg 6 |
Once you register as self-employed and become a sole trader, it is up to you to manage all
aspects of your business. From paying your tax through meeting health and safety regulations.
Tax Self-Assessment
Being self-employed, you are responsible for completing and ling your self-assessment tax
return. This is a personal tax return which declares your income, expenditure and business
prot for the previous tax year, and forms the basis for your tax and National Insurance
liability. This has to be done each year after tax year end which is always on the 5th April. In
submitting your self assessment return you have two choices.

If you want to le a paper return, then you need to ll in your return and le it with
HMRC by the 30th September after the end of the tax year.

If you prefer to le online (which is advantageous as HMRC will work out your tax
bill for you) then you need to le your return by 31 January after the end of the tax
year.
It is important that the gures you enter on the tax return are correct, that they are an
accurate reection of your business and that they are submitted on time. HMRC issue stiff
penalties for late submissions, so using an accountancy service such as Brookson that
helps with the nancial administration of your business and prepares your tax return for
you is highly recommended.
Paying your tax bill
Once you have submitted your self-assessment return showing your prots for the previous
tax year, you are required to pay your tax bill for the year. This usually takes the form of
two payments, referred to as payments on account. The rst payment must be made by
31st January following the end of the tax year and the second payment must be made by
the 31st July.
Your accountancy services provider should be able to advise you on these payments, and
also remind you exactly when they are due.
National Insurance Contributions (NICs)
Sole traders also have to pay two kinds of National Insurance Contributions.

Class 2 National Insurance is payable at a at rate of 2.50 per week and is
collected twice a year via direct debit on 31st January and 31st July. Class 2
contributions count towards certain benets including the basic state pension.

Class 4 National Insurance is calculated as a percentage of business prot each
year and is dealt with separately through the self-assessment tax return and
payable at the same time as your personal tax bill.
Your responsibilities
| Pg 7
Record keeping
Keeping accurate business records is really important to help you when you come to complete
your tax return, or to answer any questions HMRC might have. Even though you are in effect,
your business, you should still keep your business records and your personal records separate.
Basic records you must keep include:

A record of all your sales and income (e.g invoices and bank statements).

A record of all your purchases and expenses (e.g receipts and bank statements).
These are then used to create prot and loss account showing the income you have received against
the expenses you have paid and therefore ultimately the prot or loss you have made as a business.
The more detailed the records you maintain, the easier it will be to complete your return each
year, so it is best to get into the habit of recording everything you do from day one. The longer
you leave it, the harder it is to get a clear picture. This is even better working with an accountancy
partner such as Brookson, to help you maintain relevant and up-to-date information.
Other records you may want to keep include:

Invoices you have issued and receipts you have received.

Details of hire purchase and leasing agreements.

A stock inventory.

Bank and building society statements.

Details of any money taken out of the business.

Details of any private money brought into the business.
You should keep business records for up to seven years.
Legislation
You are also obliged, as a business owner to keep fully up to date with any legislation that
may have a direct impact upon the operation of your business.
Professional Advice
If you are considering running your own business as a sole trader, it is best to seek advice.
Talk to other sole traders and self-employed professionals, speak to accountants, such as
Brookson and solicitors to get their professional perspective on your ideas. The key thing
to remember is that although you are ultimately the person responsible for your business, you
do not have to do it all alone. Using a professional service for help with the nancial or
administrative side of the business will free you up to spend more time developing it.
Pg 8 |
When you register as self-employed, you are not automatically registered for VAT. However if
your business either reaches or is expected to reach the VAT threshold during any 12 month
period, then you must register for VAT unless you meet either of the following conditions:

You only sell goods or services that are exempt from VAT.

You are not in business according to the the denition that HMRC uses for VAT
purposes.
In other words, if you hit the threshold, you MUST register for VAT if you are in business and
selling products or services that are subject to VAT.
The threshold usually increases each year. If you do have to register, then you are obliged
to charge VAT on your invoices.
This in effect increases the cost of your services by the VAT rate. It also means you can
reclaim the VAT from any purchases you make for the business.
In some cases businesses choose to register for VAT even if they operate below the
threshold and therefore do not need to. Having a VAT number may help give credibility to
the smaller business, making it appear larger then it actually is. However you may need to
consider whether your charging VAT may impact on your price to your customers.
Flat Rate VAT
Depending upon the size and nature of your business, it may be preferable to register for
the Flat Rate VAT Scheme. This offers a simpler way of accounting for VAT. Should you need
it, further information on this can be found in our Guide to Flat Rate VAT.
Either way, you should really speak with an accountant. They will be able to work out the
most tax efcient way for you to pay VAT and help you to decide which, if any scheme is
best for you.
Do I need to register for VAT?
| Pg 9
The nature of your business, and the range of services you provide will largely determine
the types of insurance you should consider to ensure you are adequately covered. If you
are planning to employ people, then some forms of insurance, for example Employers
Liability cover, will be mandatory, whereas other insurances provide peace of mind that
your business is suitably protected in the event of something going wrong.
There are however three key types of insurance you should really consider operating as a
self-employed sole trader.
Professional Indemnity (PI)
If your business involves selling your knowledge or your skills then you should really have
some form of PI cover.
PI protects your business against any claims for loss or damage made by a client should
you make mistakes, or in some way be found negligent in the services you provide.
For a number of professions, PI insurance is mandatory. This includes solicitors,
accountants, insurance brokers and nancial advisers. Many consultants, advertising and
PR agencies however also choose to have this type of insurance.
Public Liability (PL)
If your business requires people to visit your premises, or if you are required to work on
site at a customers premises, then PL insurance should be a serious consideration.
PL protects you in the event one of your customers or a member of the public suffering
personal injury or damages whilst on your premises. It also covers the reverse situation,
when as a result of your negligence or lack of due diligence, you cause injury to a customer
or any of their personnel, or even damage to their property whilst on their premises.
If you operate as self-employed, you are not obliged by law to carry PL insurance, however,
you should give it serious consideration. In the event of a claim, your business, or as a sole
trader, you, would be liable for the full costs of any claims successfully brought against you.
Income Protection (IP)
If you are solely responsible for all aspects of your business, if the ongoing management
of your business is purely down to you, then some form of Income Protection is vital.
In the event of you falling sick, or sustaining an injury that meant you were unable to
work, Income Protection Insurance provides you with a replacement income allowing you
to meet your nancial obligations should it not be possible to earn any money.
Again, you are not obliged to carry this insurance by law. It is very easy to take any
income for granted, but should this be suddenly and unexpectedly taken away, its worth
taking a few moments to think about how you would manage?
A few words on business insurance
Pg 10 |
So, youve done it, you have registered as self-employed, you have all your insurance
in place and you are now set up as a sole trader.
Congratulations, its an exciting time. It is also however just the rst step. Its now up to
you to give shape to this business, to develop it, to grow it into what you want it to be. Its
time to start trading.
But before you even pick up the phone, there are a few other things to get right rst. You
only get one opportunity to start of in the correct way, to implement those rules and
processes that will ensure you meet your obligations and responsibilities as a business
owner. Now is the best time to start. Anything later than this will be too late.
1. Set up a new bank account
Although for tax purposes, you and your business are seen as a single entity, it is really
important to keep your business records and nances separate. The best way to do this is
by opening up a new business bank account.
A business account will not only allow you to keep your personal money separate, but it will also
allow the accountability and transparency you need to ensure are there in all of your business
nances. It is really important to understand at this early stage that you MUST avoid using your
business account as a personal account. It is best practice for these to be kept totally apart. At the
end of the day, it simplies everything, and makes it clearer to see exactly what funds are where.
2. Find an accountant
Of all the professional services you will need when you are running your own business,
the one you will use most often, and perhaps the most valuable one, will be a good, reliable
accountancy service.
As a small, start up business you should choose an accountancy partner that has lots of
experience in this sector. The level and type of service you will require in the rst few weeks
and months will be very different to those of a more established business. Ask them about
what other clients they have and about what experiences they have with similar businesses.
Of course, we think Brookson is the obvious choice!
Ask them what other services they provide too. Will they complete your self-assessment
and VAT returns? Any service they can provide that can help to reduce the administrative
burden on you is certainly worth considering.
Perhaps most importantly, make sure that whatever accountant you choose, that they are able
to keep in regular touch with your business. Seeing your accountant once a year to compile
your annual accounts is simply not enough. They will not get to know you, or your business
which are the two fundamental ingredients of a successful company/accountant relationship.
Time to start trading
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Prepare your documentation
You are a sole trader now, self-employed with your own business, so you need to let people
know, however, before you head off to the stationers to get your letterheads and cards
printed, there are a few points to have in mind.
Every time you write to someone, whether by letter, by fax or by e-mail you need to
include specic information about your business.
You should show the name of the proprietor of the business and an address on all pieces of
written communication, including:

Invoices.

Proposals.

Receipts.

Cheques.

Faxes.

Order forms.
In addition, if you are VAT registered you need to show your VAT number on all invoices.
Pg 12 |
There is just one nal, very important point to bear in mind.
The process of setting up as a sole trader may initially appear a little daunting, however, it is
a relatively simple process. Its about having the appropriate level of knowledge and doing
the right things, in the right order, in the correct way, at the right time.
It is no different once the business is set up and it is up to you to run it compliantly.
Initially, the administrative demands may seem a little challenging, however, by acquiring
the knowledge, and setting the correct procedures from the outset, they soon become part
of the process.
Know exactly what needs to be done, by when
As soon as you receive conrmation of your self-employment status, start to plan ahead.
Mark the key dates in your calender by when you need to complete and return your self-
assessment return and when your Personal Tax and NI payments are due. You MUST hit
these dates, if you miss them you will be penalised.
Establish a routine
Make sure you allow for your administrative duties and build these into your working week.
The longer you leave it to establish a routine, the more of a mess it gets, the more stressful
it gets and the longer it takes to x it. Control it from day one, dont let it control you.
Find an accountancy partner to help you
Remember that you are not alone. You cannot, and do not need to do everything all by
yourself. You established the company, you should be free to grow it and develop it in line
with your plans.
And nally...
Enjoy it. Having your own business is a commitment, but its also a great achievement.
If you work smart, hard, efciently and most importantly compliantly, the benets and
rewards can be considerable.
Dont forget the administration
| Pg 13
Here at Brookson, we are not your everyday accountants. We have re-invented
accountancy.
Whether you are a contractor, freelancer or self-employed professional, we believe that you,
and we, should always know where your business is at.
We have a great team of people who work closely with you, every step of the way to help you
work more efciently and to make more of your earnings potential.
We have a great range of services too, so if you choose to work as a limited company as a
sole trader or through an umbrella company, either way is ne with us, nothing is too much
trouble and we have everything we need to help you out.
For example, if you are thinking of setting up a limited company, take a look at
Brookson .
Its designed to give you all the information you need about your nances, at your ngertips.
You can literally run your business from one place, even one screen if you wish, the
dashboard. Simple. All your information brought fully up-to-date, every 24 hours.*
Heres how it works
Firstly, we everything. Invoices, bank statements, expenses, VAT, personal tax
returns, everything. We take them all, and present them to you in one intuitive, easy to use
application. All seamlessly connected and available at your ngertips, on your PC, laptop,
your smartphone or tablet. So you can even stay connected on-the-go.
But thats not all
We reconcile your accounts for you on a daily basis so you dont have to. With the closest
thing to real time accounting, in simple terms you know where you are. How much you owe
the taxman, what you are due and what you can spend, every day.
and if you still want more
Just drill as deep as you like, its all there. A Planner App to keep track of key dates, an IR35
App to keep track of your status. We keep all of your documents in the Document Storage
App and a there is a Knowledge Centre App packed with valuable information about running
your business. In fact, there is so much in there, we decided to produce a brochure for you.
You can get a copy here.
*Excluding weekends and public / bank holidays. Terms of use apply.
Heres a little bit about Brookson
Pg 14 |
You can talk to us
Just pick up the phone and call us on 0800 230 0213 or email newbusinessadvisors@brookson.
co.uk. Alternatively, you can chat to us online at www.brookson.co.uk. Tell us a little about you,
your business and your plans. We are here 6 days a week and wed love to hear from you.
You can take our FREE Financial Health Check
Its really simple, just give us a call. We will ask you a few questions about your business,
then, we will run through all your options. We even give you a brief nancial breakdown
showing your take home pay after all deductions for each option. Theres no stress, no fuss
and we will take as long as you need to feel comfortable in our recommendations.
You can join us
Limited company, sole trader, umbrella employment whichever you choose and whenever
you are ready we have the products, services and people you need. We will work closely
with you to bring your nances completely up-to-date, making sure you know where your
business is at, whenever you need to know.
And heres how we can help you
Let us help you understand your options:
0800 230 0213