Sole traders starting your own new sole trader business set up

Information for sole traders starting your own new sole trader business set up including how to start up business, basic accounts and easy accounting

Setting up in business as a sole trader is the easiest way most businesses choose but some knowledge of how to start up business is useful. Every budding entrepreneur should be aware of the need to adequately prepare for the business venture. Administration and accounting is usually straightforward, you are your own boss and all the profits belong to the sole traders. 

By adopting an approach of researching the opportunity and getting the administration right from the start the chance of success of any new start up is increased, and that is important, as more new start up businesses go out of business leaving the sole trader with personal debts than survive in the first 3 years.


New Start Up with the Business name, Business plan and personal liability risk

The first point of how to start up business as a sole trader is the business set up you can use your own name or choose a suitable business name. All transactions would be conducted under the actual name of the sole trader or the actual name trading as the business name. The sole trader own name should be used on all business stationery, letters, invoices, receipts and cheques.

As all liabilities incurred are the personal responsibility of the sole trader and there is no distinction between business assets and personal assets. Should the business incur losses, and that is quite common in the first year, all losses remain the personal liability of the sole trader.

An important step to take before trading commences in the new business set up is to prepare a business plan. A business plan is essential for a new start up if funding is being sought but is also important since the first year trading performance can be difficult. The business plan consists of sales, purchases, investment in assets and a financial profit statement plus cash flow forecast.

The major benefit initially to be obtained from the business plan is the research the sole trader conducts into such areas as competition, market research, suppliers, costs and funding requirements. A business plan is essential to raising start up finance.


HMRC registration, local authority licenses, retail change of use.

When the business set up is complete and trading starts, the date of the first sale or purchase is the new start up date, the sole trader then has a responsibility to register as self employed with HMRC. If self employment is not registered within 3 months of trading commencing the sole trader may be fined £100 for failing to register on time. Following registration HMRC will send an annual self employed tax return which has to be completed each financial year. It is usually advisable to adopt the 5 April as the year end date and so the first year would be less than 12 months trading.

The self employed registration form can be obtained by telephoning HMRC or visiting and downloading the registration form direct from the HMRC website at HMRC starting up

There is no requirement to register the business set up or business name with Companies House which is solely for limited companies.

Depending upon the type of trade there may be a requirement to register the new start up business with the local authority where either an application for change of use of the premises might be required for a retail business and/or a local authority license required for the proposed trade such as a taxi driver license, child minder, restaurant or pet shop license. Sole traders need to contact the local authority to determine if a license is required while the business set up is being considered as to start trading without a required licence can cause problems.


Insurance and public liability

How to start up business as a sole trader includes consideration of insurance requirements. Employers liability insurance will be required if employees are employed, insurance specific to the trade may be advisable to offer protection from claims, public liability insurance may be required and is often essential in retail trades particularly if that trade also requires a local authority license.


Easy Accounting

While a sole trader does not have to keep formal accounts, basic accounts are required to enable the net taxable profit to be calculated with paperwork to support that calculation. Documentary evidence includes paperwork obtained from third parties such as sales records and receipts, purchase invoices and receipts and if maintained the business bank account. The sole trader easy accounting package by DIY Accounting provides basic accounts spreadsheets to record the financial transactions and produce an income and expenditure statement.

It is preferable to maintain regular basic accounts as part of the financial control bearing in mind that all debts of the business are personal to the sole traders. By preparing monthly basic accounts cash flow can be managed more effectively and an estimate of future tax liability made.

It is not essential to employ an accountant to prepare the sole trader accounts and the tax return. Employing an accountant has the advantages of saving time in preparing the accounts, tax return; professional advice on what expenses can be claimed including calculating the capital allowances. The disadvantage is the cost and that is the choice of the sole trade, possibly do the easy accounting yourself and justify the accountant fees against the savings produced.


Tax returns, Income Tax and National Insurance

Sole traders are assessed for income tax and national insurance on an annual basis based upon the self employed tax return everyone self employed must complete and send to the tax authority. HMRC issue tax returns in April each year which need to be completed and submitted by 31 October following the end of the financial year. Tax returns filed online can be submitted with a financial submission date of 31 January, some 10 months after the end of the financial year.

There are 2 versions of the self employed tax return, The short tax return is completed if sales turnover is below £79,000 for 2014 -15 and the more detailed full self employed tax return completed if sales exceeded the cut off point which for 2007-08 was also the level at which vat registration was required. The easy accounting for sole traders with a turnover of under £30,000 includes a summary of sales and expenses which is simpler than the detailed requirements.

In calculating the tax payable HMRC deduct from the net taxable profit the personal tax allowance and calculate the income tax payable at the 20 per cent basic rate for 2014 - 15 on profits up to the higher earnings threshold and 40 per cent on net earnings above the higher threshold. Losses incurred in previous years can be offset against the net taxable profit.

Self employed pay class 2 national insurance contributions which were set at £2.75 for the financial year 2013-14. Refunds, through the small exceptions rules, are possible if net taxable profits are very low. In addition self employed also pay class 4 national insurance which in 2013-14 was 9 per cent on net profit above the personal allowance and up to the primary threshold and 2 per cent above the national insurance primary threshold

Following the financial year end on 5 April the income tax and national insurance calculated by HMRC must be paid in full by the following 31 January. In addition HMRC also assess the liability for the next financial year and 50 per cent is also payable on 31 January with the remaining 50 per cent payable by 31 July.


Benefits and disadvantages of vat registration

A new business start up as a sole trader does not involve compulsory registration for vat. If a business set up is unregistered for vat then the vat charged on purchases is treated in the accounts as a cost and vat is not added to the sales values. Businesses are required to register for vat when sales reach the vat threshold in a 12 month period, the current vat threshold as from April 2008 is £67,000.

If sales are mainly to the public who cannot reclaim the vat charged then it is usually better to delay registration until the threshold is reached. Where sales are mainly to other vat registered businesses that can reclaim the vat the sole trader adds to the sales value then it may be appropriate to voluntarily register to enable the vat input charged on purchases to be reclaimed against the vat charged to customers.

Vat registered business are required to keep audit trails of income and expenditure to support the vat returns. An easy accounting system is still feasible but has to be more formal than basic accounts.


Bank accounts

One point to consider when a sole trader considers how to start up business is that they does not need to open a separate business account. If a specific business account is used then HMRC have a right to see the transactions through that business account as supporting evidence to the basic accounts and so bookkeeping records should be maintained. HMRC may ask to see a private account but they do not have a statutory right to do so.

Since all banking transactions are the personal responsibility and liability of the sole trader if a separate business bank account is opened then it must state the name of the sole trader. Typically the bank account name would be Your Name trading as Business Name.

The advantages of maintaining a separate business account are significant in keeping business and personal finances separate which cause problems if he new business start up money becomes confused with personal money. The disadvantages are business bank charges and being committed to declaring the details to HMRC should they ask. If the business is run honestly then that should not be a problem.


Payroll and Employees

The status and business set up of a sole trader is not affected if employees are engaged as the sole trader is still self employed. If employees are engaged then the sole trader needs to register with HMRC as an employer and operate a PAYE scheme which involves calculating and deducting income tax and national insurance from employees gross pay, incurring the employers national insurance contribution, issuing payslips and keeping records of all employees and deductions. Income tax, employees and employers national insurance can be paid to HMRC quarterly if under £1500 per quarter or monthly if exceeding this level.


Networking with business groups

There are numerous groups sole traders may consider joining. The government organisation Business Link offer free advice on many issues about how to start up business and may have business grants available for new start ups. Business Link also has contacts with local enterprise agencies who offer support. The Federation of Small Business charges an annual subscription, hold regular local meetings and provide a range of discounted services to small businesses.

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