We know that starting to work for yourself can be an exciting opportunity, but before you make the leap you’ll undoubtedly have a few questions. Here we take a look at 5 of the many questions you should be asking yourself when going it alone.
1. How do I register as self-employed with HMRC?
Once you start working for yourself and run your business as an individual, you’re classed as a sole trader and you’ll be responsible for paying your own income tax and National Insurance Contributions (NICs).
As such you’ll need to let HM Revenue and Customs (HMRC) know that you’ve become self-employed by registering online with them as soon as you’ve started your business. If you don’t register before the 5th October in your business’ second tax year you could face a fine for not doing so.
A tax year runs from 6th April to 5th April of the following year. If you became self-employed in February 2017, the first business tax year will end on 5th April 2017 and therefore you must register with HMRC before the 5th October 2017, which will be in your business’ second tax year ending 5th April 2018.
Once registered you’ll be issued with a Unique Tax Reference (UTR), a 10 digit identification code, and be enrolled into the self-assessment service; this is the system of reporting your business income on which any income tax and NICs will be payable.
Where you’ve already been enrolled into the self-assessment service you should still register online but complete the form CWF1 instead.
The final step of registration is to consider whether or not your business will be working in the construction industry. If you do then you‘ll also need to register with HMRC for the Construction Industry Scheme (CIS), as either a subcontractor or contractor.
All contractors must register for the scheme. As a subcontractor you don’t have to register, but this will reduce the amount you’re paid by your client.
2. How do I arrange my business finances?
It is highly recommended that you keep your business and personal finances separate, so a business bank account is a must.
Unlike the majority of personal current accounts, a business account will attract bank charges so you may wish to shop around to see which bank gives you a better introductory offer and/or long term deal.
Your business bank account will be in the chosen name of your business. You can trade under your own name or you are free to choose a separate name for your business, subject to a few restrictions. The name must not be offensive, the same as an existing trademark, contain a sensitive word or imply you are connected to the government. As a sole trader you don’t have to register this name, although you may need to seek permission to use some words.
If you need funding to help get your business off the ground your business bank is always a good starting place, although there are many government backed schemes to provide you with financial help as well as business advice.
3. Do I need business insurance?
When running your own business you’ll need to consider which insurance policies you’re required to hold either legally, or practically to reduce risk.
The main ones to consider are:-
Employers’ liability insurance provides cover to pay compensation costs and legal fees if an employee or ex-employee sues for illness or injury caused by their work.
In addition to motor insurance, this is the only other insurance policy you must have in place by law, although this only applies where your business employs at least one person; even if on a part-time basis. The policy cover must be for a minimum of £5 million and you must clearly display your certificate of insurance. Failure to take up this insurance can see you being handed fines of up to £2,500 per day.
Public liability insurance provides cover to pay the cost of legal or compensation claims if a third party is injured or their property suffers damage whilst at your place of business or when you are working in their home or business premises.
Whilst you’re not legally obliged to hold this insurance you may find that some organisations will expect you to have this cover before giving you a contract or allowing you to operate on their premises.
Professional indemnity insurance provides cover to pay the cost of claims made by your clients for any financial losses suffered as a result of your professional negligence.
Similar to public liability insurance, whilst not a legal requirement it’s becoming common practice for organisations to require your business to have this cover in place before they’ll engage with you.
There are numerous other policies which you may wish to consider depending upon the nature of your business e.g. business equipment cover, if expensive machinery is vital for your business or goods in transit insurance, if you transport large quantities of stock.
Finally, if your business is within a recognised profession it would be advisable to check with the industry body as to which insurance policies they insist, or recommend you hold e.g. accountants are required to hold professional indemnity insurance in order to practice.
4. How long do I need to keep receipts?
Whilst admin and paperwork are not everyone’s favourite tasks, as a business owner you have a responsibility to keep a record of your business income and expenses in order to support your annual tax return to HMRC.
As a sole trader each year you’ll be required to submit your annual tax return by the 31st January following the end of the tax year (5th April) and you must keep all supporting records for a minimum of 5 years from this date, as HMRC may wish to check your records to make sure you’re paying the right amount of tax.
Whilst there is a need to keep records for the taxman, keeping accurate, up to date financial information on your business is key to its success. Properly organised records will help you keep a close eye on cash flow, a tighter rein on expenses and hopefully ensure you are making money.
Many people working for themselves are now using online software to make record keeping that much simpler and keep track of their finances, with many offering the option to do all this via a smart device.
5. Should I register for VAT?
This decision can be considered in three parts: Can I? Must I? Should I?
Some goods & services are ‘out of scope’ of the VAT system so you can’t charge or reclaim the VAT on them and some goods & services are in scope but exempt from VAT.
If your business only sells VAT-exempt goods and services you can’t register for VAT.
You must register for VAT when the total amount of your UK sales (excluding exempt sales) exceeds the VAT threshold during any 12 month period. You must also register where you expect to go over the threshold in a single 30 day period.
The VAT threshold usually changes every 1st April and currently stands at £85,000.
You should register with HMRC within 30 days of exceeding the threshold. If you are late in doing so you may receive a penalty.
Even where your sales fall below the VAT threshold you can still opt to register on a voluntary basis.
Many businesses choose this route to gain more credibility from having a VAT number and of course they can claim the VAT back on eligible purchases they make.
Being registered for VAT means you would have to account for VAT on your sales, so if you’re selling mainly to the public or non VAT registered businesses you would either increase your selling price or absorb the cost of the VAT, either way careful consideration is needed as voluntarily registration for VAT could be a costly mistake.
To find out more about how we can make the leap into self-employment easier, call me on 01253 603452.