11 STEPS TO SETTING UP AS A SOLE TRADER (SELF-EMPLOYED) - Post 1
11 STEPS TO SETTING UP AS A SOLE TRADER (SELF-EMPLOYED)
According to the Office of National Statistics – Labour Force Survey between September – November 2019 a record 5 million people were classed as self-employed that is 15.2% of all people in employment.
Irrespective if the coronavirus situation has forced your hand into deciding if becoming a sole trader (self-employed) is a viable option or just delayed you starting out, the following will guide you through the process of setting up as a sole trader (self-employed).
If you think it may take time for your business to generate the work / revenue you need to provide for your financial needs, you can still be both employed and self-employed at the same time. i.e. you can work for an employer during the day and run your own business in the evenings.
WHAT CONSTITUTES BEING CLASSED AS A SOLE TRADER
Once you start out selling services or selling goods HMRC classes you as a sole trader. This means you are self-employed even if you have not advised HMRC.
Definitions of Self-employed
· You oversee your business making all the decisions and take responsibility of your actions in the making or breaking of your business.
· You have more than one client
· The working day number of hours, location and how you do business are by your own arrangement
· If the need for additional personal is required i.e. to help you or do the actual work these are paid by you.
· Main item of equipment required in the business are provided by you
· If a client decides the product falls short of what has been agreed, anything required to finish any unsatisfactory work is your responsibility and at your expense
· Provide a quote or a contract detailing the scope and agreeing a price for the work
· Sell goods or services to make a profit (including through websites or apps)
For a Limited Company, a lot of these will also apply but you are not classed as self-employed you are classed as both an owner and an employee of you company.
SELLING GOODS OR SERVICES
Selling goods or services could class you as a trader, if you are trading you are self-employed.
· Selling regularly to make a profit
· Create items to sell for profit
· On a regular basis you sell online, at car boot sales or through classified adverts
· You sell goods for other people earning a commission
· You provide a service which you are paid for
If you sell some unwanted items on an ad hoc basis or you do not plan to make a profit you are probably not trading.
REGISTERING AS SELF-EMPLOYED
Self-employed and earned more than £1,000 you will need to set up as a ‘Sole Trader’
Being a sole trader is not the only business type for working for yourself, you could
· Be a partner in a business partnership
· Set up your own limited company
YOUR RESPONSIBILITIES AS SELF-EMPLOYED
Becoming self-employed has its responsibilities these include:
· Keeping records of your business activities i.e. sales, purchases and expenses
· Send a self-assessment tax return every year
· Pay income tax on your profits and class 2 and class 4 National Insurance
· Apply for a National Insurance number if you require one
· Register for VAT if your turnover exceeds £85,000 or voluntarily if it suits your business
· If you work in the construction industry as a subcontractor or contractor you will need to register with HMRC for the Construction Industry Scheme (CIS)
NATIONAL INSURANCE CLASSES
National Insurance Classes that may affect the self-employed are class 2, 3 and 4
CLASS 2 – If your profits are more than £6,475 a year then for the 2020-2021 tax year you will pay £3.05 a week.
CLASS 3 – If your profits are below £6,475 you can pay voluntary contributions so to avoid gaps in your records meaning you will be eligible for the full state pension
CLASS 4 – If your profits are between £9,501 and £50,000 then you will pay 9%, for profits over £50,00 you will 2%
Most self-employed pay through self-assessment.
If you are employed as well as self-employed your employer will deduct class 1 national insurance from your wages, and you pay Class 2 or 4 subject to you profits.
Limited company directors have different National Insurance rules
CONSTRUCTION INDUSTRY SCHEME (CIS)
In this scheme contractors will deduct money form a subcontractor’s payments which they pass on to HMRC. These deductions are seen as advanced payments towards the subcontractor’s tax and NI.
Contractors are required to register for the scheme, but subcontractors are not required to register. If subcontractors do not register deductions are taken at a higher rate.
A contractor is deemed as:
· Someone who pays subcontractors for construction work
· Their business does not do construction work but spend an average of more than 1 million a year on construction in any 3-year period.
A subcontractor is deemed as:
· Someone who does construction work for a contractor
WORK COVERED BY CIS
Construction work covered under CIS:
· Work to Permanent or temporary buildings or structure
· Civil engineering work like roads and bridges
Construction work includes:
· Site preparation, e.g. laying foundations and providing access works
· Site demolition and dismantling
· Building work
· Any alterations, repairs and decorating
· Installation of heating, lighting, power, water and ventilation systems
· Cleaning the inside of buildings after construction work
Registering is not a requirement for the following jobs:
· Architecture and surveying
· Scaffolding hire (with no labour)
· Carpet fitting
· Creating materials used in construction including plant and machinery
· Delivering materials
· Non construction work on a construction site, e.g. running a canteen or site facilities
For full guidance refer to the following document Construction Industry scheme: a guide for contractors and subcontractors (CIS 340)
Disclaimer: Refer to HMRC website for further details and any revisions