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Tax, Accountancy and VAT

ACCA

Sole Traders

The term "sole trader" is often used synonymously with "self-employed". However, the first point for the sole trader to establish is whether they really are self-employed. Quite often arrangements arise whereby X works for Y Ltd on a "self-employed" basis, when the reality is that the engagement looks to HMRC like an employment. There are a number of tests, such as: No single test is definitive; the arrangement must be looked at overall. If it is later ruled that there was an employment, the employer will be asked to account for tax and National Insurance on the payments made to the employee - worse, it is not always clear that the "employee" can reclaim any tax and National Insurance paid under self-assessment!

Assuming the above issues are not a problem, the newly self-employed individual must advise HMRC within three months, and begin to pay Class 2 National Insurance (NI) (£2.70 pw in 2013-14). They must also start keeping careful records of income and expenditure in order to be ready to complete a tax return by January 31st following the tax year of starting business. For advice on record keeping and for simple bookkeeping software, please contact us.

This link to HMRC may be useful http://www.hmrc.gov.uk/sa/self-emp.htm

It is also advisable to put aside a proportion of earnings in order to meet the tax bill. The first one includes, not only the tax on profit for the first period of trading, but also a payment on account for the following year.

For example, Fred starts his business on October 1st 2012. This is within the tax year 2012-13. His first tax return, covering the period to April 5th (or if more convenient, March 31st) is due by January 31st 2014 (if filed online)1. At the same time, tax and Class 4 NI will be due on the profits of that first period, and also (with some exceptions) a payment of a further 50% on account for year 2013-14. A second payment on account will become payable on July 31st 2014.

It will improve the business cash flow in the short and medium term if these payments can be reduced. This is especially the case if profits are low in the early stages, and this may be possible by using a "basis period" which does not correspond with the tax year. Careful use of Capital Allowances can also make a significant difference to the timing of tax payments. Please follow the links for advice on these points.

1 The filing date is earlier, October 31st, if sending the paper form.
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