Top tips for becoming a sole trader

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In her second post AAT member in practice, Lucy Cohen of Mazuma, offers advice on becoming a sole trader and the low-down on making sure your VAT is in order.

What advice would you give to sole traders?

  • Keep those receipts. It’s important to get organised and on top of your tax affairs from day one.  It makes life easier in the end.
  • Register as an employer if you take on staff. Don’t forget to register with HMRC as an employer if you take on staff because you’ll need to sort out their tax and national insurance as well as your own.  The HMRC employers hotline number to do this is 0845 60 70 143.
  • File your tax returns on time. Don’t forget… £100 fine if you file your tax return for the year ended 5th April after the 31st January the following year.
  • Pay your self assessment tax on time. Save yourself automatic penalties and interest. If you are one month late HMRC will increase the tax due by 5% – a late payment penalty. Interest will run from the due date, 31st January or 31st July.
  • Profit does not equal cash. Don’t forget that the timing of sales and purchases is important. Your profit is based on when things are done (i.e. the invoice date), not when they are paid. This means that you can have a tax bill but no cash.
  • Claim for working from home. The owners of most small businesses will work from home occasionally, even if just to do the paperwork sometimes. In these cases, the taxpayer may claim an appropriate proportion of his or her household bills as a business expense, including heating and lighting costs and council tax. Here the proportion is generally based on the number of rooms in the house, excluding bathrooms, toilets, kitchens and hallways. This allowance can help to reduce your tax bill so it’s worth the little extra effort to work it out!

Do I have to be VAT registered?

There is a myth that every legitimate business is required to be VAT registered. This is not the case. Your business (as a sole-trader, partnership or company) does not have to become VAT registered until the total sales for 12 consecutive months exceeds £73,000. However, this total does apply to all the businesses you run as a sole trader.

You can’t artificially divide your businesses to avoid registering for VAT. Of course you can still register for VAT if you don’t hit the £73,000 turnover mark – this is called voluntary registration and can give your business the appearance of being bigger than it is which can sometimes be useful commercially.

However, think carefully if you are registering before you have to – if your business is a business to business (B2B) trade then it may not matter as much because the businesses who buy your services can reclaim the VAT.  However, if you are selling to the public then bear in mind that you’ll have to add 20% to your prices when you become VAT registered which may make you less competitive in your market.  You also need to take into account the extra hassle of completing VAT returns every quarter.

In her next post, which goes live on 19 April, Lucy tells you all you need to know about expense claims.

Lucy’s first post in this series concentrated on the tax hurdles you face when starting a business.

You can also follow Lucy on Twitter.

Lucy Cohen is the co-founder of Mazuma Accountants.

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