Tax advice for sole traders: Accounting for SMEs

15 January 2020

UHY Hacker Young’s Corporate Tax director, Nikhil Oza, explains some important tax considerations for sole traders, as part of our Accounting for SMEs Q&A series.

Do I need to register with the HMRC as a sole-trader? How do I know if I qualify?

You need to set up as a sole trader if any of the following apply:

  • you earned more than £1,000 from self-employment during the tax year (i.e. between 6 April and the following 5 April)
  • you need to prove you’re self-employed, for example to claim Tax-Free Childcare
  • you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

To set up as a sole trader, you’ll need to register for Self-Assessment and file a tax return every year. The registration process can be done online and is usually completed within 10 working days.

Registration must be completed by 5 October following the end of the tax year in order to avoid penalties.

Similarly, when should I register for a VAT number? Are there benefits to registering?

You must register your business for VAT with HM Revenue and Customs (HMRC) if its VAT taxable turnover is more than the VAT threshold (currently £85,000).

When you register, you’ll be sent a VAT registration certificate. This confirms:

  • your VAT number
  • when to submit your first VAT Return and payment
  • your ‘effective date of registration’ – this depends on the date you went over the threshold, or is the date you asked to register if it was voluntary

You can register voluntarily if your turnover is less than the VAT threshold, unless everything you sell is exempt (e.g. insurance, online lottery games, financial services).

Registering for VAT voluntarily can ensure that you are ready to grow as a business – creating a positive impression about your intent – and allows you to reclaim VAT on purchases you make.

If your “input tax” (the VAT you pay) is greater than the VAT you collect from your customers, you can claim the difference back from HMRC. However, you could end up paying more to HMRC if the reverse is true.

Also, you would need to charge VAT to your customers, pushing up prices. This is fine if the customer can also reclaim the VAT (i.e. they are VAT-registered), but may not be agreeable if you are selling to the general public who can’t reclaim the VAT.

What’s next?

We will be posting the next in our Accounting for SMEs Q&A shortly so watch this space! Our next piece will focus on navigating tax deductions.

For more information on the issues mentioned above, or any other tax and accounting queries you may have, please contact Nikhil or your local UHY specialist.

Alternatively, fill out our contact form here.