Registering with HMRC
“What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin.” – Mark Twain
If you register with HMRC as a self-employed person (i.e. sole trader or partnership) you will pay tax on any profits your business makes at the end of your trading year. This is not just on any personal earnings but the bottom line on your year end accounts that shows the profit – irrespective of whether you have withdrawn it as earnings or not
In addition, as self employed, you will be required to pay Class 2 and Class 4 National Insurance contributions (NIC’s). Any employees within the business should be dealt with, irrespective of the legal entity your business takes, as indicated in the paragraph below on limited companies.
If you incorporate the business as a limited company, you are then classed as an employee, which means you must pay income tax through the company’s Pay As You Earn (PAYE) scheme, as well as NICs, (including any employees on your payroll).
The company must also pay Corporation Tax to HMRC each year, at the prevailing rate, against their profits after all costs, allowances and expenses have been accounted for and taken off.
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In addition, should the business register for VAT, this also needs to be taken into account. Registering for VAT isn’t dependent on the legal status of the business (i.e. sole trader, limited company etc) but on other factors which need to be considered. Irrespective of this, there is a turnover threshold at which point the business MUST be VAT registered – currently (2017/18) £85,000. This is turnover (the total amount of business you do within a year) NOT profit.
Registering with HMRC for VAT can be advantageous but, equally, the opposite could be true. It’s worth taking the time to consider the pro’s and con’s of VAT registration within business planning process and we would suggest you seek professional advice for this. VAT is applicable to the sale of most goods and services but there are exceptions (some food, childrens clothes, training services, etc – see the following link for the UK.gov guide) and you also need to know if any of these apply to your venture.
There are various options for paying your VAT but the most common is a quarterly return and payment. This has become much simpler through online returns, submissions and payments that HMRC now employ.
The HMRC provide a great deal of information on their site to help you register your business, be sure to check out their site and follow the steps. However, we would always recommend seeking professional advice from an accountant to be sure you comply with all HMRC requirements.
Thoughts on registering with HMRC from Yorkshire Powerhouse
Being a sole trader simply means that you register with HMRC as a self-employed person running a business. Read >