Self employed people (Sole Trader)

Although being a sole trader is one of the simplest ways to get started in business, there are many processes that need to be followed to ensure that you are compliant with HM Revenue and Customs' requirements.

TaxMates offer tax advice for small businesses and self-employed individuals.
The main advantages of setting up as a sole trader are:

  • Total control – You have total control over the business. Decisions can be made quickly and easily, from accountancy and financial decisions to general business decisions. Easy to change to another trading identity. It is relatively easy to change your trading identity from that of a sole trader to a limited company.
  • Keep the profit – As the owner of the business, all the profit belongs to you.
  • Business affairs are private – When you run an unincorporated business your accounts are not made available to the public therefore competitors cannot see what you are earning hence they will know less about how your business works and how it succeeds.

The reasons why sole traders are often successful are:

  • They can offer a more personal approach – A smaller business can have closer contact with their customers and develop a close rapport in order to give a high level of service and customer care.
  • They can be sensitive to the needs of their customers – Since you are closer to the customer that allows you to react more quickly to their needs than a larger business.
  • Can cater for the needs of local people – Small local businesses will be closer to the community and can develop good business relationships with their understanding of the area and local knowledge.

The main disadvantages of being a sole trader are:

  • You are personally liable and accountable for all your businesses debts - Should your business fail you could end up losing your personal assets such as your home, car, etc.
  • Can be difficult to raise finance -When you run a small unincorporated business, banks will not lend you large sums and you may find raising finance for the business is very difficult unless you are prepared to change your ownership status.
  • Can be difficult to enjoy economies of scale - Smaller business often find that they cannot buy supplies in bulk and do not enjoy the same discounts as larger businesses.

How we can help

Starting up a new business can be a big ordeal. Our accountants can assess whether your business would benefit by starting up as limited company or as a sole trader. If you are already running a business, we can help you with forecasts to see whether you are running the business in the most efficient way, or whether you should consider changing the status from self-employed to limited company or vice versa. We can deal directly with HM Revenue and Customs on your behalf and discuss your National Insurance requirements and exemptions with you, as well as provide guidance on all taxation matters.

Tax Refunds

Our tax refund service is simple - we aim to ensure that PAYE employees are paying the correct amount of tax and have the right tax code. A short questionnaire helps us to liaise with H M Revenue & Customs on your behalf to determine if you are due any tax refund.

If you can answer YES to any of these questions, you could be due a tax refund.

  • Have you had more than one employment in the last 6 years ?
  • Do you pay subscriptions to a professional organisation?
  • Do you have to use your own car as part of your job?
  • Are you required to work from home some, or all of the time?
  • Have you at any time in the last 6 years been required to provide tools for your employment?
  • Have you at any time in the last 6 years been required to launder workwear provided by your employer?
  • Have you received more than one notice of coding within a tax year ?

Your employer deducts tax straight from your wages and follows the guidelines of H M Revenue & Customs according to your given tax code. It is estimated that 44% of employees have paid too much tax simply because their tax code is incorrect. Here at the Tax Mates, we can check your tax code and liaise with H M Revenue & Customs to refund the money you are owed.

Our Tax Refunds Service:

No tax refund = no fee

For every £1.00 refunded, you receive 70p

We provide a completely confidential service

Capital Gains Tax

Overview

If you sell an asset at a profit, you could have a capital gains tax (CGT) liability. If so, the net gain above the exempt amount is taxable at 18% (2010). The resulting tax liability has to be paid by the 31 January following the tax year of sale (eg a sale in the year to 5 April 2010 means any CGT is due by 31 January 2011). Not all assets are liable to CGT, however:

Main Exemptions

  • Your own home (only one- second homes don't qualify)
  • Private cars
  • Damages and compensation for any wrong or injury suffered by you as an individual
  • Chattels (antiques, paintings, furniture etc..) sold for not more than £6,000
  • Personal decorations for valour or gallantry
  • Many UK government securities
  • Foreign currency bought for your personal use outside the UK
  • Works of art and other types of National Heritage property
  • Shares in a Venture Capital Trust, if sold by the original subscriber, and the company remains a VCT at the time of sale
  • Certain gifts of business or Heritage assets, or which are subject to Inheritance tax
  • The first £10,100 (2010) of gains annually

Annual Exemption

Each person has a separate annual exemption so it is possible for married couples to get gains of £20,200 [2010] tax-free by transferring ownership of the asset to be sold so that each owns half before the sale, as gifts between spouses do not attract CGT. This unfortunately doesn't apply to unmarried couples, but marrying for the sake of the capital gains tax exemption may be a little extreme!

It may be worth selling an asset with an in-built gain just before the end of the tax year so as to use up the annual exemption, and then repurchase it straight away. This should not be attempted without seeking advice from a tax advisor as there are pitfalls for the unwary! Quoted shares, for instance cannot be repurchased by the same person, but a spouse can repurchase the same shares. (this is called a bed & breakfast arrangement).

Indexation Relief

This started in March 1982 and stopped for individuals in April 1998. If you owned an asset between those dates your cost is increased by the movement in the retail prices index between the date of purchase (or March 1982 if it was owned at that date) and the date of sale. Over the complete period March 1982 to April 1998 the RPI increase was 104.7%. This is a way of ensuring that you do not pay CGT on gains solely attributable to inflation.

Taper Relief

With indexation relief stopped after April 1998, it was replaced, for individuals, by taper relief, which wasapplicable for assets sold prior to 5 April 2008. This exempted part of the gain, the exemption depending on the type of asset and the length of ownership.

Roll Over Relief

This is a relief for businesses which defers CGT on the sale of most business assets provided you reinvest at least the full sale proceeds into another business asset bought between 12 months before the sale and three years afterwards. If you operate a business as a limited company, note that your shares in the company do NOT qualify for roll-over relief, although other reliefs may be available. Ask for advice before selling.

Entrepreneurs Relief

This is a relief on the sale of a business or business assets after a sale, which have been owned for more than a year. It reduces the chargeable gain by 4/9.

This is by no means an exhaustive treatment of Capital Gains Tax and I would recommend that you seek professional advice BEFORE entering into what could be a costly transaction!