Coconut’s Elaine Clark – who is also the Managing Director for CheapAccounting.co.uk – provides IMS StratNews with this exclusive and excellent quick guide, which will take you on a whistle-stop tour through the maze of rules and regulations for Freelance & self-employed workers, giving you a taste of what you need to know to get started!

As soon as you start to trade you need to register your business with HMRC. However it’s not always clear when your business formally starts, as you may have some pre-launch tasks to do, stock to buy or contracts to secure.  Unfortunately HMRC isn’t much help either as they provide no guidance on the definition of starting to trade. The best approach is to register with HMRC sooner rather than later and, in particular, before you make your first sale.

 

You can do this online at https://www.gov.uk/log-in-register-hmrc-online-services/register

 

 

You can of course claim for pre-launch costs incurred through your business even if they were paid out of your own funds. Keep receipts and invoices then record the amounts spent in the accounts once you register it for taxes, showing the total spent as an amount that the business owes to you.

 

The taxes that you’ll register for with HMRC will depend on what structure you choose for your business, in a freelance & self-employed capacity.

 

By far the simplest of structures is that of a sole trader.

 

 

A self-employed person working on their own is a sole trader.

 

 

There is no formality to setting up as a sole trader as there is no distinction between you and your business; basically you just get started.

 

A sole trader is an unincorporated business structure meaning that you have unlimited liability (responsibility). This means that you are personally liable or responsible for the debts of the business should it fail. Creditors (people or businesses that you owe money to) could attempt to recover any amounts owed to them from your personal assets including your house.

 

 

A limited company is an incorporated business established through a formal process and registered at Companies House. A limited company has its own separate identity in the eyes of the law; a company can trade, own assets, incur liabilities and be sued.

 

 

Ownership of a limited company is by way of shares allocated to and purchased by shareholders. The shareholder(s) appoint director(s) to run the business on their behalf. Directors have legal obligations bestowed on them when they are appointed, including keeping accounting records and filing accounts. Of course, the shareholder and director can be one and the same person, as is often the case in an owner managed business.

 

 

The distinction to remember is that shareholders own the business while directors are appointed to run it. The clear advantage of setting up a limited company and trading through such a business structure is the protection of limited liability; if the company fails the debts remain with the limited

company and aren’t passed on to its directors – unless there has been some wrongdoing.

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Simply put, the shareholders (business owners) liability is limited to their investment in the company i.e. how much they agreed to pay for the shares unless of course they give personal guarantees on the debts. Hence the term limited liability.

 

The business structure that you operate under will determine the taxes that are paid.

 

 

In the past the attraction of a limited company has been enhanced due to lower taxes on the profits extracted from the business. That tax advantage has been eliminated for many with the introduction of the dividend tax. So, unless you have large profits, then operating as a sole trader might be the preferred route.

Depending on profit levels a sole trader will pay:

● Class 2 National Insurance – a fixed weekly amount

● Class 4 National Insurance – a percentage based on profit

● Income tax

 

Class 2 and 4 National Insurance is explained at https://www.gov.uk/self-employed-national-insurance-rates

 

Income tax is explained at https://www.gov.uk/income-tax

A limited company pays corporation tax on its profits. The directors of the limited company may need to account for any salary paid on their self-

assessment. If they are also a shareholder and in receipt of dividends, these need to go on to the self-assessment as well.

If either a sole trader or limited company employs anyone then they will, subject to conditions, have to run a payroll and pay PAYE.

 

 

It’s really important to keep on top of your deadlines and filing responsibilities. Generally HMRC and Companies House, for limited companies, will write to you about your deadlines.

 

 

Of course the correspondence will only reach you if you have told the authorities about any changes in address or if you have mail forwarding when using a registered office service.

For limited companies the accounts will generally be due at Companies House 9 months after the year end. Special rules do apply in the first year, with the accounts being due 9 months after the date of registration of the company. The corporation tax has to be paid 9 months and 1 day after the end of the year with the accounts and corporation tax return being filed with HMRC 12 months after the end of the year, although in practice this is usually done at the same time as filing at Companies House.

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