How do Sole Traders work?
Sole traders are individuals who runs their own business. In many ways, the sole trader is the business itself, as the business has no legal identity separate to the owner.
Being a sole trader suits a variety of different businesses. However, it’s most common amongst service providers including carpenters, hairdressers and builders.
Sole traders have complete autonomy when it comes to their own business. They make all the decisions regarding their business, own the business assets and are personally liable for any business debts.
Choosing to work as a sole trader brings freedom as well as responsibility. It’s an opportunity to pursue a direction, hobby or trade that really excites and engages you.
Sole Trader Liability
Unlike with a limited company, a sole trader is personally liable for all of the business’s debts. As a result, should the debts remain unpaid, their assets may be at risk.
What to consider when you become a sole trader
When you first become self-employed, you should let HM Revenue & Customs (HMRC) know as soon as possible. You should tell them no later than by 5 October after the end of the tax year in which you started trading. For example, if you started your self-employment in June 2019, the latest you should tell HMRC that you are self-employed is 5 October 2020.
The importance of planning
Every business needs a business plan. When you’re developing yours, there are a few things to ask yourself:
- What’s your vision? How do you see the business growing? Research is key here. Look at what products/services you plan on selling, as well as costs and prices. Think about who your competitors are, how they work and what they charge.
- What skills do you have? Look at your skillset – know your strengths and be aware of where you might need to develop and build on your skills. There are lots of ways to boost your knowledge. When you’re self-employed, you’ll need to wear many hats.
With a robust business plan, not only will you be better prepared, you’ll be in a stronger position to apply for finance.
Arguably the most important aspect of your business! You’ll need to estimate your business’ income and outgoings which means preparing a cashflow forecast. This will give you an understanding of what your business needs as well as predicting seasonal spikes (as happens frequently with businesses like wedding planners, personal trainers, etc.
Once you’ve completed your forecast, think about what funding is needed. This can be sourced through you own bank, but shopping around for the best deals is always recommended. As a sole trader, remember that you’re liable for any business debts.
Stay in control
Making sure you have good credit control procedures and that you stick to them. Always ask for customer references and follow the correct protocol when customers do not or will not pay. Doing so will avoid any delays in payment should an issue arise.
Stock control is equally important. Keeping record of your stocks either on paper or via computer will help to track what is going in and out of your business.
Your business will need to hold varying degrees of stock to satisfy the demands of your customers. Be careful not to overbuy however, by doing so you’ll avoid tying your money up in your business for too long.
Premises and property leases
If you need a bricks and mortar base, it might be worth investigating commercial property leases. A commercial lease will allow you to use and occupy a property for an agreed period. Get expert advice on this to make sure you’re investing wisely. It’s a big commitment so tread carefully.
The lease will also outline the rights and duties of both you and the property’s owner. It should show you how much you have to pay towards the property as well as expectations about the owner’s responsibility.
Income Tax for sole traders
As a sole trader, you’ll need to complete and submit tax returns to HMRC every year known as ‘self-assessment’. This information helps HMRC work out how much tax you owe.
This is always easier to do when you keep accurate and up to date records of receipts, invoices, etc. With Making Tax Digital now in place, this may take less time. You can do this yourself or you can use an accountant or specialist software if numbers aren’t your forte.
Although the income tax year runs from 6 April every year to the following 5 April, you’ll need to complete and return your forms by a set deadline.
If you send it by post, the deadline is 31 October following the end of the tax year. If you submit your income tax return online, the deadline is 31 January following the end of the tax year.
For more information on filling in your tax return, see GOV.UK’s guide.
What about VAT?
Value Added Tax (VAT) is levied on most goods and services that businesses provide. If your gross turnover for the tax year is likely to be bigger than £85,000, you must register for VAT.
VAT on your purchases is known as ‘input tax’. The VAT you place on sales you make is known as ‘output tax’.
Usually every quarter, you’ll need to send HMRC a VAT return. This must include details of your input and output tax. If your output tax is greater than the input tax, you will then have to pay the difference to HMRC.
Head over to HMRC’s website for more information on VAT www.gov.uk/government/organisations/hm-revenue-customs.
My business debts are stacking up…
If you’re going through financial difficulties, it’s time to get some debt help.
Two of the available options are:Informal negotiation, in which you make an offer to your creditors in instalments based on what you can afford. We can help you work this out.
Think about whether you are realistically able to continue trading through your financial difficulties.