What is a Sole Trader?
A sole trader is an individual 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.
What control does a Sole Trader have over their business?
Sole-traders have completely autonomy when it comes to their own business. They will beable to make all the decisions regarding their business, personally own the business assets and be personally liable for the business debts.
Sole Trader liability
Unlike with a limited company, a sole trader is personally liable for all of the businesses debts. As a result, should the debts remain unpaid, their assets may be at risk.
With this sole liability comes a great deal of responsibility, as well as a significant degree of pressure.
Common Sole Traders
Being a sole trader would best suit a variety of different business types, although it’s most common amongst service-providing tradesmen. Some common examples of sole traders are carpenters, hairdressers and builders and they often deal with individuals and families.
Starting out as a Sole Trader
If you’re starting out as self-employed, you should tell HM Revenue & Customs (HMRC) 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 2018, the latest you should tell HMRC that you are self-employed is 5 October 2019.
Every business needs a business plan. When planning yours, there are several important questions to ask yourself.
- What are your intentions for the business? Outline your vision of the business. Look at what products/services you plan on selling, as well as costs and prices.
- What skills do you have? Look at your skill set as well as that of your employees. Analyse strengths and weaknesses of your team and areas in which you could improve.
- How can I use my research? Include all research you’ve conducted about supply & demand for your product or service. Also include market research about your competition.
Alongside better preparing yourself, having a business plan will stand you in better stead should you apply for finance.
Look at your finances
One of the most important aspects of your business is the money coming into it. By doing a cash-flow forecast, you will be able to effectively estimate your business’ income and outgoings.
A cash-flow forecast will also help you prepare for any future financial difficulties, as well as coping with an increased demand. This is often seen in seasonal businesses such as wedding planners or personal trainers, for example.
Top tip – Try and set up a business account with a bank with which you have no existing debts. This will strengthen your position should you later be unable to pay your creditors.
Upon completing your forecast, it’s worth considering what funding is needed. This can be sourced through you own bank, but shopping around for the best deals is always recommended. However, remember that you will be personally liable for any debts taken out.
Remain 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.
Securing a property for your business can be a daunting prospect. This is why many turn to business leases. These allow you use and occupy a property for an agreed period of time.
Top tip – Don’t hastily enter into a business lease. They are a big commitment that usually last for a long period of time.
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 what the owner will do for you.
Completing your income tax returns
Sole traders are required to complete and submit tax returns to HMRC every year. This information helps HMRC work out how much tax you owe. The completing of your income tax return is known as ‘self-assessment’.
This is where the importance of keeping all your records, such as receipts and invoices comes in. You don’t have to send these to HMRC, but you will need them handy to complete your income tax return.
Top tip – Keep hold of your receipts and track your expenses! Recording, storing and backing up your receipts via a spreadsheet will save you all the hassle of finding them come tax-returns day.
The income tax year runs from 6 April every year to the following 5 April.
You have to complete and send HMRC your income tax return by a set deadline, depending on how you send your tax return.
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 usually 31 January following the end of the tax year.
For more information on filling in your tax return, see GOV.UK’s guide.
Sole Trading and 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.
Tackling business debts as a Sole Trader
Is a monthly profit looking unlikely? Are your businesses debts stacking up? It might be time to seek debt help.
There are two main options available, the first of which is an informal negotiation, in which you make an offer to your creditors in instalments. The second of which is a Self-Employed IVA.
If you are struggling to pay your business debts, consider whether you can trade through your financial difficulties and negotiate with your creditors.
If you’re struggling financially, get in touch with PayPlan today.