YOUR HMRC & COMPANIES HOUSE RESPONSIBILITIES

Running your own business carries several benefits. However, it also has risks and responsibilities. Yes, you will work for yourself and make all the decisions. However, that means there is no one to guide or stop you if you make a wrong choice. You will be the sole beneficiary of your successes. But you will also be personally liable for any debts/ fines you might incur.

To ensure your company’s success, some core rules and responsibilities are essential to know before you begin trading. 

How to register as a Sole Trader with HMRC

The first (and most important) thing to do is register as self-employed with HM Revenue and Customs (HMRC). You can register online here. https://www.gov.uk/register-for-self-assessment.

You need to tell HMRC that you are a sole trader by 5th October in your second tax year. This is so that you register in enough time to submit your Self Assessment tax return without receiving a penalty for late registration.

E.g. You started your business in August 2020 – You need to register with HMRC by 05th October 2021.

  • If you are a new sole trader who has not sent a tax return before: You will need to register as a new business for Self Assessment tax returns and Class 2 National Insurance Contributions (NICs) at the same time by 05th October 2021 in order to submit for the 2020-21 tax year.
  • If you are becoming a sole trader for the first time, you and have sent Self Assessment tax returns before for other reasons: You'll need to register as self-employed and for Class 2 NICs using a CWF1 form. You can continue to use your Unique Tax Reference (UTR) number from your previous Self Assessment, but you will need to provide this to HMRC so they can link the accounts.
  • If you have previously submitted Self Assessment as a sole trader: You can use your existing account information to sign in.
  • If you fall under CIS rules: When you register as a sole trader online, you can also register for CIS at the same time. This will enable contractors to be able to verify you and deduct the correct percentage. If you are already registered and need to add CIS, you will need to call HMRC. 
     

Self-Assessment Tax Return

Sole Trader

You need to be aware of your financial year. In most cases, it will be the 06 April – 05 April, which is the same as the tax year. However, many sole traders choose to have this as their financial year as it keeps this nice and simple.

At the end of every financial year, your business will need to produce annual accounts, which will summarise how your business is doing and will detail things like income profit, assets and liabilities. Sole traders are not legally required to submit annual accounts, and these do not need to be submitted to HMRC. But completing them will make your self-assessment a lot easier to produce. Using accounting software will also help to keep track.

The Self Assessment deadline is January 31st, following the end of the tax year that you need to submit a return for. However, it is well worth submitting your accounts early as January gets incredibly busy.

Paying Tax

31st January

The deadline to pay your tax bill is also 31 January. This will be a balancing payment if tax is still owed in addition to your payment on account. You will also have to make your first payment on account for the next tax year. 

31st July

Your second payment on account is due by midnight on 31 July. The amount you pay is an estimate based on your earnings. If you still owe tax, a further 'balancing payment' will be due on 31 January. This is also when you will have to make your first payment to cover the next tax year.

If your income has reduced and your payment on account is too high. You can request HMRC to reduce it.

Director of Limited Company

HMRC now states that where all of a director’s income is taxed at source and there is no other sources of income, then there is no need for them to register for self-assessment and to file a return.

If as a director you have been requested to submit a self assessment tax return, but have no other taxable income to report, then you can request for that notice to file to be withdrawn.

However if you meet any one of these following conditions then you must submit a tax return to HMRC:

  • You are repaying a Student Loan (unless already accounted for in your PAYE)
  • You receive Child or Bereavement Benefit (unless already accounted for in your PAYE)
  • Receiving Interest from Shares, Funds, & other investments
  • Receiving Foreign Income
  • Receiving Rental/Lettings Income
  • Receiving Dividends

 

Accounting Methods

Sole Trader & Limited Companies

You will need to choose an accounting method to use in your business.

Traditional accounting
Many businesses use traditional accounting, where you record income and expenses by the date you invoiced or were billed.

Example You invoiced a customer on 28 March 2021. You would record that invoice for the 2020 to 2021 tax year - even if you did not receive the money until the next tax year.

Cash basis accounting
Most small businesses with an income of £150,000 or less can use cash basis reporting.

With this method, you only record income or expenses when you receive money or pay a bill. This means you will not need to pay Income Tax on the money you have not yet received in your accounting period.

Example You invoiced someone on 15 March 2021 but did not receive the money until 30 April 2021. Record this income for the 2021 to 2022 tax year.

Record Keeping

Sole Trader 

You do not need to send your records in when you submit your tax return, but you need to keep them so you can:

· work out your profit or loss for your tax return

· show them to HMRC if asked.

You must make sure your records are accurate. Using accounting software can help you to do this.

Types of proof include:

· all receipts for goods and stock

· bank statements, chequebook stubs

· sales invoices, till rolls and bank slips

If you are using traditional accounting
As well as the standard records, you will also need to keep further records so that your tax return includes:

· what you are owed but have not received yet

· what you have committed to spend but have not paid out yet, for example, you've received an invoice but have not paid it yet

· the value of stock and work in progress at the end of your accounting period

· your year-end bank balances

· how much you have invested in the business in the year

· how much money you've taken out for your own use

Limited Companies

A private limited company must keep the following business records, where applicable:

  • Register of members (shareholders or guarantors).
  • Register of company directors.
  • Directors’ service contracts.
  • Register of Secretaries
  • Register of People with Significant Control (PSC)
  • Records of resolutions and minutes of meetings.
  • Directors’ indemnities – security against liability claims or legal costs.
  • Contracts relating to purchase of own shares.
  • Documents relating to redemption or purchase of own shares out of capital by private company.
  • Register of debenture holders.
  • Instruments creating charges and register of charges – i.e. mortgages or secured loans.

A company should also keep copies of its certificate of incorporation, the memorandum and articles of association and all share certificates (if applicable).

In addition, you'll need to keep accounting records for the following:

  • Goods and services bought and sold by the company
  • All forms of income and expenditure
  • Company assets, liabilities and credits
  • Inventory of all stock and assets owned at the end of each financial year
  • The stocktakings used to work out the inventory figures
  • Details of who goods and services were bought from and sold to, with the exception of retail sales.
  • Board meetings - Dividend vouchers

The accounting records will be kept automatically as part of your bookkeeping and accounting service. 

VAT

Sole Trader & Limited Companies

As a sole trader, it is not compulsory to register for VAT if you are below the threshold of £85,000. If you are below the threshold, you can voluntary register for VAT. Whether you decide to register voluntarily or you hit the threshold, your responsibilities are the same. 

Once registered, you will need to keep detailed records of all VAT-liable transactions. Many business owners choose to do this within their existing accounts system. You must then submit regular returns to HMRC, usually quarterly. Your return will normally be due one month & 7 days after the VAT period ends. E.g

VAT Quarter - January – March

VAT Return - Due by 07th May 

If you have hit the VAT threshold, you have to submit your return via a digital link to HMRC to comply with Making Tax Digital (MTD). MTD will become compulsory for all VAT returns under the threshold In April 2022.

Several simplified VAT accounting schemes exist, including the VAT Annual Accounting Scheme, Flat rate scheme, Apportionment scheme, and Cash Accounting Scheme. If you are signed up for one of these schemes, your filing and payment responsibilities may differ. (I will be going through the different schemes separately in more details).

PAYE

Sole Trader & Limited Companies

As a sole trader, you can employ other people to help you in your business. But, first, you need to decide whether you want full-time or part-time employees. Or you may prefer to collaborate with freelancers.

If you choose to have employees on your payroll, you are legally required to register for PAYE (Pay As You Earn system). The PAYE means you will be collecting Income tax and National Insurance contributions from your employees, which you will then be paying to HMRC by the 22nd of the following month. You can register online for a PAYE reference number. You will also be required to set up an employer's workplace pension scheme. 

Before you employ personnel, you will need to consider the following:

· Will your business generate enough to pay them every month? Your accounting bill may also increase if you include PAYE.

· You are legally required to pay your employees at least the minimum wage.

· Having employees working on your premises means you will need to get employers' liability cover, which will increase your costs and expenses.

· There are other legal requirements when it comes to personnel, such as pension payments, maternity leave, and creating a safe workplace.

CIS - Construction Industry Scheme

Sole Trader & Limited Companies

Construction Industry Scheme (CIS) Sub-Contractor

· As a sub-contractor, your responsibility is to make sure you notify HMRC that your job falls inside CIS and you need to register under the scheme. 

· You also need to keep copies of all CIS deduction statements you receive. You will need these to complete your self-assessment tax return.

Construction Industry Scheme (CIS) Contractor

If you are a Contractors, Every month, you must file a CIS return with HMRC. 

The CIS monthly return must be filed within 14 days of the tax month-end. All tax month ends are the 5th of each month, so the monthly return must be filed by the 19th of every month.

For example, the monthly return ending 5th June 2021 covers all payments made to subcontractors between 6th May 2021 and 5th June 2021. This CIS return must be filed by 19th June 2021.

 

You need to familiarise yourself with:

how to verify subcontractors, 

how to calculate the CIS tax, 

how to report the information to HMRC 

what documents you have to provide your sub-contractors each month. 

(I will be going through the contractor's responsibility separately in more details).

Making Tax Digital (MTD)

Sole Traders & Landlords

HMRC is changing how self-employed businesses and landlords with an annual business or property income of more than £10,000 have to report income to them. You will be required to follow the rules for MTD for Income Tax Self Assessment from your next accounting period starting on or after 6th April 2023. In addition, you will be required to send quarterly income tax updates to HMRC digitally.

Using the right accounting software will mean you are MTD compliant when it is compulsory in 2023. From 2023, 

More info can be found here https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital

Corporation Tax

Limited Companies Only

Corporation tax is paid by businesses in the UK, and is calculated on their annual profits, in a similar way to income tax for individuals.  The corporation tax rate has been 19% for all limited companies since April 2016. Prior to this, the rate varied depending on the company's profits. Unlike individuals, companies don't receive any kind of tax-free allowance, and therefore all profits are taxable. However, there are a number of expenses and deductions that can be claimed to reduce your bill. To pay, you must submit a company tax return (form CT600) to HMRC once a year. We explain how in our section on filing your tax return.

Corporation tax is due 9months and 1 day after your company’s financial year end.

Statutory Accounts

Limited Companies Only

As a limited company director you are required to file annual statutory accounts with Companies House. These must include a snapshot of summarised financial information.

When you first set up and incorporate your limited company, you will automatically be assigned a date for the company’s ‘end of financial year’. This date is the last day in the month that you incorporated your limited company. It gives you a guideline on when you need to file your accounts each year.

For example:

Company A incorporates on 13th October 2018. Therefore, its Accounting Reference Date and end of financial year will be the 31st of October.

For its first year of operation, Company A must file accounts for the dates 13th October 2019 to 31st October 2020. Subsequent annual accounts will be filed for the dates 1st November to 31st October (12 months).

For your first year, you must file these accounts within 21 months of your incorporation date. 

After the first year, you must file your annual accounts within nine months of your Accounting Reference Date. For example, for 2020’s annual accounts, Company A will have to file no later than 31st July 2022 for the period 1st November 2020 – 31st October 2021.