Lots of us dream of being self-employed and taking the plunge to pursue the journey is an exciting moment in a lot of people’s lives. However, it does have a downside. Dealing with regulations and rules surrounding self-employment can be tricky. Whether your business is a single-staffed company or a larger business, it’s vital that you know what you need to do to stay above board. Here are some of the most common questions we get asked and the information you need to answer them:
When should I register with HMRC?
As soon as your business starts operating and trading you must register with HMRC. As with any new business, there’s probably a few things you need to do before you officially launch your business. Such as buying stock, securing deals and arranging the finer details. We advise to register sooner rather than later on the HMRC website to avoid any misunderstandings with them. Costs for those tasks you did before officially launching you are able to claim for. Make sure you keep invoices and receipts and record how much you’ve spent in your businesses accounts.
Sole trader or Limited Company?
This is a question we get asked a lot. We’ve even written a blog post on the pros and cons of becoming a limited company.
If you’re a sole trader you’re pretty much a self-employed individual working on your own. Setting up as a sole trader requires no formality as there’s no clear division between you and your business. However, as a sole trader, you are personally liable for the debts of your business. Therefore, if your business owes money to anybody they may try and recover it from your personal assets. This includes your house, cars and valuable personal property.
As a Limited Company you’ll be formally set up and registered at Companies House. The business and yourself have separate identities which means you must keep the financial activities of the company entirely separate from your personal finances. When you become the director of a Limited Company you have a legal duty to keep accounting records and file them legally.
The single biggest advantage of being a limited company is that if the company fails, the debts aren’t tied to you as an individual.
What can I claim against tax?
If you have purchased something ‘wholly and exclusively’ for the purpose of your business then generally you can claim it back. Think things such as; stock, costs of websites and printed materials, advertisements, software, office supplies etc.
However, there are a few things to be aware of. You can only claim for clothing if it’s uniform or protective clothing. Make sure you read up on the rules surrounding travel costs and entertaining clients too. If you work from home there are another set of rules – you can read more about this in our blog post.
What if I pay business expenses out of my own pocket?
You can claim back for things that you’ve personally paid for. However, we strongly advise setting up a business account and making all payments from there. There are lots of mobile apps where you can store your receipts to make it as easy as possible.
Should I register for VAT?
If your business is over the VAT threshold then you must register for VAT. If you’re under the threshold you can still voluntarily register. If your business incurs more VAT than it collects then a refund would be due. This basically means that if you sell to businesses who aren’t VAT registered then your price will be higher by the amount of VAT. This could have a huge impact on your business when comparing prices to your competitors. If you need more info on going VAT registered you can read more here.
My businesses income is small, do I still need to complete accounts?
If your income is under £1000 you don’t need to register for self-assessment. If it’s over £1000 then the amount is able to be offset against income rather than claiming all costs. Rules do apply and you can find the full details at https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income.
If you need more information about starting your journey freelancing, get in touch with the ABC team today!