How to register as a sole trader?

To qualify or be able to register with HM Revenues and Customs (HMRC) as a sole trader you need to check off the following boxes -

1. You have earned at least £1000 between 6 April 2020 and 5 April 2021 from your business.
    
2. You need proof of employment to be able to claim some benefits like Tax-Free Childcare.
    
3. To qualify for benefits accrued to persons who subscribe to a voluntary Class 2 National Insurance scheme.

If you have checked those boxes and you want to create your own business, then you are ready to register as a sole trader.

How to set up as a sole trader?

Many sole traders find themselves at a loss when it comes to registering their companies, especially to find the right information on the how-to. If you are in that category, you have come to the right place. There are three ways by which you can register with HMRC.

• Complete the online form (Self-Assessment form – SA103S or SA103F forms) via the HMRC website,
• Print out the form, fill, and send it to the address on the form, or
• Call HMRC on 0300 200 3310.

Here is some information you will need to fill out the forms:

• National Insurance number – This insurance number enables you to work in the UK so if you do not already have it, you can apply for and obtain one before commencing your registration with HMRC. You can do the application online and it will normally take 16 weeks (4 months before you get your NI number).
• Legal name
• Date of birth
• Phone number
• Email Address
• Postal Address
• Name of business
• Type of business (what your business is all about)
• Start date (the date you started your business)

It is legally required by HMRC that you register your business by 5 October of the tax year of starting your business. For example, let’s say you started your business in February 2021. Since the UK tax year is 5 April 2021 to 6 April 2022, then you must register your business by 5 October 2022. It is very important you register as soon as possible to avoid problems with HMRC.

Also, be aware that keeping a separate bank account for your company from a personal one is important. This is because you will need to be able to track your expenses and returns for proper tax documentation which may be difficult if you lump it all together in a personal bank account.

Depending on how big your company is, you may want to seek the help of a professional accountant. The accountant may not be on permanent payroll but he/she will help to guide or do the accounting of your company for you. That will save you the time and headache of doing it yourself.

If your taxable turnover is more than £85,000, you must compulsorily register for VAT. Also, if you take over a VAT-registered business, buy or sell VAT-exempt goods, provide goods and services in Northern Ireland, or supply goods and services to the UK even if you are not based there, then you need to register for VAT. You can still choose to voluntarily register even if your turnover is below the threshold because VAT gives your company a kind of credibility that makes people think your turnover is high.

Your VAT can also be recovered from the goods and services you sell. So, registering for VAT may be good for your company.

Take note however that if your taxable turnover is more than the threshold and you did not register for VAT in due time, you will be penalized by HMRC.

When should I change from Sole Trader to Limited Liability Company?

If you are wondering, there are some benefits to becoming a Limited Liability Company (LLC) such as

1. Reduce tax payments, 
    
2. Shared liabilities like losses and debts i.e., your liabilities become limited (hence the “Limited Liability” in the name) compared to when you are going it alone,
    
3. Greater borrowing power, and 
    
4. Better credibility.

Although, several sole traders choose to remain sole traders because they prefer it that way. However, you may want to consider becoming a Limited Company if you are limited by shares or guarantees.

Your business is limited by shares if the business

• is legally separate from its owners
• has separate finances from the personal finances of its owners
• has shares and shareholders
• can keep its profit after all tax has been duly paid.

Your business is limited by guarantees if it fulfills the following in addition to the first two bullet points above

• has guarantors with a dedicated guaranteed amount invested
• the profits after tax are invested back into the company.

If your company falls into any of the categories listed above, then you should consider becoming an LLC. In which case, you will need to do your registration with Companies House, not HMRC. However, you should seek the professional opinion of an accountant to be sure your business is in the right position financially for such a transition.