SOLE TRADER & SELF EMPLOYMENT GUIDE

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1 Sipher Accounting & Tax Chartered Certified Accountants and Business Advisers Website: SOLE TRADER & SELF EMPLOYMENT GUIDE

2 SIPHER ACCOUNTING & TAX S PROMISE TO OUR CLIENTS Our team of qualified and experienced accountants who have over 15 years of combined UK accounting and tax experience are well equipped to help you achieve your goals and objectives. We accomplish this through adhering to the following: CLEAR AND SIMPLE COMMUNICATION We believe in the learning curve so we would ask you at the very beginning about your accounting experience. Whether you are just starting out as a sole trader or changing accountants, we will get you up to speed in no time. We like to avoid jargon talk so our language will be simple and easy to understand English. We always welcome queries whether they are generic or more technical, you will always have an appropriate reply back. PRACTICAL INFORMATION AND GUIDANCE As a professional practice, we always aspire to provide the most relevant and up to date information that is applicable to you. We frequently review our practices and procedures through further professional development courses in order to provide the very best possible advice and practical solutions for your businesses. PROFICIENT AND QUICK SERVICE The most important aspect of being self employed is to know your statutory deadlines. Sipher Accounting & Tax will designate an experienced accountant to you keeping you well informed of your tax status and reminding you of your duties in good time so you can focus on growing your business. PRACTICAL SOLUTIONS FOR YOUR BUSINESS Our services go beyond just statutory reminders, we can also provide direction, guidance and support in order for you to improve and grow your business. Our interim management reports will give an indication on which areas to focus on improving your business. CONTINUOUS SUPPORT At Sipher Accounting & Tax, our management is either qualified accountants or working towards it. We are always on hand to provide support via various communication means. We are not just any 9am 5:30pm accounting firm as we place a strong emphasis on building personal relations with our clients. We can also be contacted out of office hours.

3 Contents Business set-up & registration 1 Naming the business 1 Business bank accounts 2 PAYE registration 2 Value Added Tax (VAT) registration 3 Insurance 4 Employer s liability insurance 4 Public liability insurance 4 Professional indemnity insurance 4 Invoicing 4 Choosing an Accountant 5 Expenses guideline 6 Detailed business expenses 6 Salaries 7 Travelling expenses 7 Subsistence expenses 8 Business mileage 9 Business entertainment 9 Christmas party/ annual event 9 Home telephones and internet 9 Mobile phone contract 10 Professional subscriptions 10 Miscellaneous purchases 10 Training 10 Reference books and journals 10 Eyesight tests 10 Use of home as an office 11 Equipment purchases 11 Expense items that cannot be claimed 11 Personal allowances 12 Income tax rates and bands 12 What if your income is over 100,000? 12 National insurance 13 Self assessment tax returns 13 Payments on account 13 Record keeping 14 Penalties 14

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5 BUSINESS SET-UP & REGISTRATION If you have decided to operate as a sole trader, you are required to register your business with HMRC as soon as possible. This is to ensure that you are paying the Class 2 national insurance and your tax affairs are in order. The consequences of not registering could result in fines and penalties from HMRC. Upon joining we will send you the form Registering for Self Assessment. A completed form will be sent off to HMRC on your behalf. NAMING THE BUSINESS You can use your own name or trade under a business name. When choosing a business name please make sure you do not: use the terms Limited, Ltd, public limited company, plc, limited liability partnership, LLP or their Welsh equivalents; use sensitive names unless you have permission; suggest an association with government or local authorities; use a name that is too similar to a registered trademark or an existing business in the same area or sector. You must include your own name and business name (if you have one) on any official paperwork, like invoices and letters. Sipher Accounting & Tax Page 1

6 BUSINESS BANK ACCOUNTS If you are trading in your own name then it may be possible to receive and pay for invoices under your private bank account however we do recommend our clients to have a separate business bank account to identify business transactions. Sipher Accounting & Tax can offer some advice on business bank accounts so please contact us for more information. PAYE REGISTRATION If you wish to hire employees for your sole trader business, you must be PAYE registered before you can operate a PAYE scheme. Income tax and NICs from your employees will need to be deducted at source and paid to HMRC. Sipher Accounting & Tax can apply for your PAYE registration free of charge. Upon receiving the PAYE registration you should be able to: Pay salaries to your staff; Deduct tax and national insurance on their behalf; Pay the PAYE due over to HMRC; Issue P45/P60 s as and when required; File P11d or P11d(b) on your employees behalf. Under the new RTI rules, running a payroll is a strict business and you have to report to HMRC who you paying and when you paying them. At Sipher Accounting & Tax we can offer you confidential PAYE services. Our software is RTI accredited and we will make sure that we run your payroll and send you the payslips before you are required to pay your employees. Please contact us for a quote. Sipher Accounting & Tax Page 2

7 VALUE ADDED TAX (VAT) REGISTRATION VAT is the most difficult tax of all but rest assured you are in good hands at Sipher Accounting & Tax. It is compulsory for a UK business making taxable supplies to be VAT registered if: the actual turnover of the business in the previous 12 months is over 82,000; or the turnover in next 30 days will be over 82,000. If your turnover is below 82,000 and you would like to be VAT registered then you can, as a sole trader, apply for voluntary VAT registration. Under the voluntary VAT registration you can choose the date you would like to be VAT registered from. Once you are VAT registered you will be required by law to add 20% VAT to your invoices. The additional VAT amount is not part of your income and has to be paid back to HMRC via filing of quarterly VAT returns. As a UK VAT registered business, all invoices raised should bear the business registration number. It is an unlawful act to collect VAT if the business is not VAT registered and could be deemed a criminal offence. Upon joining Sipher Accounting & Tax, under the voluntary scheme, your designated accountant will ask you to provide a suitable date for VAT registration. We can make some recommendations but generally it can take upto 8 weeks to get VAT registered. Sipher Accounting & Tax will recommend a VAT scheme once an evaluation of your business status, structure and trade has been undertaken. The most popular scheme is the Flat Rate Scheme (FRS). Under FRS you will charge your clients at 20% but will only be paying a maximum of 14.5% of your gross turnover to HMRC. The FRS gain will be more than enough to cover your fees with us. Upon joining us we will be happy to prepare your quarterly VAT returns and file them with HMRC. The VAT return should be filed and the VAT payment should reach HMRC by 7 th day following the end of the VAT quarter. For instance, if your VAT quarter ends 30 th June, the deadline for VAT submission and payment to HMRC is the 7 th August. It is always advisable to ensure VAT filings and payments are made before deadline as there are various fines and penalties which could be incurred. Sipher Accounting & Tax Page 3

8 INSURANCE Once operating your own business, there are different types of business insurance which must be considered as follows: Employer s liability insurance If your business has more than one employee then, by law, you need an employer s liability insurance to cover any claims made by the employees for personal injury etc. This cover is not required if you do not have any employees. Public liability insurance You will require public liability insurance against claims made from third parties who may make a claim against you if they have suffered an injury or damage to property in connection with your business. Professional indemnity insurance You will require professional indemnity insurance to insure against claims made against you for causing financial loss to your clients as a result of potential errors or negligence. INVOICING In order to be remunerated for the services provided to your clients, you have to raise an invoice. An invoice should include the following: Your business name and address; Your customer/client s business name and address; Invoice date; VAT number, if you are VAT registered; Invoice number; An itemised breakdown of particulars i.e. chargeable period, rates etc. Self billing: If you source your assignments through an agency they may operate a self-billing system they will generate an invoice for you, so there is no need for you to issue an invoice. Expenses: If you are billing for your expenses then please add VAT to your net expenses. Sipher Accounting & Tax Page 4

9 CHOOSING AN ACCOUNTANT We at Sipher Accounting & Tax do understand the stress and time it takes to choose your accountants. We can provide you some distinctive features which should help you with this task. Is the firm CCAB registered? CCAB includes ACCA, ICAEW, CIPFA, CAI and ICAS Can they file accounts, VAT and tax return on your behalf? Can they issue you with a free accountants reference letter when required? Are they offering free initial consultation? Would you get direct numbers and addresses for your accountant? Would they file a free personal tax return for you? Sipher Accounting & Tax Services Ltd is regulated by Association of Chartered Certified Accountants. There are many accounting firms out there (some are just bookkeepers) but Chartered Certified Accountants are held in high esteem. You are ensured of a professional and up to date advice. We regularly attend ACCA seminars to keep us up to date with ever changing accounting and tax laws. Sipher Accounting & Tax Page 5

10 EXPENSES GUIDELINE HMRC will only allow expenses that are 'wholly, exclusively and necessarily incurred in the performance of your duties. Typical examples of expenses: Salaries; Employer s National Insurance; Employer s Pension contributions; Business travelling; Accommodation while away from home on business; Subsistence whilst working away from home; Lunch while working away; Accountancy fees; Mobile costs; Postage and stationery; Home office expenses; Business computer equipment and cost; Internet; Business computer equipment and software costs; Technical books and publications; Staff entertainment; Subscription to approved professional bodies; Bank charges. It is essential to obtain and retain receipts for all expenses incurred in order to be able to justify the expense if questioned by HMRC. DETAILED BUSINESS EXPENSES HMRC will disallow any expenses that do not meet the rule and do not fulfil each of the three criteria wholly, exclusively and necessarily. An example is clothing; this expenditure will generally be disallowed as it will have a dual purpose. You will need to wear clothing whether you are at work or not. Please find further detailed guidelines on expenses. Sipher Accounting & Tax Page 6

11 Salaries The salaries are a deductible expense only if you have employees working for you. If you are paying a salary to yourself then this will not be regarded as an expense because you will be taxed on the profits of the business. Please contact Sipher Accounting & Tax if you are planning to employ staff. Travelling expenses You can only claim travelling expenses to your work place if it can be categorised as your temporary workplace. A temporary workplace is defined as a workplace where you go to perform a task of limited duration or for a temporary purpose. A temporary work place ceases to be a 'temporary' workplace if you attend it for a period of continuous work that lasts, or is likely to last, more than 24 months. This means as soon as you know that you will be at a workplace for more that 24 months then travel and subsistence cannot be claimed. Example: If you sign a twelve month contract at a new location then you should be able to claim travelling costs involved. However if at the end of that twelve month period you extend it for further twelve months then at that stage you are continuously at the site for 24 months and your claim to travelling should cease when you sign the contract. Examples of travel expenses: Air, Train, bus, ferry and taxi fares Parking, congestion charges and tolls Mileage using your own vehicle Sipher Accounting & Tax Page 7

12 Subsistence expenses HMRC has introduced an advisory system of benchmark scale rates as follow: Breakfast rate (irregular early starters only): If a worker leaves home before 6am and incurs a cost on breakfast on route to work, a rate of 5 can be claimed. However if the employee regularly leaves home before 6am due to shift based work, then the claim of 5 will not be entitled to the employee. One meal rate (5 hour rate): If an employee has been away from their normal place of work/home for at least 5 hours, then he/she can claim a rate of up to 5 on a cost of meal. Two meal rate (10 hour rate): If an employee has been away from their normal place of work/home for at least 10 hours, then he/she can claim a rate of up to 10 on a cost of meal or meals. Late evening meal rate (irregular late finishers only): If an employee finishes after 8pm after having worked his normal working day, he/she can claim up to 15 on the cost of buying a meal or meals which he/she would usually have at home. The late meal allowance could still be applicable if the employee finishes work after 8pm and buys a meal in which he/she would have at home even if an allowance has been claimed under the 5 hour/10 hour rule. However if the employee regularly finishes work after 8pm due to late evening shift based work, then the late evening meal allowance would not be entitled to the employee. Sipher Accounting & Tax Page 8

13 Business mileage You can claim the rates set out in the table below if you your own vehicle for business travel. Total business mileage relates to each individual tax year (6th April- 5th April) and will take into account of mileage claimed in previous employments in that tax year. Vehicle Rate Per Mile (On first 10,000 miles in tax year) Rate Per Mile (On each mile over 10,000 miles) Cars and Vans 45p 25p Motorbikes 24p 24p Cycle 20p 20p With regards to the cycling scheme, if you own the bicycle yourself, you can claim mileage of 20p per mile. Business entertainment Business entertaining expenses will be disallowed in calculating your year-end profits. Christmas party/ annual event The cost of the Christmas Party should not be over 150 per head provided all staff is invited. Home telephones and internet You can claim a proportion of your phone bill if you make business calls. Your claim must be based upon previous usage. If you are claiming 100% of the costs then private portion will be disallowed in the accounts. Internet costs can be allowed in full if you can show that most of it is used for business purposes. Sipher Accounting & Tax Page 9

14 Mobile phone contract If the account is in the business name and business pays the bill then the cost should be allowed for tax purposes. Professional subscriptions Professional subscriptions to certain professional bodies are allowed costs if they are relevant to your trade. Private club subscriptions which are directly not applicable to your trade will be explicitly disallowed. Miscellaneous purchases The actual cost of office stationery, postage and computer consumables used wholly, exclusively and necessarily in the performance of your duties. Please retain receipts. Training Training costs can be claimed as an allowable expense provided that the purpose of the training is to enhance your current skills exclusively related to your work and not gain a new skill which is not relevant to your business. Reference books and journals Reference books and journals are allowed expenses provided these relate to your business. Eyesight tests The cost of an eyesight test, if it is necessary for the initial or continued use of visual display equipment in your duties, will be allowed. The cost of spectacles cannot be claimed. Sipher Accounting & Tax Page 10

15 Use of home as an office If you work from home then as a sole trader you can charge a proportion of certain household expenses such as mortgage interest, utility bills, and insurance. A good way to calculate the proportion to charge is to work out a rough estimate of square footage used, or base it on the number of rooms used, and the amount of time they are used for business. Note if you are using part of your house exclusively for business then this can give you problems with capital gains tax when you sell your house in the future non exclusive use is much safer. Alternatively you can claim 4.15 for each week (from onwards) where you use part of your house for work, which is an easier calculation! Equipment purchases The cost of equipment purchased to carry out the duties of your trade. This would include computers, printers, software, and other peripherals. You will be able to claim capital allowances on the first year of purchase to reduce your income tax liabilities. You must obtain an invoice in the trade name if you are purchasing any assets. EXPENSE ITEMS THAT CANNOT BE CLAIMED Business expenses should only be directly related to your business and any expenses which have a dual purpose will be disallowed. Expense items that cannot be claimed include the following: Office Clothing such as business suits (except safety clothing); Spectacles; Training Courses not related to your trade e.g. accountant claiming electrician courses; Private club subscriptions - e.g. Tennis Club membership; Items mainly for personal use - e.g. televisions, cameras, music cd s. Sipher Accounting & Tax Page 11

16 PERSONAL ALLOWANCES Income Tax is a tax on earnings. Income tax is either collected through Pay As You Earn (PAYE) or through Self-Assessment. The personal tax allowances are as follows: Allowance 2015/ /15 Personal Allowance 10,600 10,000 Personal Allowance - Age 65 to 74 Personal Allowance - Age 75 and over 10,600 10,500 10,660 10,660 INCOME TAX RATES AND BANDS There are tree types of income tax bands. Rate 2015/ /15 Basic rate 20% 0 to 31,785 0 to 31,865 Higher rate 40% 31,786 to 150,000 31,866 to 150,000 Additional rate 45% from 150,000 onwards 45% from 150,000 onwards What if your income is over 100,000? For every 2 your income is above 100,000, your Personal Allowance will be reduced by 1. At 120,000 your Personal Allowance will be reduced to Nil. Sipher Accounting & Tax Page 12

17 NATIONAL INSURANCE As a sole trader you will be paying both Class 2 and Class 4 National insurance. The current rates and limits are: Class 2 : 2.80 per week if earnings over 5,885 per annum Class 4: 9% of profit between 8,060 and 42,385 and 2% on profits over 42,385 SELF ASSESSMENT TAX RETURNS As a self employed individual, HMRC will expect you to fill out your tax return each year. The fiscal tax year runs from 6th of April to the following 5th of April. The online tax returns can be filed by 31st of January. The self employment tax return will normally include your profits from your business, rental income, and interest received. Sipher Accounting & Tax will complete your tax return for you and upon approval will file it online. The tax returns are issued in April each year. If you have not been issued with one or received a letter saying that you need to complete one then please contact HMRC to request the tax return. PAYMENTS ON ACCOUNT If you owe 1,000 or more in taxes to HMRC for the previous tax year most probably you will be making payments on account for the current tax year. Payment on account is a tax payment made twice a year by self employed people in order to spread the cost of the current year s tax. The payments on accounts are always 50% of the tax liability due and are payable on 31st of January and 31st of July. Sipher Accounting & Tax Page 13

18 RECORD KEEPING It is required by law to keep records of your tax declarations and filings for a period of 6 years from the end of the tax year when you started to work. HMRC periodically identifies a tax payer for random checks so you do not have to be concerned about any investigations if your record keeping is up to date. Please keep copies of the following in either digital or paper form: Bank statements; Income invoices; Purchase invoices; Contracts; Rental agreements and lease documents. PENALTIES There are penalties and fines applicable for non filing and late filing of self assessment tax returns. Penalties for filing late tax returns: 1 day late: Charged initial penalty of 100 regardless of if you have no tax to pay or if you have already paid the tax liability due; Outstanding after 3 months: If the tax return is still yet to be filed after 3 months, an automatic penalty of 10 per day is charged. Up to a maximum of 900; Outstanding after 6 months: Additional penalties charged; either of whichever the greatest of 5% of the tax is due or 300; Outstanding after 12 months: Further penalties applicable; whichever is the greatest of 5% of the tax due or 300. In most severe cases, the penalty could be as much as 100% of the tax liability due. Penalties for paying late: 30 days late: charged at initial 5% of the tax unpaid at that date; 6months late: charged a further penalty of 5% of the tax that is still yet to be paid; 12 months late: charged a further penalty of 5% of the tax that is yet to be paid. These penalties are in addition to the interest you will be charged on all late filings and outstanding amounts until payment is received. Sipher Accounting & Tax Page 14