If you wish to register for self-employment, then you must comply with the official HMRC procedures to ensure that you are paying the correct national insurance (NI) and income tax.
How does the government define self-employment?
HMRC will consider you self-employed if you are frequently trading goods or services, and take responsibility over the success or failure of your business. The government outlines two main types of self-employment models: a sole trader, and a business partnership.
Register as a sole trader
A sole trader is one person running a business as an individual. It is acknowledged as a relatively hassle-free way to test the water for people just starting out in business.
As a sole trader, after you register for self-employment, you are required to complete a self-assessment return each year. It requires you to keep records of each business transaction, as well as all expenses for your activity.
If your business has a turnover of over £83,000, then you are required by law to register for VAT.
The government allows sole traders that do not qualify for VAT the opportunity to register voluntarily. For example, if goods are sold to another VAT-registered company, then the sole trader can reclaim VAT.
For first-time sole traders that have not submitted a tax return before, the registration process begins on HMRC’s online registration portal.
To register for self-employment, sole traders are not required to submit their business name at Companies House – however, they are still subject to the same legal requirements. For example, suggesting a connection to government or local authorities, or using offensive or sensitive language without permission.
HMRC offers sole traders working in the construction industry the opportunity to register for the Construction Industry Scheme (CIS). CIS requires contractors to deduct payment from a sub-contractor, which then add to the worker’s NI and income tax contributions. If you are self-employed and working for a contractor, then choosing to register for CIS will see you receive a smaller deduction.
Register as a business partnership
An “ordinary” business partnership is a model of self-employment recognised by HMRC as shared responsibility between two or more people – or “partners” – of a business. Profits can be shared among partners, and each partner is required to pay their share of tax on business profits.
HMRC requires a nominated partner to submit a collective self-assessment tax return for the business, while each partner is responsible for a personal self-assessment tax return.
As with sole trading, an ordinary business partnership is required to register for VAT if it expects turnover of over £83,000 each year.
Self-assessment and VAT registration duties can be completed online at the HMRC website. Once a business partnership has registered for VAT, then HMRC must be notified each time a partner leaves the business.
Legal obligations are shared among partners, with each partner responsible for their share of business losses and any company expenses, for example, stock and equipment.
Similarly to setting up as a sole trader, ordinary business partnerships do not have to register under a name at Companies House, but the rules regarding government association remain.
If you are still unsure if you qualify to register for self-employment, the government’s Employment Status Indicator offers further advice. You can also contact Jane at the Helpful Bean Counter firstname.lastname@example.org