Setting Up as a Self-Employed Sole Trader or Partnership

Introduction:

Setting up in business for yourself is a big event. It can open new horizons, improve your income and give you a better quality of life. It also carries responsibilities and requires discipline. For many becoming self-employed whether independently as a sole trader or with others collectively as a Partnership is one of the most important things they will do in their career.

WHY GO SELF-EMPLOYED?

A combination of reasons usually leads people to go self-employed.

For those going it alone for the first time, the big motivation is to be their own boss and have the freedom to work in a way that suits their lifestyle.

You can work where you want and for who you want, which provides opportunity for: a greater variety of work, lets you meet new people, learn new skills, and potentially create greater earning potential!

It is also a good method of starting out in business with the minimum of administration, and without the added responsibility of managing a limited company.  Furthermore, being self-employed often gives you the opportunity to operate with greater tax efficiency than being directly employed.

SETTING UP YOUR BUSINESS

There are a number of steps that must be followed in order to setup as being self-employed including:

CHECK IF BEING SELF-EMPLOYED IS THE MOST APPROPRIATE STRUCTURE FOR YOU

There are many different business structures and each is suited to a different type of business and way of working.  So, the very first step is always to consider if being self-employed is the most appropriate business structure for your business plans?

In particular it is essential to understand that as a self-employed business you have “unlimited liability”, which means that you are personally liable for any debts incurred by the business.

Other potential business structures include:

• Setting up an Unincorporated Organisation or Social Enterprise
• Setting up as a Limited Company
• Setting up as a Limited Liability Partnership
• Setting up as a Charity
• Setting up a special type of limited company called a Community Interest Company (CIC)

As one of the UK’s premier online accountants we service each of these areas and we can discuss your requirements in greater detail to help you decide which may be the most appropriate structure for your business.  And in addition to this guide which explains the steps and thought processes that you have to go through to setup as being self-employed we have also produced a number of other guides comparing these different structures.

CHOOSING A BUSINESS NAME

There are certain rules that must be followed, such as ensuring that the name:

• Isn’t offensive – You cannot include words in the name which are offensive or similar in nature to words which are offensive.
• Doesn’t use certain reserved words – There are also other reserved words which cannot be used such as government organisation names, or using company legal pseudonyms which are not appropriate to the business structure being created such as PLC, LLP, etc.

And it is also good practice to similarly perform a trademark search to verify that there aren’t any trademarks with the same or similar name.

CHOOSING A NOMINATED PARTNER

This step is not required for sole traders, but general partnerships must have a “Nominated Partner” who acts as the primary contact with HMRC and is responsible for managing the Partnership books and records and the submission of the Partnership Tax Return.  The Nominated Partner must register the Partnership for Self-Assessment, and where applicable VAT (see below).

PREPARING PARTNERSHIP CONSTITUTION DOCUMENTS

Again, this step is not required for sole traders, and in fact it isn’t a legal requirement for Partnerships to have a formal Partnership Agreement in place either.  However, it is strongly advisable to do so, to protect each of the partners in the future in times of disagreement, or to setup rules which are different to the default arrangements stipulated in the Partnership Act 1890.

A Partnership Agreement is a legal agreement created between the members which outlines, for instance: the rights and responsibilities of the partners, how profits are to be split, how decisions are to be taken, and what actions are to be taken if a partner joins / leaves.

Where a Partnership Agreement is not in place then the legislation which applies to that type of Partnership typically defines the default treatments that must be applied such as the equal allocation of profits, equal decision making, etc.

It is normally advisable to seek legal advice when drawing up a Partnership agreement.  Although if this is not possible then there are templates available online that can be customised if required to suit your requirements.

REGISTERING AS A SOLE TRADER FOR TAXES

Setting up as a sole trader is easy.  There is no employer (because you are the boss) and so you can start trading whenever you are ready to do so!

However, HMRC have set rules whereby you have to inform them immediately and register for self-assessment as being self-employed when any of the following criteria has been met:

• You earned more than £1,000 (at current rates) from self-employment in the current tax year (which runs 6th April to 5th April the next year).
• You want to claim self-employed tax-free childcare

So, in summary once “profits” reach £1000 you need to notify HMRC by registering for self-assessment as someone who is self-employed.  This can be done relatively easily online.

You must also apply for a National Insurance Number if you don’t already have one, potentially because you have recently moved to the UK from overseas.

Registering the business for VAT is optional and may not be required immediately as a business is only required to register for VAT once Turnover (income) levels exceed certain thresholds.  However, it may be desirable to register for VAT voluntarily, for instance if the business incurs large values of purchases which include Input VAT which can be reclaimed.

WHAT HAPPENS IF YOU WORK IN THE CONSTRUCTION INDUSTRY

If you work in the construction industry then HMRC has created additional rules that you need to be aware of called the Construction Industry Scheme (CIS).  This scheme has been designed to try and reduce the frequency of construction workers who are either: not submitting tax returns, or failing to make self-assessment payments when they are due.

The scheme works by requiring the end client, referred to as the “Contractor”, to deduct tax at source (i.e. similar to an employer) equivalent to:

• 20% of Invoiced Value – Where the worker, referred to as the “Sub-Contractor” HAS registered with HMRC under the scheme.
• 30% of Invoiced Value – Where the worker, referred to as the “Sub-Contractor” HAS NOT registered with HMRC under the scheme.

Given the huge difference in tax rates it is clearly essential that workers who are sub-contractors register with HMRC in advance of starting work which is covered by the scheme, or as soon as possible afterwards, ideally before raising an invoice!

Additionally, if your business also employs other sub-contractors then you must also register under the scheme as a “Contractor” as well, and submit monthly CIS returns to HMRC, and pay the associated tax deducted at source to HMRC.

MAKING TAX DIGITAL (MTD) FOR INCOME TAX

From April 2026, Sole Traders will be phased into MTD for income tax based on the INCOME of their business in the previous tax year:

• From 6 April 2026: mandatory if qualifying income over £50,000 (based on the 2024/25 tax year).
• From 6 April 2027: mandatory if qualifying income over £30,000 (based on the 2025/26 tax year).
• From 6 April 2028: HMRC policy publication describes plans to bring in those with qualifying income over £20,000 (based on 2026/27).

MTD for Income Tax does not (currently) change the requirement to submit a self-assessment tax return each year, or the payment dates for income tax (and associated payments on account), which all remain the same.

It is fundamentally a change to how you keep records and how you report to HMRC during the year:

• Digital record keeping is required using HMRC approved software
• Similar to VAT:
  • You need to make summarised quarterly reporting to HMRC
  • Penalties will be applied for late submission on a points based system

MTD for Income Tax only impacts Sole Traders and “Private” Property Investors (those who own property privately instead of via a limited company).  It also specifically DOES NOT include Partnerships at the current time.

OPEN A BUSINESS BANK ACCOUNT

Unlike starting a limited company, there is no legal obligation to open a business bank account when you start out in business as being self-employed.

Nevertheless, we recommend ALWAYS opening a separate bank account through which all of the business’s transactions will be recorded.  It doesn’t matter whether this is a personal bank account or a business bank account (banks tend to charge extra for a business account).

The reason this is so important is because if you don’t do this, then either you (if you manage your own books and records) or your accountant (will need to ask you) to classify all the transactions in your bank account for the entire year as being either “personal”, or “business”, or a combination of both.  This is a HUGE and often difficult process.  In contrast, having a separate account means this process is much easier and more cost effective!

ARRANGE BUSINESS INSURANCES

Most businesses require to have insurances in place. Even if not asked for, it’s good practice to hold certain policies (at the minimum) to protect you and your new business.

QAccounting can facilitate the following on a “non-advice” basis as an authorised agent of QDOS Broker & Underwriting Services Limited and underwritten by HCC International Insurance Company Plc. Subject to policy terms and conditions:

PROFESSIONAL INDEMNITY INSURANCE (PII)

This type of insurance policy will cover you if – through error or omission in your services – a loss is caused to a third party. Without this in place, many organisations will not engage with your company.

PUBLIC AND EMPLOYER’S LIABILITY (PL AND EL)

This protects you against claims made against you when you are held responsible for the death or injury suffered by third parties or employees or damage caused to third party property.

TAX ENQUIRY INSURANCE (TEI)

This insurance policy covers the costs of professional representation in the form of legal cover and defence for a range of potential HMRC enquiries.

APPOINT AN ACCOUNTANT!

Although you are not obliged to appoint an accountant, it is always good to have professional advice and help!  Most business owners do, in order to lighten the burden of running the financial and taxation side of the business and to provide financial expertise.

Make sure you find a firm of accountants who understand the nature of your business, and have the necessary expertise you require.  You will want to appoint people who you like and trust, and who can offer a wider range of services to you as your business expands and more options for your personal financial future open up.

GOING SELF-EMPLOYED WITH QACCOUNTING

We provide a whole range of services to suit a self-employed trader with any budget, including:

• Self-assessment personal tax returns
• CIS reclaims
• CIS contractor accounting
• Sole trader accounting
• Partnership accounting

So, it doesn’t matter whether you would like to do the bookkeeping yourself, and just need help at the year end to submit your self-assessment tax returns or CIS reclaims, of whether you would like us to help you with all your businesses accounting and taxation needs.

All you have to do is provide the associated support documentation we require to supply to HMRC as we request it and we can take care of everything else for you.  Making the above processes as easy and stress free as possible.

We are completely in tune with the needs and concerns of people who have chosen this career path and our services are designed to make life easier for you, to help you maximize your business opportunities and earnings, while operating efficiently within the regulations and tax laws that affect your business.

We look forward to hearing from you today!

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