|Being self-employed gives you a lot of freedom as you are no longer required to work for someone else. But being your own boss also brings with it various legal and other obligations. This guide is intended to provide an overview of the obligations of being self-employed.
You can be self employed as a sole trader or in partnership with others. Being a sole trader is the simplest and quickest way to get going. No registration (other than the HMRC one) required, not much of paper work and the business is up and ready to run.
As more and more people are joining the self employed route it is important to understand the legal interpretation of who is self employed and who is not. Whether the working relationship is that of an employed or self-employed depend on a couple of key tests. Basically the test is whether there is a contract OF employment (employed) or a contract FOR employment (self employed). In a contract of employment typically there is a ‘mutuality of obligation’ whereby the hirer is obliged to provide work and the employed is obliged to accept and carry out the work. The hirer also has the right to exercise a sufficient degree of control over the employed to make the relationship one of ‘master and servant’.
The taxman’s perspective
From the taxman’s perspective you would qualify as a self employed if you can prove that you:
Once you are self employed you will need to consider various obligations as a self employed:
- have the final say in how your business is run,
- take the profits when the business makes profits and are responsible when the business incurs a loss,
- can hire someone on your own terms to work for you,
- risk your own money in to and out of the business ,
- provide the main items of equipment you need to do your job,
- agree to do a job for a fixed price regardless of how long it may take,
- can decide what work to do, how, when and where to do it,
- regularly work for a number of different people, and
- have to correct any unsatisfactory work that you have done, in your own time and at your own expense.
License and permissions to operate
Certain types of work may require you to obtain a license or permission before your start. As an example you may need local authority license to trade as cab drivers, child minders, restaurants, street workers etc. The nature of the permission or license will depend on the nature of work undertaken. Also, if you use your home address as the trading address then you might want to check if you are liable to pay business rates.
Professional indemnity insurance
Being on your own also may mean running the risk of being slapped with crippling claims by dissatisfied clients. The claims could range from negligence, breach of duty of care, loss of data or documents and theft to unintentionally infringing on other’s copyrights and intellectual property rights. So if you expect that the nature of work you do may land you in claims it is better to insulate yourself against such claims by taking up what is called Professional Indemnity Insurance.
Registration with HMRC
When you become self-employed you must register with HM Revenue & Customs (HMRC) for Income Tax and National Insurance purposes. You should register with HMRC as soon as you start working for yourself but you can't register in advance. If you delay registering for three months or more you may have to pay an initial penalty of £100. You will have to pay further penalties if payments become due and have not been met.
As a self employed you are required to keep adequate accounting records and to keep them updated regularly so you pay the correct tax. Records include cash book, sales ledger, purchase ledger, payroll, invoices, bank statements and others depending on your situation. The tax year runs from 6 April to 5 April the next year. Your records should enable you to prepare the accounting reports for each tax year. The accounting records need to be kept for a minimum of six years (see our Accounting Services page).
You are liable to pay tax on your profits after claiming all reliefs and allowances as are applicable to your specific situation. Most of those who are resident in the UK for tax purposes are eligible for a 'personal allowance' (currently £6,475) up which no tax is payable. After all allowable expenses and allowances have been accounted for you will need to pay tax on your ‘profits’, applying different tax rates depending on the tax band your profits fall in to (see our Taxation Services page).
National Insurance Contributions (NIC)
As a self-employed person you are liable to pay Class 2 National Insurance contributions. If your business profits are £5,715 or over you are also liable to pay Class 4 National Insurance contributions. If you have gaps in your National Insurance Contribution record it can reduce the amount of state pension you receive when you retire.
The tax laws require you to register for VAT if your total turnover for the previous 12 months exceeds the registration threshold (currently £70,000) or you expect it to go over that level in the next 30 days. You also need to register for VAT in many other situations as well, for example, if you make taxable supplies to non-VAT registered customers in the UK from another EU country (see our VAT Registration page).
Self assessment tax returns
As a self-employed, you will have to fill in a self assessment tax return every year. HMRC will send you a paper form each year for you to fill in and file. There are deadlines for filing your tax return and paying any tax due:
- 31 October for filing the tax return in paper form, and
- 31 January for filing your tax return online, and where paper tax returns cannot be filed online
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