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How to register as self-employed

Being self-employed means different things to different people. The starting point is what HM Revenue & Customs (HMRC) thinks of your situation. They are particularly concerned with individuals leaving a firm to go ‘self-employed’ but who then effectively work for just one client in all but name as an employee.

How do I know if I’m self-employed?

HMRC has a number of tests that you will need to satisfy to pass as someone who is truly self-employed. You are probably self-employed if you:

  • run your own business and are responsible for its success or failure
  • have several customers at the same time
  • decide how, where and when you do your work
  • can hire other people at your own expense to help you or to do the work for you
  • provide the main items of equipment to do your work
  • are responsible for finishing (replacing) any unsatisfactory work (goods)
  • charge an agreed fixed price for your work
  • sell goods or services to make a profit.

Many of these checklist items also apply if you are running your businesses as a limited company where effectively you are an employee of your own business.

How do I know if I’m not classed as self-employed?

The recent trend of firms to move staff off payroll and into ‘self-employment’ has led to the rise of the ‘gig’ economy – such as Uber’s drivers or Deliveroo’s home food cyclists. 

Case law has been catching up with this situation and is determining where people are or are not truly self-employed. The law and rulings have said that you are not likely to be self-employed if you:

  • are required to provide a service personally – you cannot hire someone else to undertake the work for you
  • you are subject to supervision, direction or control over the manner in which the work is performed – you have no real freedom of action when it comes to how you work.
  • there is a mutual obligation of both parties – the firm you are contracted to is obliged to provide work and you are obliged to make yourself available to do it.

Understanding your status is crucial as it will affect how you pay tax and whether you have any employment rights. If you’re not sure, use the HRMC online employment status checking tool

What are the different structures?

When you start a business one of your first actions will be to choose a legal structure. 

The type of legal structure you choose will impact on:

  • the amount of tax you pay
  • the amount of control you have over your business
  • the amount of paperwork you’ll need to deal with
  • any profit your business makes
  • your responsibilities if your business makes a loss.
  • Sole trader

    Registering as a sole trader is usually the easiest to set up and administrate – and will offer lower costs to run. However, a sole trader will be liable for all business debts and may find it harder to access finance. Sole traders have fewer options to legitimately tax plan as tax is dealt with on a personal basis.

  • Partnership

    A partnership, in comparison, offers a structure for two or more people to work together and share expertise. Like a sole trader, the partners will be liable for the business debts, but also for each other’s business debts; partners will each account for tax personally.

  • Limited company

    The third option is to form a company, a separate entity from you and any other owners (shareholders) who are only liable for the shares they’ve bought (or agreed to buy). Unless shareholders offer a guarantee, personal assets are secure. The company pays tax on its profits and the shareholders pay tax on their dividend income. A derivative of this is a limited liability partnership where the partners have a liability akin to that of a company but the flexibility of a partnership.

Which structure should I choose?

There is no wrong or right answer  – it’s a personal decision.

However, it’s important to recognise that companies and limited liability partnerships and their business affairs are in the public domain (and have expensive compliance and reporting duties). Sole traders and partnerships are more secretive as there is no obligation to publish business information. If you are concerned about protecting your personal assets then you should steer away from being a sole trader or a partnership.

Sole Trader or Partnership

Limited Company

You are the business.

The business is a different legal entity.

You own the business.

You (and others) own the business through shares held.

If anything goes wrong you are personally liable for all debts and claims against the business.

If anything goes wrong it’s the company that’s in the firing line; directors will only be liable for the amount they’ve paid (or due to pay) for shares they own. However, the directors can be held personally liable for matters such as fraud, insolvent trading, environmental, and health and safety breaches.

You are self-employed.

You are a director, not necessarily an employee.

You pay National Insurance and Income Tax on the taxable profits of your business, or your share of profits, if you are in partnership.

The company pays Corporation Tax on its taxable profits which at present are lower than Income Tax. Profits extracted as dividends are taxed separately on amounts over (at present) £5000.

You can borrow from the business on demand.

Directors can borrow from the business but there are tax implications.

You can only have a personal pension.

Pension contributions can be used to lower Corporation Tax. If you have staff you will need to consider your pension arrangements for any employees you have.

There is no need to prepare accounts for tax purposes. However, good accounts will tell you how well the business is doing.

You need to prepare annual accounts for HMRC and Companies House to defined standards. Drawing up accounts can be expensive

When you sell the business or its assets you are personally taxed on any capital gain.

The company pays Corporation Tax on any profit on sale. Shareholders are taxed on their share when proceeds are distributed.

On death the business dies; assets can be passed on and there may be some Inheritance Tax relief.

On death the company continues and there may be some Inheritance Tax relief.

You can expense items incurred wholly and exclusively for the business. Other items need to be proportionately claimed for private use.

The company can expense items incurred wholly and exclusively for the business. Director’s private expenses may be treated as earnings or distributions if they’re a shareholder.

If you work from home you can claim a deduction for mortgage interest, rates and light and heat.

You can claim £4 per week without receipts for home expenses. As an alternative, the company can cover the cost of light and heat.

You cannot charge yourself rent.

As a director, you may set up a licence between you and your company to rent an office (or other space) in your home or outbuildings. This will enable you to recharge a proportion of mortgage interest and council tax.

1:33

Video: Should I register as a limited company or a sole trader?

by Informi

This video explains the benefits of trading as a limited company, explaining the differences between sole traders and limited companies and the various ways that a limited company can protect small business owners and inspire confidence in their businesses.

How do I register for self-employment?

No matter which route you take to self-employment, you will need to tell HMRC immediately as it will want you to register for National Insurance, Income Tax and possibly VAT (which is obligatory if your turnover exceeds or is likely to exceed the VAT threshold (£83,000 in 2016/17, £85,000 during 2017/18).

If you choose to operate via a limited partnership or limited company you will also need to tell Companies House.

On top of this come responsibilities for pensions if you have staff and possibly also health and safety reporting duties. Don’t forget that if you take on premises you will need to register for business rates through your local authority.

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