03: Responsibilities as a sole trader

Tax and national insurance contributions (NICs)

A sole trader must register with Her Majesty’s Revenue and Customs (HMRC) within three months of commencement of trading. HMRC arranges payment of Class 2 NICs, at a flat rate for every week of trading. NICs are normally collected by direct debit. Class 4 NICs may also have to be paid - these are calculated as a percentage of profits over a minimum threshold, and are paid together with any income tax due on your profits. A personal self-assessment tax return form must be completed each year.

VAT

VAT registration is mandatory when sales within 12 months exceed a certain level (£60,000 from 1 April 2005).

Voluntary registration for VAT may be made before the turnover threshold is reached, to take advantage of VAT schemes designed for small businesses, and to avoid penalties that may arise on late registration.

Once VAT-registered, quarterly VAT returns must be submitted, and invoices that comply with the VAT regulations need to be issued.

Premises

Any new business, including a sole trader working from home, should inform the local authority that the premises will be used for business purposes, and register for business rates.

  • The premises’ landlord or mortgage lender should be informed when trading commences. Buildings insurance may also have to be altered to extend cover to the business activity.
  • Planning permission may be required from the local authority. For example, alterations may be needed to make the premises accessible for disabled people.
  • A fire risk assessment for the new business must be undertaken. Certain categories of businesses require a fire certificate, eg where 20 or more employees work in one building.
  • Certain types of businesses must comply with special regulations. For example, a food business must comply with hygiene rules that affect the design and registration of the premises.
Employees

A sole trader can take on employees, and responsibilities include:

  • Operation of a PAYE scheme to deduct tax and NICs from each employee’s pay.
  • Payment of at least the national minimum wage to all employees, unless they are relatives and live at home.
  • Payment of statutory sick pay to employees.
  • Access to a stakeholder pension if there are five or more employees (there are exemptions for low paid workers).
  • Allowing workers minimum rest breaks and a set number of days off each week.
Trading regulations

A shop or street stall may need a licence from the local authority depending on the goods or services offered.

  • Care must be taken to describe goods and services accurately and clearly to ensure compliance with the Trade Descriptions Act 1968.
  • If the business involves holding information about customers, suppliers or other business contacts in electronic form, registration under the Data Protection Act 1998 is probably required.
  • If the business sells or promotes products or services online, it must comply with the E-commerce Regulations 2002.