With jobs in the UK market place still scarce, people are turning to other methods of income such as selling items on eBay, working online as a freelance or walking the streets offering to clean windows. As an author on Infobarrel; any proceeds generated through the various revenue streams is classed as a sole-trader business income for me and as an honest British taxpayer I am obliged to record this and report it to Her Majesty's Revenue and Customs and pay tax and national insurance. So if you are specifically working, selling or doing something else for an income, this guide should show you as a sole-trader what you should be doing, how your should be doing it and how to stay on the right side of the law.
While I am here writing Infobarrel articles, I will use the online freelance writer scenario as an example from time to time, but the thought processes are the same for any sole trader role that you decide to undertake.
Are You a Sole Trader?
A sole trader definition
Let's be absolutely honest; there is very little to being an online freelance writer in terms of the small business management side of things. There are excellent authors on here such as AJWalton who will show you theoretically how you can make a million (ok so I exaggerated the exchange rate) through writing on a site like Infobarrel; but you theoretically do not have much in terms of business property, stock to sell on. You are still working for a profit though and that means you are in business.
A "sole trader definition" is exactly what it should say on the tin. You are a sole person, trading a stock or service for money and hopefully profit; making you a business. In our Infobarrel example the service you are selling is information - a tertiary industry - and the payment you receive depends on the various revenue accounts that you use with it. If you are starting to buy stock in bulk to sell on via eBay and other sites then you also become a sole trader and not a private seller, because you are buying goods specifically to sell on the marketplace website at a hopeful profit.
Sole Trader - A type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.
There has been some small discussions over recent months about the definition of a small business when a Romanian woman was ruled by a social security tribunal to be self-employed while selling the Big Issue; and therefore entitled to housing benefits in line with UK law. As this person is buying a supply of The Big Issue for resale, she has a small business; she is working alone, therefore she can be a sole trader.
The Good Things about being a Sole Trader
Lets start with the easiest bit of being a sole trader, which is actually possibly one of the hardest. Being a sole trader means working for yourself, managing yourself and disciplining yourself. that doesn't mean that you need to give yourself a written review of your work, or sack yourself if you don't meet sales targets; but it does mean that you have to be sure of your ability to push yourself to start working in the mornings, to not have that lay in on a Monday or not to put off until tomorrow what you should be doing today.
If you have any concerns about things like this, you should be asking if a small business is for you and whether you really are more suited to being an employee.
From a business perspective, being a sole trader is far easier than being a company. Unlike larger counterparts, the sole trader does not need to register as a company at Companies House, pay the annual Companies House registration fee or have to keep meticulous financial records that can be inspected. Obviously you have to keep basic records of income and expenditure - these are so simple you can fit everything into a single book - so that you can accurately record your tax returns, but there is no need for the fine detail that is required of a limited company or multi-national corporation.
At the moment, all the at is legally required in the UK for a sole trader is that there is a profit and loss account, rather than balance sheets and cash flow charts.
The bad things about being a Sole Trader
Let's start with the easy one.... don't do anything risky. Unlike a limited company, you are the guarantor for all debt, you are the legally responsible person for all wrong doing; if someone trips over your advertising poster and breaks a bone its you they sue. The British sole trader is exposed to unlimited liabilities and even if a business goes bust owing the bank money; it can be recovered from a sole trader's personal effects and property.
If you are looking for a heavy investment in your new sole trader small business then it might be considered that being a sole trader is not actually for you after all. Although all financial institutions insist on business plans for a business based loan, not all institutions will lend even with a business plan, if that company is operating as a sole trader.
You might also find that being a sole trader limits the work that you can undertake as a freelancer. I have previously worked with a company that outsources its catalogue call centre work and a condition of the work with external freelancers is that the contract is on a business-2-business basis and the outsourcing undertaken by a limited company. Operating a sole trader as a limited company can be a complicated matter as this can again attract the attention of Her Majesty's Revenue & Customs as it risks breaching Intermediary Legislation but in this instance it is possible to get around the issue by working for an umbrella company.
What You Do To Be A Sole Trader
Keeping It Legal
There are a number of steps to legitimately becoming a sole trader in the UK. These generally make sure that you are correctly registered to pay tax in the UK at the right rate, especially considering that some people will be operating a self-employed sole trading business in addition to traditional employment.
Thankfully a guide to small business finance is also available on my InfoBarrel range of articles, for more information.
You must make sure you register as self-employed with the taxman. Unlike the Companies House registration that you are not required to make (or pay for) you need to register (for free) as self-employed and for self-assessment. By taking the risk not to do so you leave yourself liable for a fine; which recently the HMRC started to clamp down on using recently installed technology to crack down on different areas of the self-employed sole trader market.
Local Authority / Council
If you use any part of your home for your business then you must declare this to your local council. This is because any part of your premises used exclusively for business is subject to business rates and not council tax and may increase or decrease your liability to the local authority.
It is slightly more complicated if you have parts of your home that are not exclusively business use; such as using the family computer to write-up your accounts or writing an article while sat on the sofa with your laptop. When I enquired with my local authority though, I was lucky that simply using my family computer to write articles or sitting in front of the TV laptop on sofa is not an issue for them and I did not have to declare it.
It may sound strange, but if you are employed and work as a sole trader as well then you may need to tell your boss or company HR department that you have a second job. In many contracts it can be a minor and overlooked clause which is merely there to protect the employer; but it is also there to protect the employer against malicious intent from their employees.
It is most likely to be an issue if your line of work brings you into conflict with your sole trader company. Using knowledge or information from an employment may become an issue, especially if the intention is to offer supplementary or competitive services, or to use the company's goodwill to further the work of the sole trader.
It is not compulsory though and even from the perspective of the HMRC; the taxman will not even need to change your tax notifications to your employer.
Other Options to Being a Sole Trader
If you think that being a sole trader is too risky, you are considering employing people in your new company or you make large profits; then you might have to consider becoming a limited company. This provides a some extra safeguards against being a sole trader, such as the limited exposure to liabilities should the business fail in debt; but there are more factors to consider such as the need to file accounts, adhering to company law and inevitably the employment of a professional financial service to deal with your affairs.
But for the one man band, making instant decisions, managing their own affairs and providing that personal service; there is nothing easier to start testing the water than being a sole trader.