Most small businesses operate as sole traders (or self-employed, for tax purposes they are essentially the same). There are very good reasons for this. It is the simplest, cheapest way of setting up a business. It avoids the additional cost and complexity of a limited company. If for any reason the owner decides to stop trading, they can easily shut down the business.
All businesses need to keep records, but sole trader accounts are the simplest. HMRC do allow a considerable degree of flexibility in sole trader accounts. A very small business needs to produce nothing more than a statement of total income and costs. However, the taxpayer must have sufficient records to show that the reported profit is correct. Bigger businesses do need to report more detail but still with less complexity than for a limited company.
Accounts are usually made up for a period of 12 months except in the first and last years of trading. The choice of year end used to be important as it could significantly affect the business’ cash flow. Changes in the rules have all but eliminated the benefit. Unless there is a good reason, it is probably best to make 31 March your year end.
It is possible to change the year end, but the process is not simple. If handled incorrectly, you can end up paying too much tax. You should seek professional advice before making a change.
The deadlines and processes for partnership accounts and tax returns are similar to a sole trader. The main differences are:
The partnership profit needs to be split between partners. For the partners’ peace of mind as much as for the benefit of HMRC, the partners really should have written agreement of the splitting of profit.
Each member of the partnership and the partnership itself will need to submit tax returns. So, a partnership with 3 partners will need to submit 4 returns.
One partner should be nominated to represent the partnership. Note that although the partnership submits a tax return, the partnership itself is not subject to income tax. It is the partners that are taxed on their shares of the profit.
Subcontractors in the Construction Industry Scheme
Nearly all subcontractors engaged in construction are covered by the Construction Industry Scheme (CIS). For this purpose, the definition of “construction” is extremely board. For example, landscape gardening on the new build is deemed to be construction. HMRC guidelines provide further details.
The CIS is a method of collecting income tax but does not remove the need to maintain proper financial records. Sub-contractors are sole traders (or, less often, partners or limited companies) and must submit tax returns like any other business. Apart from avoiding penalty charges from HMRC, there is often a big incentive for submitting the returns; if your earnings before CIS deductions are less than £25,000, you are probably due a significant tax rebate.
However, for all its informality, the sole trader is still required to prepare business accounts and accurately calculate their tax liability. We work with you as a business partner would. We are on your side, dealing with HM Revenue and Customs on your behalf, at the same time ensuring compliance with all tax laws and regulations.