At a glance

Start here

1. You are planning to start a new business and your options are:

1. Going self-employed as a sole trader.
2. Running the business through a new company.
3. Going into a partnership (you need two or more of you to run a partnership).

Note: If you are recruited and paid by an agency the chances are that will not be self-employed but an employee.

If you are unsure of your employment status there are four key things to consider: What is the difference between being self-employed and employed? Will the tax rules automatically treat you as employed or self-employed? What do you really want to do: be employed or self-employed?? Useful FREEVIEW guides if you are unsure whether you are self-employed or not: Starting work: Self-employed or Employed? Starting work: Special rules for certain types of worker Starting work: How employees are taxed Starting work: How the self-employed are taxed

 

2. Once you know that you will be 'self-employed', choose which 'trading style' or 'trading vehicle' is best for you?

• Your options are operating as:
  • A sole trader (running a business on your own or with employees).
  • A partner in a partnership (running a business with someone else).
  • A director and shareholder: running your own company (on your own or with others via a limited company).

If you are unsure of the different trading styles and vehicles, these guides take you into more detail: Trading vehicles: introducing the different trading vehicles used in the UK and Europe and what they mean. Which trading structure is suitable for me? A concise side-by-side comparison of the different trading vehicles used in the UK. Partnerships: a concise comparison of the different types of partnership recognised in the UK.

 

3. Do you want to consider tax advantages and cost savings? 

There may be some key advantages, as a start-up in setting up as a sole trader than via a company or partnership: it depends on individual facts and circumstances.

Note that:

• It is very easy to set up as a sole trader: this is the recommended route for someone starting up a small business on their own for the first time.
• Once you have set up as a sole trader, it's easy to change into a partnership (say if a friend comes to join your business) or into a company (if you get bigger and want the protection of limited liability).
• It is less easy to convert backwards: changing from a partnership back to a sole trader is easier than changing from a company back to a sole trader.

Compare different trading styles and trading vehicles with these guides: Sole trader v limited company: an 'At a glance' comparison of tax and legal treatment. Sole trader v limited company: Tax differences and savings (2020/21): which is really most tax-efficient?  Will I pay less tax if I trade via an LLP? Comparing a company and a Limited Liability Partnership (LLP).

 

4. What are the legal requirements to set up in your choice of trading vehicle?

Sole trader

• There is no legislation that directly describes the operation of a sole trader: sole traders run their business according to the principles of general law. 
• Certain businesses, such as taxis and scrap metal dealers are subject to meeting the rules on tax Conditionality. Licence renewal (which excludes the first issue of a licence) is conditional on the business completing a tax check confirming they are registered for tax.

Partnerships

• Partnerships are governed according to different Partnership Acts and the Companies Act which variously apply to the different types of UK partnerships, these acts setting out various defaults:
  • 1907 Limited Partnership Act.
  • 2000 Limited Liability Partnership Act.
  • 2006 Companies Act.
• Even best friends can fall out: is advised draw up a partnership agreement that deals with how you split profits or capital and what happens if you part company.
• We do not provide a template at this time because partnerships vary so greatly in size and activities that we don't think that a 'one size fits all' approach is ever suitable.

See our guide A new Partnership: Start here...

Companies

• If you chose to trade through a company, the starting point is to form a new company with Companies House.
• Companies can be unlimited, limited by guarantee or limited by shares.
• If you are running a non-for-profit organisation then you may consider being limited by guarantee.
• The majority of trading companies are limited by shares.
  • Before you get started you need to plan your share classes, consider whether to modify the Articles of Association and/or draw up a shareholders' agreement. You can also make amendments following formation. 
  • You must also appoint first directors and a company secretary, and decide on the location of the company's official address, the Registered Office.

See our guide Starting a company: Start here... 

5. Trading names

Your business needs a name. It can be just your name or you may want something original to stand out in order to attract new clients online and you will probably require a website.

Check that: If you are registering your business with a professional body or trade organisation that your proposed business name satisfies their guidelines. If you are intending to trade via a limited company, go to Companies House, Webcheck and check that the name is not already taken.  Go to a website, such as Namesco (other domain registrants are available) do a domain search and check that the name is available as a URL. Go to Twitter and see if you can buy an account that is similar to your chosen name. Go to the Intellectual Property Office website, https://www.ipo.gov.uk/types/tmtext.htm and check that no one has trademarked the name that you have chosen. Domains If you can purchase the .com and .co.uk versions of your domain then buy both to protect your URL.

 

6. Registration for tax

Registration with HM Revenue & Customs

If start in business, whether as:

• A self-employed individual.
• An individual in a partnership.
• A company.

You need to open an account on the Government Gateway www.gov.uk and register with HMRC. You will need to upload your ID and proof of address.

Sole traders

• Under Self Assessment you must notify HMRC if you have taxable income or chargeable capital gains in a tax year for either Income Tax or Corporation Tax.

See Self-employed: Registering for tax

Employers (individuals, partnerships or companies)

If you are going to employ any staff you must register with HMRC and operate PAYE.

• Separate online notification and registration with HMRC are required if you take on workers and employees.
• You must assess any worker's employment status.
• Certain categories of workers are automatically deemed to be employees for tax purposes (this does not always confer any employment rights on them).
• You must pay employees via a payroll and deduct PAYE & Real-Time Information reporting (RTI).
• If you trade via a company and you are paying yourself a salary or any benefits, or if you trade via any type of business entity and you take on employees or pay your directors, or you make available employment type benefits, you will need to set up a PAYE scheme.
• See RTI of PAYE for employers.

Construction industry Employers: Construction Industry Scheme (CIS) 

If you are a contractor you must operate the CIS on your workers unless they are employees or their work is outside the CIS scheme.

• If you are a sub-contractor you must register with HMRC otherwise you will have tax deducted from your income at 30%.
• See CIS: Contractors and Subcontractors.

VAT

You must register for VAT if:

• You expect your turnover in the next 30 days to exceed the registration threshold of £85,000 in 2022/23 see Registering for VAT. 
• You have taken over a business as a Transfer of a going concern.
• You have taken over the business premises of a VAT registered business and are carrying on a similar trade, see VAT: Taking over an existing business.
• When you register for VAT you must join Making Tax Digital for VAT.
• See MVD tool: who has to join?

If you don't have to register for VAT you can choose to do so if you will be making taxable supplies.

See VAT: Starting in business

7. Record keeping and accounting for tax and : sole traders and partnerships

You have a choice of kind of 'system' you use for tax.

• You can use cash basis accounting: this means that you declare your income and deduct your expenses according to when you receive payment or make a payment.
• The alternative is the accruals basis: this basically means that you declare your income and deduct your expense when invoiced. 

Most small business stick to the cash basis as its pretty simple to use.

You can also decide to use a system of fixed-rate expenses, instead of claiming your actual costs.

For example, HMRC allows you to use a milege rate of 45p/25p per mile, if you use those rates you only need to record your mileage and not have to retain your fuel bills.

These things are supposed to simplify accounting for tax but they are very confusing.

• Neither method is in practice simple to use: each has several drawbacks.
• We compare the different systems: keep an open mind about which system to use until trading is underway.

See our fantastic guide, Accounting: Simpler Income Tax (cash basis)/fixed expenses

Accounting: companies

• Companies file their accounts with Companies House, in different formats according to their size.
• Small companies have the option of filing abbreviated accounts or micro-entity accounts.
• Company accounts are prepared according to Generally Accepted Accounting Practice (GAAP).
• Top tip: it is definitely recommended use an accountant to prepare company accounts and tax returns unless you want to study UK GAAP and invest in special software.
• See UK GAAP & FRS 

 8. Miscellaneous FAQs

Pensions: you can contribute to a pension scheme as a method of saving for your retirement or passing down your wealth to your family when you die.

If you take on employees, you will need to set up a workplace pension scheme.

• Will I need a pension scheme?

9. Tax Planning

Tax planning guides are available throughout the website, see the left hand menu.

A handy index for company owners is:

• Tax planning for directors (index)

See Indexes to essential guides in this series