A person starting to trade is faced with a number of requirements; for example, they must register their business with HMRC. Penalties may be charged where the person fails to meet or is late in meeting those obligations. In addition, the person must make a number of important decisions; for example, choosing the date to which they will prepare their accounts. In some cases, a tax and/or cashflow advantage could be obtained.

In addition, a number of important decisions have to be made, for example, you must choose the date on which you will prepare your accounts. In some cases, the direction taken will influence your tax liabilities

Take a look at the mind map below for key dates.

If you have any questions, please book a Discovery Call with an advisor.

Sole traders and Partnerships

Keeping Records

The individual must keep records that enable them to make a correct and complete return. The maximum penalty for failure to keep adequate records is £3,000.

Therefore, it is important that a system is in place to record the transactions of the business. It is common for accounting software to be used. In light of HMRC’s Making Tax Digital project, it is advisable that all new businesses are encouraged to use the software, even if it is not mandatory for the business to use the software at that stage. A range of products is available and each should be considered against the person’s particular circumstances.

A good practice is for the business to have its own bank account, and for all business, income to be paid into, and for all business expenditure to be paid out of, this account. In this way, all business transactions can be easily identified and there is a reduced risk of (1) business transactions being missed; and (2) personal transactions being treated as business transactions.

In addition, the individual should be encouraged to set up a tax savings account and to make regular deposits into this account to cover estimated future tax liabilities. The correct amount to put aside will be determined by the particular circumstances; for example, the rate at which tax is likely to be payable, the person’s anticipated profit margin, and significant one-off costs, such as the purchase of a van. It is likely that this will need to be revised on a regular basis as the accounting information is reviewed and as the business grows.

Submitting a tax return

The sole trader or partner must submit a tax return for each tax year by 31 January after the end of the tax year. Therefore, the filing date for the return is on or before the 31st of January. In the case of a partnership, a return is required for the partnership too, and the same deadline applies. This deadline must be met in order to avoid a penalty of £100 per return.

Paying tax

The general rule is that the income tax and NICs liability for the tax year must be paid by 31 January after the end of the tax year. However, some taxpayers are required to make payments on account (POAs) of their liability on 31 January during the tax year and on 31 July following the tax year; with a balancing payment, if required, to be made on 31 January following the end of the tax year.