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Guide to Value Added Tax for Businesses | VAT Explained

What is VAT?

Value added tax is a general tax that applies to all commercial activities involving the production and distribution of goods and/or provision of services. VAT is a tax on consumer expenditure and is collected on business transactions, imports and acquisitions.

Most business transactions involve supplies of goods or services. VAT is payable if they’re supplies made:

  • in the UK or the Isle of Man
  • by a taxable person
  • in the course or furtherance of business
  • that are not specifically exempted or zero-rated

Supplies which are made in the UK or the Isle of Man and which are not exempt are called taxable supplies.

A taxable person is an individual, firm, company and so on who is, or is required to be, registered for VAT. A person who makes taxable supplies above certain value limits is required to be registered.

If the annual turnover of a business is less than a certain limit (the threshold), which does differ accordingly, the person or business does not have to charge VAT on the sales of services or products.

VAT is charged as a percentage of your product or service price. So if for example your product or service is £100 and the applicable VAT rate is 20%, you would charge £20 VAT (£100 x 20%) on top of your product or service price. This makes the total cost to your customer £120. You would then pass that £20 VAT over to HMRC via your VAT returns and keep the £100 as your sale value.

It’s important to understand how VAT works and how to calculate the correct amount that applies to your business. If in doubt we recommend reaching out to your accountant.

When do I need to register for VAT?

You must register for VAT when your VAT taxable turnover is over £85,000 (known as the threshold), or if you know it will be. Your VAT taxable turnover is the total of everything sold that is not VAT exempt.

When is it compulsory for my business to VAT register?

You must register for VAT if:

  • you expect your VAT taxable turnover to be more than £85,000 in the next 30-day period
  • your business had a VAT taxable turnover of more than £85,000 over the last 12 months

You might also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.

If you’ll exceed the VAT threshold in the next 30-day period

You must register if you realise that your total VAT taxable turnover is going to be more than £85,000 in the next 30-day period.

You have to register by the end of that 30-day period. Your effective date of registration is the date you realised, not the date your turnover went over the threshold.

Example

On 1 May, you realise that your VAT taxable turnover in the next 30-day period will take you over the threshold. You must register by 30 May. Your effective date of registration is 1 May.

If you exceeded the VAT threshold in the past 12 months

You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.

You must register if it goes over the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – it could be any period, for example the start of June to the end of May.

You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.

Example

Between 10 July 2020 and 9 July 2021 your VAT taxable turnover was £100,000. That’s the first time it has gone over the VAT threshold. You must register by 30 August 2021. Your effective date of registration is 1 September 2021.

What if neither you or your business are based in the UK?

There’s no threshold if neither your nor your business is based in the UK. You must register as soon as you supply any goods and services to the UK.

What if I register late for VAT?

If you register late, you must pay what you owe from when you should have registered.

You may get a penalty depending on how much you owe and how late your registration is.

Can I register for VAT even if I am not over the threshold?

You can register voluntarily if your business turnover is below £85,000. You must pay HMRC any VAT you owe from the date they register you.

What counts towards my VAT taxable turnover?

VAT taxable turnover is the total value of everything you sell that is not exempt from VAT.

To check if you’ve gone over the threshold in any 12-month period, add together the total value of your UK sales that are not VAT exempt, including in addition:

  • goods you hired or loaned to customers
  • business goods used for personal reasons
  • goods you bartered, part-exchanged or gave as gifts
  • services you received from businesses in other countries that you had to ‘reverse charge’
  • building work over £100,000 your business did for itself

Include any zero-rated items – only exclude VAT-exempt sales, and goods or services you supply outside of the UK.

Example:

Month Sales that are not exempt from VAT Rolling 12 month total Over £85,000 in VAT taxable supplies?
Start of trading:
February		  5,000.00
March  5,500.00
April  5,700.00
May  5,900.00
June  6,000.00
July  4,500.00
August  8,000.00
September  7,500.00
October  7,000.00
November  7,800.00
December  5,600.00
January  8,200.00  76,700.00  No
February  9,000.00  80,700.00  No
March  9,500.00  84,700.00  No
April  7,600.00  86,600.00  Yes – must register
May  7,800.00  88,500.00  Yes – stayed over
June  8,200.00  90,700.00  Yes – stayed over

What happens after I VAT register?

Once registered, you’ll need to complete regular VAT returns, these are usually quarterly, however other periods do sometimes apply.

This is where you declare how much VAT you have charged (output VAT) and how much you have paid (input VAT).

If you’ve charged more VAT than you’ve paid, you’ll have to pay the difference to HMRC. Conversely, if the company has paid more than you charged, you can claim this back from HMRC.

Are there different VAT schemes available?

Yes there are different schemes available, some of which listed below:

  • Retail schemes
  • Cash accounting
  • Second hand schemes
  • Annual accounting scheme
  • Flat-rate scheme

If you intend to use any of these schemes we recommend you discuss them with your accountant beforehand.

Can I reclaim VAT on my expenses?

VAT you have been charged on business expenses is called input VAT.

Input tax is the VAT you’re charged on your business purchases and expenses, including:

  • goods and services supplied to you in the UK
  • goods you import from outside the UK
  • goods you acquire into Northern Ireland from a taxable person in an EU member state (see The single market (VAT Notice 725))
  • goods you remove from a warehouse
  • any services supplied in the UK which you receive from abroad
  • overheads and research and development costs

What can be claimed as input tax on your VAT returns?

You can usually reclaim the VAT paid on goods and services purchased for use in your business.

Examples of items that may have VAT reclaimable (please note this list is not exhaustive):

  • Materials or goods purchased to enable you to make your product of provide your service
  • Computer of software costs
  • Accountants fees
  • Printing & Stationery
  • Marketing costs
  • Consulting costs
  • Equipment costs
  • Office costs

If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.

Be careful to review the invoice/receipt to check whether the item actually had VAT on it before you reclaim input VAT. Also be sure to keep evidence of your input VAT.

What cannot be claimed as input tax?

You cannot reclaim VAT for:

What about expenses / purchases incurred pre-registration for VAT?

There’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:

  • 4 years for goods you still have, or that were used to make other goods you still have
  • 6 months for services

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including:

  • invoices and receipts
  • a description and purchase dates
  • information about how they relate to your business now

What are the VAT rates?

  • Standard rate of VAT: The standard rate applies to most goods and services, which is currently set at 20%. You should charge the standard VAT rate of 20% on all goods and services unless they are classified as reduced, zero-rated or exempt.
  • Reduced rate of VAT: The reduced rate is set at 5% and only applies to some goods and services, for example children’s car seats, health, heating, mobility aids, energy and protective products and services. This rate depends on the type of item being sold as well as circumstances of it being sold.
  • Zero rate of VAT: Zero rated is as the name implies, it’s items that have a 0% rate applied to them. Zero rated isn’t the same as exempt items. Zero rate counts as a taxable supply, but you do not add any VAT to your selling price. Zero rate items include health, building, publishing, books, newspaper, motorcycle helmets, most goods you export to outside the UK and children’s clothes and shoes. Even though there is no VAT applied on zero rate goods, it is still a rate of tax. Therefore, it must be recorded in all VAT accounts and reported in VAT returns.

Exempt supplies:

Some goods and services are exempt from VAT. If all the goods and services you sell are exempt, your business is exempt and you will not be able to register for VAT. This means you cannot reclaim any VAT on your business purchases or expenses.

If you are VAT-registered and incur VAT on any items that will be used to make exempt supplies, you are classed as partly exempt.

There are some goods and services on which VAT is not charged, including: insurance, finance and credit, education and training, fundraising events by charities, subscriptions to membership organisations, selling, leasing and letting of commercial land and buildings – this exemption can be waived

VAT rates may change and you must apply these changes to the rates from the date they do change.

What should I include on my VAT invoices?

Only VAT-registered businesses can issue VAT invoices and you must:

  • issue and keep valid invoices – these can be paper or electronic
  • keep copies of all the sales invoices you issue even if you cancel them or produce one by mistake
  • keep all purchase invoices for items you buy

Valid invoices

You’ll use a full VAT invoice for most transactions. You can use:

  • a modified invoice for retail supplies over £250
  • a simplified invoice for retail supplies under £250 – and for other supplies from 1 January 2013

You cannot reclaim VAT using an invalid invoice, pro-forma invoice, statement or delivery note.

Include the following on your invoice, depending on which type you use:

Invoice information Full invoice Simplified invoice Modified invoice
Unique invoice number that follows on from the last invoice Yes Yes Yes
Your business name and address Yes Yes Yes
Your VAT number Yes Yes Yes
Date Yes No Yes
The tax point (or ‘time of supply’) if this is different from the invoice date Yes Yes Yes
Customer’s name or trading name, and address Yes No Yes
Description of the goods or services Yes Yes Yes
Total amount excluding VAT Yes No Yes
Total amount of VAT Yes No Yes
Price per item, excluding VAT Yes No Yes
Quantity of each type of item Yes No Yes
Rate of any discount per item Yes No Yes
Rate of VAT charged per item – if an item is exempt or zero-rated make clear no VAT on these items Yes Yes (1) Yes
Total amount including VAT No Yes (1) Yes

(1) If items are charged at different VAT rates, then show this for each.

Are there any other areas of VAT I should be mindful of?

Yes, VAT is a complex tax and there are lots of things you should be mindful of, some of which we have listed below:

  • If you trade with customers in the EU you should review the VAT and import/export changes as a result of Brexit
  • There are specific rules for trading with customers in Ireland that you should check and ensure compliance with
  • The ‘place of supply’ rules are intricate and complex and we recommend you ensure you are clear on the place of supply based on legislation
  • Record keeping is key, you must maintain specific records in support of the information included on your VAT return
  • Different products and services have different VAT rates
  • Making Tax Digital for VAT requires VAT-registered businesses, with taxable turnover above the VAT registration threshold, to keep records digitally and file their VAT Returns using software
  • Special rules that apply to digital sales

When should I reach out to an accountant?

Regardless of what type of business you have, VAT is very important and not something you can ignore.

Understanding the VAT rate that applies to your business and how you charge it correctly will help you to avoid any penalties, reclaim any VAT owed and to ensure your business is running successfully and efficiently.

Having the right accountant who understands your business, is on hand to answer questions and provide support will help you to stay organised and compliant with all of the VAT rules and regulations.

Failure to comply with the rules or registering late can be very costly and we highly recommend you reach out to an accountant to understand your obligations and get advice.

If you would like support please do get in contact with The Orenda Collective.

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How to Become a Personal Trainer

There are many reasons why you may want to go freelance. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a personal trainer.

How to become a personal trainer

  • Choose your business structure
  • Register your business
  • Get a business bank account
  • Get appropriate insurance
  • Understanding record keeping requirements 
  • Understanding accounting and tax requirements

In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a personal trainer.

Choose your business structure for your personal training business

You have decided you want to become a personal trainer, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:

For the purposes of our becoming a personal trainer guide there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types please get in touch.

Do you need an accountant which specialises in personal trainers?

Learn More

So what is the difference between being a sole trader and a limited company?

To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.

Self-employed/Sole Trader

A self-employed individual, often known as a sole trader, does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals earn an income by offering their services or products directly to customers or businesses. They are required to win personal training clients themselves and take responsibility for the success or failure of their sessions with clients. As a personal trainer this would mean you would have to go out and find clients yourself. You may be able to do this as a self-employed trainer within a gym, therefore helping you increase your chances of finding clients.

Benefits of a personal trainer being self-employed

  • Simple freelance business structure without the administration burden of a Limited Company
  • Free and simple registration of your business with HMRC
  • Flexible freelance business structure that can later transition to a Limited Company

Considerations of a personal trainer being self-employed

  • You are personally responsible for any losses the freelance business makes
  • You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
  • Potential Clients may see sole-traders as less attractive than Limited Companies

What is required of you as a self-employed individual

  • Register with HMRC at gov.uk
  • Record keeping of all income and expenses
  • Submit a tax return each year

Limited Company

Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (director) of a limited company.

A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets as a personal trainer.

Benefits of a personal trainer operating as a Limited Company

  • Retain more of profits by utilising tax efficiencies
  • Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
  • Limited companies have a certain level of prestige in terms of brand image that sole traders do not

Considerations for a personal trainer operating as a Limited Company

  • More complex and expensive to set up than a sole trader
  • Limited company accounts and tax are more technical than a sole trader
  • There are additional costs incurred when operating a limited company

What is required if you register as a Limited Company

  • Incorporate your company with Companies house and register for company tax with HMRC
  • Record keeping of income and expenses in line with company regulation
  • Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)

Further information on both structures can be found in our blog on setting up as Self-employed versus Limited Company.

So which should I choose?

Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.

If you are looking for a simple way to set up as a personal trainer then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.

Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start.  We offer a free consultation call for new clients, contact us here.

Register yourself as a personal trainer

Once you have decided on an operating structure you will register your personal training business. The process is different for sole traders and limited companies.

Self-employed/Sole trader registration

Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration from.

You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.

Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.

Limited company registration

To start up as a limited company there are a few more steps that need to be taken.

  • Decide on a company name
  • Decide who will be the director(s) of the company
  • Decide who will be the shareholder(s) of the company
  • Prepare documents on how to run the company (articles of association)
  • Incorporate your company with Companies House
  • Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC

We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.

Apply for a bank account for your personal training business

The number one thing you should always do when you set up as a personal trainer, whether you are self-employed or a limited company, is set up a business bank account specific to your personal training work.

Setting up a business bank account means that you are able to keep all of your personal training income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.

What is required to set up a bank account?

It is easy to set up a bank account. You will provide the bank with the following information:

  • Business name and address
  • Photo identification such as a driver’s license or passport and proof of address
  • They may require a letter from your accountant

What banks could I look at?

You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.

There are a few things you should consider whilst deciding which bank to go with such as:

  • Are there any extras/benefits you will receive as part of using that bank account?
  • How quick is it to set up?
  • Is there a fee? If so, is it a one off fee or monthly?
  • Is there an app?

Apply for appropriate insurance

As a personal trainer there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.

Public Liability Insurance

Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.

Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.

You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.

Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a personal trainer, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.

Employers Liability Insurance

Employers’ liability insurance covers you and your business for compensation costs if an employee becomes ill or injured as a result of the work they do for you. It’s legally required of all businesses with one or more employees.

Employers’ liability insurance is a legal requirement if you have employees – including many types of subcontractor. If you are caught without cover, your business can be fined up to £2,500 per employee per day.

Professional Liability Insurance

Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.

Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.

Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.

How much is insurance for personal training?

The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.

Understand your record keeping requirements

The requirements for record keeping for sole traders and limited companies are different.

Self-employed/Sole Trader

As a sole trader you must keep records of your personal training income and expenses for your tax return.

Types of proof include:

  • All receipts for goods, services and stock
  • Bank statements
  • Sales invoices, till rolls and bank slips etc.

How to keep track of records?

As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g. once a month and entering all income and expenditure. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.

Limited company

As a limited company you are required to keep more records than as a sole trader.

Records about the company

  • Details of directors, shareholders and company secretaries
  • The results of any shareholder votes and resolutions
  • Any details for the company to repay loans at a specific date in the future and who they must be paid back to
  • Details for the company to make payments if something goes wrong and it’s the company’s fault
  • Transactions when someone buys shares in the company
  • Loans or mortgages secured against the company’s assets

Accounting records

  • All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
  • Details of assets owned by the company
  • Debts the company owes or is owed
  • Stock the company owns at the end of the financial year
  • All goods/services bought and sold and who you bought and sold them to and from

How to keep track of records?

As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.

The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.

This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.

Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.

Understanding you accounting and tax requirements

There are different requirements for sole traders and limited companies when it comes to accounting and tax.

Self-employed/Sole trader

As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).

For example:

You register as a personal trainer on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.

You must include all taxable income on your self-assessment tax return.

As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you.

Limited Company

In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.

As a limited company you must complete the following:

  • Corporation tax return to the financial year end
  • Company accounts to the financial year end
  • Confirmation statement
  • Dividend vouchers & minutes
  • VAT returns (if appliable)
  • PAYE returns (if applicable)

For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.

For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.

For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.

What happens if you miss your deadlines?

If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.

To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.

Round up

You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:

  • Decide if you will operate as a sole trader or as a limited company
  • Register as self-employed or incorporate your company
  • Open a business bank account
  • Apply for appropriate business insurance
  • Decide how you will maintain your records; spreadsheet or accounting software
  • Put the accounting deadlines in your calendar so you ensure you meet all requirements

A great idea before deciding on any of the above, would be to speak to us about becoming a personal trainer. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.

If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a personal trainer.

Related questions 

What is a confirmation statement?

A confirmation statement (CS01) is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders, share capital and people with significant control.

What is a Limited Liability Partnership?

A Partnership is an arrangement between two or more people to manage and operate a business and share its profits. The profits are shared in line with the agreed partnership terms, for example if there were two partners this could be 50% for each partner or 75% for one partner and 25% for the other.

For example, Accountants, Doctors, Dentists or Solicitors often operate in a partnership.

What is Business premises and contents insurance for personal trainers?

If you’re based in a fitness studio and have all your equipment on site, don’t forget you’ll need to get that covered too – making sure your business premises and contents cover is up-to-date and tailored to cater to your needs.

And if you travel with your work, check that your van insurance or car insurance policy also covers any kit being stored in the vehicle.

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How to Become a Freelance Beautician

There are many reasons why you may want to go freelance. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a freelance beautician.

How to become a freelance beautician

  • Choose your business structure
  • Register your business
  • Get a business bank account
  • Get appropriate insurance
  • Understanding record keeping requirements 
  • Understanding accounting and tax requirements

In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a freelance beautician.

Choose your business structure to become a freelance beautician

You have decided you want to become a freelance beautician, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:

For the purposes of our becoming a freelance beautician guide there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types please get in touch.

So what is the difference between being a sole trader and a limited company?

To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.

Do you need an accountant which specialises in beauticians?

Learn More

Self-employed/Sole Trader

A self-employed individual, often known as a sole trader, does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals earn an income by offering their services or products directly to customers or businesses. They are required to win work or customers themselves and take responsibility for the success or failure of their freelance beautician work. As a freelance beautician this would mean you would have to go out and find clients yourself.

Benefits of a freelance beautician being self-employed

  • Simple freelance business structure without the administration burden of a Limited Company
  • Free and easy registration of your business with HMRC
  • Flexible freelance business structure that can later transition to a Limited Company

Considerations of a freelance beautician being self-employed

  • You are personally responsible for any losses the freelance business makes
  • You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
  • Potential Clients may see sole-traders as less attractive than Limited Companies

What is required of you as a self-employed individual

  • Register with HMRC at gov.uk
  • Record keeping of all income and expenses
  • Submit a tax return each year

Limited Company

Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (director) of a limited company.

A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets as a freelance beautician.

Benefits of a freelance beautician operating as a Limited Company

  • Retain more of profits by utilising tax efficiencies
  • Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
  • Limited companies have a certain level of prestige in terms of brand image that sole traders do not

Considerations of a freelance beautician operating as a Limited Company

  • More complex and expensive to set up than a sole trader
  • Limited company accounts and tax are more technical than a sole trader
  • There are additional costs incurred when operating a limited company

What is required if you register as a Limited Company

  • Incorporate your company with Companies house and register for company tax with HMRC
  • Record keeping of income and expenses in line with company regulation
  • Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)

Further information on both structures can be found in our blog on setting up as Self-employed versus Limited Company.

So which should I choose?

Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.

If you are looking for a simple way to set up as a freelance beautician then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.

Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start.  We offer a free consultation call for new clients, contact us here.

Register yourself as a freelance beautician

Once you have decided on an operating structure you will register your freelance beautician business. The process is different for sole traders and limited companies.

Self-employed/Sole trader registration

Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration form.

You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.

Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.

Limited company registration

To start up as a limited company there are a few more steps that need to be taken.

  • Decide on a company name
  • Decide who will be the director(s) of the company
  • Decide who will be the shareholder(s) of the company
  • Prepare documents on how to run the company (articles of association)
  • Incorporate your company with Companies House
  • Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC

We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.

Apply for a bank account for your freelance beautician business

The number one thing you should always do when you set up as a freelance beautician, whether you are self-employed or a limited company, is set up a business bank account specific to your beauty work.

Setting up a business bank account means that you are able to keep all of your beautician income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.

What is required to set up a bank account?

It is easy to set up a bank account. You will provide the bank with the following information:

  • Business name and address
  • Photo identification such as a driver’s license or passport and proof of address
  • They may require a letter from your accountant

What banks could I look at?

You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.

There are a few things you should consider whilst deciding which bank to go with such as:

  • Are there any extras/benefits you will receive as part of using that bank account?
  • How quick is it to set up?
  • Is there a fee? If so, is it a one off fee or monthly?
  • Is there an app?

Apply for appropriate insurance

As a freelance beautician there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.

What is Public Liability Insurance?

Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.

Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.

You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.

Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a freelance beautician, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.

What is Treatment Liability Insurance?

Treatment liability cover is vitally important to protect you if a client sustains an illness or injury as a result of the treatment administered by you. For example, a client could claim you have caused irritation, burn or reaction from the treatment you’ve provided.

What is Product Liability Insurance?

Product liability cover is important for beauticians who sell products in connection with their treatments, for example, creams for aftercare or products used during facials. This type of cover will protect you if a client suffers an allergic reaction from products sold by you.

Professional Liability Insurance

Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.

Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.

Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.

How much is Insurance for freelance beauticians?

The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.

Understand your record keeping requirements

The requirements for record keeping for sole traders and limited companies are different.

Self-employed/Sole Trader

As a sole trader you must keep records of your beauty income and expenses for your tax return.

Types of proof include:

  • All receipts for goods, services and stock
  • Bank statements
  • Sales invoices, till rolls and bank slips etc.

How to keep track of records?

As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g. once a month and entering all income and expenditure. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.

Limited company

As a limited company you are required to keep more records than as a sole trader.

Records about the company

  • Details of directors, shareholders and company secretaries
  • The results of any shareholder votes and resolutions
  • Any details for the company to repay loans at a specific date in the future and who they must be paid back to
  • Details for the company to make payments if something goes wrong and it’s the company’s fault
  • Transactions when someone buys shares in the company
  • Loans or mortgages secured against the company’s assets

Accounting records

  • All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
  • Details of assets owned by the company
  • Debts the company owes or is owed
  • Stock the company owns at the end of the financial year
  • All goods/services bought and sold and who you bought and sold them to and from

How to keep track of records?

As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.

The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.

This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.

Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.

Understanding your accounting and tax requirements

There are different requirements for sole traders and limited companies when it comes to accounting and tax.

Self-employed/Sole trader

As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).

For example:

You register as a freelance beautician on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.

You must include all taxable income on your self-assessment tax return.

As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you.

Limited Company

In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.

As a limited company you must complete the following:

  • Corporation tax return to the financial year end
  • Company accounts to the financial year end
  • Confirmation statement
  • Dividend vouchers & minutes
  • VAT returns (if appliable)
  • PAYE returns (if applicable)

For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.

For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.

For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.

What happens if you miss your deadlines?

If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.

To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.

Round up – How to become a freelance beautician?

You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:

  • Decide if you will operate as a sole trader or as a limited company
  • Register as self-employed or incorporate your company
  • Open a business bank account
  • Apply for appropriate business insurance
  • Decide how you will maintain your records; spreadsheet or accounting software
  • Put the accounting deadlines in your calendar so you ensure you meet all requirements

A great idea before deciding on any of the above, would be to speak to us about becoming a freelance beautician. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.

If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a freelance beautician.

A great idea before deciding on any of the above, would be to speak to an accountant. They will make sure you understand exactly how to become a freelance beautician and ensure tax efficiencies. 

Related questions 

What is Xero?

Xero is a Cloud Accounting Software. It provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper, integration with multiple applications such as Hubdoc, Shopify and Paypal
and your accountant has real time information.

What pension should I get as a Limited Company Director?

As a director of a limited company you can pay into a personal pension from your company. This means that you are able to obtain tax relief within the company. A few providers that are great for small companies are Get Penfold and Pension Bee.

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How to Become a Life Coach

There are many reasons why you may want to go freelance. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a freelance life coach.

How to become a freelance life coach:

  • Choose your business structure
  • Register your business
  • Get a business bank account
  • Get appropriate insurance
  • Understanding record keeping requirements 
  • Understanding accounting and tax requirements

In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a freelance life coach.

Choose your business structure for your freelance life coaching business

You have decided you want to become a freelance life coach, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:

For the purposes of our becoming a freelance life coach guide there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types please get in touch.

So what is the difference between being a sole trader and a limited company?

To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.

Do you need an accountant which specialises in life coaches?

Learn More

Self-employed/Sole Trader

A self-employed individual, often known as a sole trader, does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals earn an income by offering their services or products directly to customers or businesses. They are required to win coaching work or customers themselves and take responsibility for the success or failure of their freelance life coach work. As a freelance life coach this would mean you would have to go out and find clients yourself.

Benefits of a life coach being self-employed

  • Simple freelance business structure without the administration burden of a Limited Company
  • Free and simple registration of your business with HMRC
  • Flexible freelance business structure that can later transition to a Limited Company

Considerations of a life coach being self-employed

  • You are personally responsible for any losses the freelance business makes
  • You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
  • Potential Clients may see sole-traders as less attractive than Limited Companies

What is required of you as a self-employed individual

  • Register with HMRC at gov.uk
  • Record keeping of all income and expenses
  • Submit a tax return each year

Limited Company

Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (director) of a limited company.

A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets as a life coach.

Benefits of a life coach operating as a Limited Company

  • Retain more of profits by utilising tax efficiencies
  • Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
  • Limited companies have a certain level of prestige in terms of brand image that sole traders do not

Considerations for a life coach operating as a Limited Company

  • More complex and expensive to set up than a sole trader
  • Limited company accounts and tax are more technical than a sole trader
  • There are additional costs incurred when operating a limited company

What is required if you register as a Limited Company

  • Incorporate your company with Companies house and register for company tax with HMRC
  • Record keeping of income and expenses in line with company regulation
  • Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)

Further information on both structures can be found in our blog on setting up as Self-employed versus Limited Company.

So which should I choose?

Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.

If you are looking for a simple way to set up as a freelance life coach then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.

Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start.  We offer a free consultation call for new clients, contact us here.

Register yourself as a life coach

Once you have decided on an operating structure you will register your life coach business. The process is different for sole traders and limited companies.

Self-employed/Sole trader registration

Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration form.

You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.

Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.

Limited company registration

To start up as a limited company there are a few more steps that need to be taken.

  • Decide on a company name
  • Decide who will be the director(s) of the company
  • Decide who will be the shareholder(s) of the company
  • Prepare documents on how to run the company (articles of association)
  • Incorporate your company with Companies House
  • Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC

We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.

Apply for a bank account for your life coaching business

The number one thing you should always do when you set up as a freelance coach, whether you are self-employed or a limited company, is set up a business bank account specific to your freelance coaching work.

Setting up a business bank account means that you are able to keep all of your life coaching income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.

What is required to set up a bank account?

It is easy to set up a bank account. You will provide the bank with the following information:

  • Business name and address
  • Photo identification such as a driver’s license or passport and proof of address
  • They may require a letter from your accountant

What banks could I look at?

You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.

There are a few things you should consider whilst deciding which bank to go with such as:

  • Are there any extras/benefits you will receive as part of using that bank account?
  • How quick is it to set up?
  • Is there a fee? If so, is it a one off fee or monthly?
  • Is there an app?

Apply for appropriate insurance

As a freelance life coach there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.

Public Liability Insurance

Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.

Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.

You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.

Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a freelance life coach, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.

Employers Liability Insurance

Employers’ liability insurance covers you and your business for compensation costs if an employee becomes ill or injured as a result of the work they do for you. It’s legally required of all businesses with one or more employees.

Employers’ liability insurance is a legal requirement if you have employees – including many types of subcontractor. If you are caught without cover, your business can be fined up to £2,500 per employee per day.

Professional Liability Insurance?

Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.

Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.

Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.

How much is insurance for life coaching?

The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.

Understand your record keeping requirements

The requirements for record keeping for sole traders and limited companies are different.

Self-employed/Sole Trader

As a sole trader you must keep records of your coaching income and expenses for your tax return.

Types of proof include:

  • All receipts for goods, services and stock
  • Bank statements
  • Sales invoices, till rolls and bank slips etc.

How to keep track of records?

As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g. once a month and entering all income and expenditure. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.

Limited company

As a limited company you are required to keep more records than as a sole trader.

Records about the company

  • Details of directors, shareholders and company secretaries
  • The results of any shareholder votes and resolutions
  • Any details for the company to repay loans at a specific date in the future and who they must be paid back to
  • Details for the company to make payments if something goes wrong and it’s the company’s fault
  • Transactions when someone buys shares in the company
  • Loans or mortgages secured against the company’s assets

Accounting records

  • All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
  • Details of assets owned by the company
  • Debts the company owes or is owed
  • Stock the company owns at the end of the financial year
  • All goods/services bought and sold and who you bought and sold them to and from

How to keep track of records?

As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.

The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.

This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.

Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.

Understanding your accounting and tax requirements

There are different requirements for sole traders and limited companies when it comes to accounting and tax.

Self-employed/Sole trader

As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).

For example:

You register as a freelance life coach on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.

You must include all taxable income on your self-assessment tax return.

As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you.

Limited Company

In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.

As a limited company you must complete the following:

  • Corporation tax return to the financial year end
  • Company accounts to the financial year end
  • Confirmation statement
  • Dividend vouchers & minutes
  • VAT returns (if appliable)
  • PAYE returns (if applicable)

For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.

For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.

For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.

What happens if you miss your deadlines?

If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.

To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.

Round up

You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:

  • Decide if you will operate as a sole trader or as a limited company
  • Register as self-employed or incorporate your company
  • Open a business bank account
  • Apply for appropriate business insurance
  • Decide how you will maintain your records; spreadsheet or accounting software
  • Put the accounting deadlines in your calendar so you ensure you meet all requirements

A great idea before deciding on any of the above, would be to speak to us about becoming a freelance life coach. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.

If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a freelance life coach.

Related questions 

What is a confirmation statement?

A confirmation statement (CS01) is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders, share capital and people with significant control.

What is a Community Interest Company?

CICs are limited companies which operate to provide a benefit to the community they serve. They are not strictly ‘not for profit’, and CICs can, and do, deliver returns to investors. However, the purpose of CIC is primarily one of community benefit rather than private profit.

Please read some of our other recent articles:

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Client Spotlight – Our Sisterhood

1. Who are Rebecca and Rachita?

Rebecca and Rachita are creatives and co-founders of Sisterhood. We met whilst studying visual communication design at Central Saint Martins and really bonded over our interest in using design to create social impact. We wanted to use the skills and experience we had gained to contribute towards creating services, systems and places that really work for the people who use them.

Fun fact: we were also flat mates, so naturally we decided to start a business together.

Photographer: Edith Whitehead 

2. Who/what is Our Sisterhood?

Sisterhood is a design led social business – it comprises of Sisterhood Studio specialising in socially conscious design and Sisterhood School, our creative social action programme for young girls (aged 13-17) to build confidence by addressing and creating real world solutions to issues they face in their everyday lives such as online safety, body image to larger issues such as street harassment.

3. What is your vision or mission?

Sisterhood is where all self-identifying girls design their place in the world. We use design and creative education as a vehicle for social change to positively impact young girls and their futures.

Photographer: Edith Whitehead

4. What drove you to start Our Sisterhood?

Sisterhood started as a final project whilst we were at University, we were about to start our creative careers and noticed a real drop-off of women in the creative industry. This was really surprising to us as we came from a cohort that was 70% female – so we started enquiring as to why this was happening.

When we started this as a design research, we spoke to women from a breath of careers and from all different stages in their careers as well. We soon realised this isn’t only limited to the creative industry and the two main things that kept on coming up again and again were that a lot of changes in a young girls lives stemmed when they were younger, in school e.g. drop in confidence and the second was lack of opportunities as they were growing up.

Form our own experiences, our research and studies we found all this to be true; so we decided that in order to change this cycle, we have to go to the root. We have to meet girls where they are, in their formative years and work with them to create this change.

5. Explain the 3 C’s, impact on girls and women etc.

The 3 C’s – confidence, courage & charisma are some of the most celebrated, promoted, rewarded and employable attributes and yet studies show these three traits still sit uncomfortably with young girls.

What this means is that at an early age, a girls self-esteem and aspirations are affected, having devastating impact on their future ambitions. These disadvantages trickle down affecting women in their later life.

6. How design fits into your mission?

When we decided that we were going to approach this through the lens of design and creativity – we really had to take stock and do in-depth research about the benefits of design. We had first hand experience as to what creative education did for us as individuals but we were also very weary that when working with schools we had to prove and show hard evidence of the benefits of design.

Creative education offers you more than just the skills to be able to communicate something through visual language. Particularly the design thinking and making process it is a framework through which you problem solve. It has so many transferrable skills such as building empathy, being a self-directed learner, leadership, project management, grit & resilience, critical & entrepreneurial skills. All of these are essential for young people to be able to thrive in future careers.

Design at its core enables you to imagine a better future and then gives you the tools to actually create it.

Photographer: Edith Whitehead

7. What projects you offer and what the impact of them is?

Through Sisterhood School we work with schools, cultural organisations, clubs, brands & companies in a couple of ways:

  • Social Action Programme – These are 15 week programmes embedded into the curriculum or hosted after-school hours with a group of 12-15 young girls, through which they create a real world social impact project.
  • Design Sprints – 1-2 Day Workshops that give young people an insight into different industries, young people collaborate with industry experts to create a prototype project.
  • Social Action Workshop – Condensing the 15 week programme into 1 or 2 week workshops held in the school holidays.
  • Partnerships – Programmes in which girls are creating projects that apply to the work your business is doing.

8. What does the future look like for Our Sisterhood?

Where do we even begin. The most exciting thing to look out for is a 2 week pop store coming in May/June 2021 which has been made possible through Appear Here’s ‘Space for Idea’ competition. We’ll be popping up as a storytelling lab & bookstore for young girls. There’s lots of work going on behind the scenes to make this happen and some announcements to come about that soon.

We are also really working towards scaling our reach and impact, at the end of the day we want to make sure we are reaching girls in areas that really don’t have access to opportunities such as these and those who particularly face inequalities. This means we are now starting to reach girls, schools, clubs beyond the city and making sure ALL girls have the chance to build a future for themselves.

9. How people can support you?

You can support us in a variety of exciting ways!

Make sure you are following us on social media (@oursisterhood) and are signed up to our newsletter on our website which tells you all about exciting opportunities and events we have going on at Sisterhood.

If you have any wonderful teachers, schools or after-school clubs in your neighbourhood who would really benefit from a programme like this, connect us with them as we do offer taster workshops.

We couldn’t the work we do without our community so if you would like to support young womxn, girls and gender expanding youth through Sisterhood please visit our patreon page  and join our community of incredible supporters.

Finally, if you or your organisation are in need of design services and you would like to work in a meaningful way that creates real, measurable benefit to your users and business – please get in touch.

10. Best place for people to connect?

You can connect with us on Instagram – @oursisterhood or email us directly: [email protected]

If you want to find out more about our programmes, you can find this on www.oursisterhood.co.uk

Photographer: Edith Whitehead

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Self-Employed Training Expenses

Can you expense training costs when self-employed or a sole-trader?

We get lots of questions when it comes to understanding what expenses you can offset against your income as self-employed, and training costs is often one people find confusing. In this guide we are going to provide you with an overview of training costs and the tax implications to help you make decisions for your business.

Can I include training costs as a tax deductible expense if I am self-employed?

The tax deductibility of training costs depends on whether the expense is considered to be training for a new skill or specialism or whether it is updating current skills and professional expertise, for example, continuing professional development (CPD).

CPD and skill updating is generally allowable for self-employed, whereas training for a new specialism or qualification is generally not allowable.

HMRC state:

Provided it is incurred wholly and exclusively for the purposes of the trade carried on by the individual at the time the training is undertaken, expenditure on training courses attended by the proprietor of a business (either as a sole trader, or in partnership with others) with the purpose of updating their skills and professional expertise is normally revenue expenditure, which is deductible from the profits of the business.

In considering the question of purpose, you should not take an unduly narrow view of whether the content of any particular course only updates existing skills of the individual. But if it is clear that, for example, a completely new specialisation or qualification will be acquired as a result of the expenditure, it is unlikely that the expenditure will be wholly and exclusively for the purposes of the existing trade.

Expenditure incurred by the proprietor of a business on training courses for themselves is revenue expenditure if the course merely updates existing expertise or knowledge. Expenditure on a course which provides new expertise or knowledge is capital.

We are going to explain in more detail what training costs can be defined as, the types of training costs that exists and which of these are allowable to offset against your income as self-employed to get to your taxable profits.

What are training costs?

Training costs consist of courses, seminars, webinars and CPD. We can usually put training costs into two buckets:

1) Training for a new skill or specialism (often where a qualification is gained)

For example, you were a hairdresser and you decide to train to become a Personal Trainer. This would be considered a new specialisation and qualification and not linked to your current trade, therefore not tax deductible.

2) Updating skills or expertise (CPD)

Training to update skills within your current trade, for example you are a hairdresser and you attend a course to learn a new colouring technique available. This would be considered tax deductible as its updating a skill used and linked to your current trade.

What is included as training for a new specialism or qualification for a self-employed individual?

Training for a new specialism or qualification falls into bucket 1 above and these costs are generally not deductible for tax purposes. According to HMRC you cannot claim for training courses if they are in relation to:

  • A new trade or business
  • Expanding into new areas of business, including anything not related to your current trade, for example, if you are currently a personal trainer and you train to teach Yoga this would be considered a new area of business.

What counts as updating skills/CPD?

Updating skills means growing or expanding skills you currently already possess or use within your business.

CPD is a term used to describe the learning activities professionals engage in to develop and enhance their abilities. For tax purposes CPD training costs are generally deductible for tax purposes.

According to HMRC ‘You can claim allowable business expenses for training that helps you improve the skills and knowledge you use in your business (for example, refresher courses)’.

For example, if you are a photographer and you attend a course to improve your knowledge in Photography lighting this would count as CPD and is tax deductible.

What is the tax impact?

What does allowable and disallowable mean?

Training for a new skill or specialism is generally not allowable from a tax perspective meaning you cannot offset this expense against your income when calculating your taxable profit.

Skill updating or CPD is generally an allowable expense from a tax perspective, meaning you can offset this expense against your income when calculating your taxable profit. Here is an example:

Income for the year – £10,000

New skill course – £2,000

CPD course – £1,500

For tax you can reduce your income by the CPD amount but not the new skill course, so:

£10,000 – £1,500 = £8,500 = Taxable Profit

You will only be taxed on the £8,500.

What about costs connected to my training course?

It is also worth highlighting that some costs incurred as a result of your ‘CPD/updating skills’ course are also allowable for tax relief, and these include:

  • Public transport
  • Parking
  • Congestion charges and tolls
  • Hotel accommodation if you have to stay overnight
  • Subsistence (food and drink)
  • Business telephone calls and printing costs

An exception to the above is that you can’t claim for travel if the training is taking place at your usual place of work.

Associated training costs, such as books may also be claimed, as long as the training costs themselves are allowable.

Conclusion:

Generally training costs that allow you to start trading or providing a new skill or qualification are not allowable. Whereas training that enhances a current skill you use within your trade is allowable.

We understand this is a complex area with judgement involved so do not hesitate to ask us questions. Our number one rule for clients is ‘No question is a silly question’!

Related questions:

What is a dual purpose expense?

As a sole trader there are some expenses that may fall under ‘dual purpose’ expenses, for example if you have a mobile phone that is used for both business and personal use. You are able to expense the proportion that relates to business use, for example, you could use your phone 60% personal use and 40% business use, you would be able to then claim 40% of the phone cost as a deductible expense against your profits.

We always recommend checking with your accountant before claiming though.

What are Capital Allowances?

Capital allowances can be claimed for assets that you have bought for use over the longer term within the business, such as a laptop. You are often able to claim ‘Annual Investment Allowance’ in the year that you buy the item to save tax in the year of acquisition, rather than over the life of the asset. The rules around capital allowances are complex and we always recommend checking with an accountant like The Orenda Collective.

First time here?

We have also created some other useful content to help you in your business:

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How to Become a Freelance Graphic Designer

There are many reasons why you may want to go freelance. It might be that you are fed up of working for someone else, you would love to be your own boss or you want to choose your own hours and work from home. Whatever the reason, we have put together a guide to talk you through the steps on how to become a freelance graphic designer.

How to become a freelance graphic designer:

  • Choose your business structure
  • Register your business
  • Get a business bank account
  • Get appropriate insurance
  • Understanding record keeping requirements 
  • Understanding accounting and tax requirements

In this guide we walk through each of these steps in detail to give you the confidence and knowledge required to become a freelance graphic designer.

Choose your business structure for your freelance graphic design business

You have decided you want to become a freelance graphic designer, but don’t know where to start. There are multiple options when deciding what structure is for you, the most common structures include:

For the purposes of our becoming a freelance graphic designer guide there are two structures that we will focus on; Self-employed and Limited Companies. For further detail on other business types, please get in touch.

So what is the difference between being a sole trader and a limited company?

To put it simply, being a self-employed/sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.

Do you need an accountant which specialises in graphic designers?

Learn More

Self-employed/Sole Trader

A self-employed individual, often known as a sole trader, does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals earn an income by offering their services or products directly to customers or businesses. They are required to win design work or customers themselves and take responsibility for the success or failure of their freelance graphic design work. As a freelance graphic designer this would mean you would have to go out and find clients yourself.

Benefits of a freelance graphic designer being self-employed

  • Simple freelance business structure without the administration burden of a Limited Company
  • Free and simple registration of your business with HMRC
  • Flexible freelance business structure that can later transition to a Limited Company

Considerations of a freelance graphic designer being self-employed

  • You are personally responsible for any losses the freelance business makes
  • You are taxed at income tax rates which can be less tax efficient than operating as a Limited Company
  • Potential Clients may see sole traders as less attractive than Limited Companies

What is required of you as a self-employed individual

  • Register with HMRC at gov.uk
  • Record keeping of all income and expenses
  • Submit a tax return each year

Limited Company

Many of the indicators of a self-employed individual also apply to owners of a limited company, however, instead of being self-employed you are considered both an owner (shareholder) and office holder (director) of a limited company.

A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets as a freelance graphic designer.

Benefits of a freelance graphic designer operating as a Limited Company

  • Retain more of profits by utilising tax efficiencies
  • Limited personal liability, this means that if a Company is in debt, the personal assets and finances of the shareholders will be protected by law
  • Limited companies have a certain level of prestige in terms of brand image that sole traders do not

Considerations of a freelance graphic designer operating as a Limited Company

  • More complex and expensive to set up than a sole trader
  • Limited company accounts and tax are more technical than a sole trader
  • There are additional costs incurred when operating a limited company

What is required if you register as a Limited Company

  • Incorporate your company with Companies house and register for company tax with HMRC
  • Record keeping of income and expenses in line with company regulation
  • Submit Financial Accounts and Corporation tax return each year (as well as a self-assessment tax return for you as a director and shareholder)

Further information on both structures can be found in our blog on setting up as Self-employed versus Limited Company.

So which should I choose?

Ultimately the choice as to whether operate as a sole trader or a limited company is completely up to you and personal to your specific situation.

If you are looking for a simple way to set up as a freelance graphic designer then a sole trader is probably the best place to start. However, there are certainly many advantages to operating as a limited company, especially if you intend to grow and scale your business in the future.

Whichever option you are leaning to we always recommend you discuss it with an accountant to get their professional opinion and ensure you are set up correctly from the start.  We offer a free consultation call for new clients, contact us here.

Registering yourself as a freelance graphic design business

Once you have decided on an operating structure you will register your freelance graphic design business. The process is different for sole traders and limited companies.

Self-employed/Sole trader registration

Registering as a sole trader is fairly straightforward, you must create a government gateway account with HMRC and complete the registration from.

You’ll receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days and subsequently you will receive an activation code. You will need your government gateway log in details and UTR number to file your taxes, so make sure to keep it safe.

Once you are registered you will be required to keep on top of your record keeping and deadlines for filing your tax return.

Limited company registration

To start up as a limited company there are a few more steps that need to be taken.

  • Decide on a company name
  • Decide who will be the director(s) of the company
  • Decide who will be the shareholder(s) of the company
  • Prepare documents on how to run the company (articles of association)
  • Incorporate your company with Companies House
  • Register for Corporation Tax (and other taxes such as PAYE and VAT as appropriate) with HMRC

We would recommend using a professional to help you with registration of a Limited Company to ensure you meet all of the legislation requirements.

Apply for a bank account for your freelance design business

The number one thing you should always do when you set up as a freelance designer, whether you are self-employed or a limited company, is set up a business bank account specific to your freelance design work.

Setting up a business bank account means that you are able to keep all of your graphic design income and expenditure separate from your personal finances. This makes is much easier when you come to your tax and accounts at year end. Furthermore, as a Limited Company you are required to have a company bank account as the company is a separate legal entity in its own right.

What is required to set up a bank account?

It is easy to set up a bank account. You will provide the bank with the following information:

  • Business name and address
  • Photo identification such as a driver’s license or passport and proof of address
  • They may require a letter from your accountant

What banks could I look at?

You can apply for a business bank account from most banks. You could choose a traditional high street bank or an online bank.

There are a few things you should consider whilst deciding which bank to go with such as:

  • Are there any extras/benefits you will receive as part of using that bank account?
  • How quick is it to set up?
  • Is there a fee? If so, is it a one off fee or monthly?
  • Is there an app?

Apply for appropriate insurance

As a freelance graphic designer there are many types of insurance that may be applicable to you, such as public liability insurance, employers liability and professional liability insurance.

Public Liability Insurance

Public liability insurance is an insurance product for business owners. It protects you in case your business is brought to court by a client, a customer or a member of the public. If your business is sued, public liability insurance will cover the cost of your legal defence, plus any compensation or settlement money you have to pay out.

Public liability doesn’t cover any injury to yourself or your employees. It covers the cost of legal action and compensation claims made against your business if a third party is injured or their property suffers damage while at your business premises or when you are working in their home, office or business property.

You’re not legally required to have public liability insurance, but if you’re a business owner the chances are you’ll need it. Public liability insurance covers your costs if someone else sues your business – and without cover, unexpected legal costs could bankrupt your business.

Public liability insurance is particularly important if your business involves interacting with the public. If a customer has an accident on your premises, they might sue. You may still need public liability insurance if your business doesn’t have a physical premises. If you’re a freelance graphic designer, you could accidentally damage a client’s property while visiting them. Even if you sell your services from home, there’s always a chance that a customer could bring you to court.

Employers Liability Insurance

Employers’ liability insurance covers you and your business for compensation costs if an employee becomes ill or injured as a result of the work they do for you. It’s legally required of all businesses with one or more employees.

Employers’ liability insurance is a legal requirement if you have employees – including many types of subcontractor. If you are caught without cover, your business can be fined up to £2,500 per employee per day.

Professional Liability Insurance

Professional indemnity insurance can cover compensation payments and legal fees if a client makes a claim against you. The compensation payment will usually take into account the financial loss that the client has suffered.

Imagine, for example, that you are handling client data, but you or an employee copies the wrong person into an email when sending on the data. Your client sues you for breach of confidentiality. In this case, your professional indemnity insurance could pay for the cost of the compensation claim, along with legal expenses.

Professional indemnity insurance isn’t mandatory under the law, but, as mentioned above, protects you and your business if something goes wrong. It’s also required by some client contracts.

How much are these insurances for freelances graphic designers?

The cost of insurance will differ depending on the size of your business and the services you provide. There are a lot of comparison search engines online which will help you decide which insurance is best for you and your business, speaking to an insurance broker will also allow you to get quotes from a variety of insurers.

Understand your record keeping requirements

The requirements for record keeping for sole traders and limited companies are different.

Self-employed/Sole Trader

As a sole trader you must keep records of your graphic design income and expenses for your tax return.

Types of proof include:

  • All receipts for goods, services and stock
  • Bank statements
  • Sales invoices, till rolls and bank slips etc.

How to keep track of records?

As a sole trader it is possible to keep track of records in a spreadsheet (though this is likely to change in the future with the implementation of Making Tax Digital for income tax). We would recommend looking at your records on a regular basis e.g once a month and entering all income and expenditure into a spreadsheet. This means when you come to complete your tax return at the end of the year you have all your details in one place. As a sole trader you could also use an accounting software system, see limited company section for further details regarding accounting software.

Limited company

As a limited company you are required to keep more records than as a sole trader.

Records about the company

  • Details of directors, shareholders and company secretaries
  • The results of any shareholder votes and resolutions
  • Any details for the company to repay loans at a specific date in the future and who they must be paid back to
  • Details for the company to make payments if something goes wrong and it’s the company’s fault
  • Transactions when someone buys shares in the company
  • Loans or mortgages secured against the company’s assets

Accounting records

  • All money received and spent by the company, including grants and payments from support schemes e.g. coronavirus support scheme
  • Details of assets owned by the company
  • Debts the company owes or is owed
  • Stock the company owns at the end of the financial year
  • All goods/services bought and sold and who you bought and sold them to and from

How to keep track of records?

As a limited company we would not recommend keeping track of your records using a spreadsheet. We would instead recommend you use an accounting software.

The benefits of using cloud accounting software is that it provides 24/7 access to all your financial data from anywhere in the world, electronic filing for all of your invoices and receipts to minimise the need for paper and integration with multiple applications such as Hubdoc, Shopify and PayPal.

This could mean for example that when you invoice for a piece of branding work you have completed for a client the software will automatically speak to PayPal and when the client pays the records will be updated in the system to show the invoice as paid without you having to do anything. The other great thing is that your accountant has real time access to the software to help you with any queries you have.

Examples of accounting software are Xero, Quickbooks and Freeagent. As partners of Xero we would highly recommend this as a great tool but as always research to decide which software suits you best.

Understanding you accounting and tax requirements

There are different requirements for sole traders and limited companies when it comes to accounting and tax

Self-employed/Sole trader

As a sole trader you are required to complete a self-assessment tax return at the end of each tax year. You will be required to complete the tax return including detail from the 6th April in one year to the 5th April the following year and you have until the 31st January after the tax year ends to file your tax return (assuming your year end is in line with the tax year).

For example:

You register as a freelance graphic designer on the 6th April 2020, you will complete a tax return for the year ending the 5th April 2021 and you will have until the 31st January 2022 to complete the return.

You must include all taxable income on your self-assessment tax return.

As a sole trader you can complete the return yourself on the HMRC website or you can engage an accountant to complete it for you.

Limited Company

In keeping with the trend of limited companies being more complex, there are more accounting and tax requirements for a company.

As a limited company you must complete the following:

  • Corporation tax return to the financial year end
  • Company accounts to the financial year end
  • Confirmation statement
  • Dividend vouchers & minutes
  • VAT returns (if appliable)
  • PAYE returns (if applicable)

For your corporation tax and company accounts you have until 9 months after your financial year end to complete them.

For limited companies, the financial year is generally set according to when the company was incorporated. In the UK, companies are given an accounting reference date (ARD) which refers to the last day in the month the company was incorporated.

For example, if a company incorporated on 20th of May, their ARD would be the 31st of May. Their financial year would therefore run from June 1st – May 31st.

What happens if you miss your deadlines?

If your deadlines are not met, as either a sole trader or a limited company you will incur penalties and often interest.

To ensure you comply with financial regulatory standards we would recommend using an accountant to complete these for your company.

Round up

You may be feeling overwhelmed by the information detailed within this guide, so to break it down the next steps to do are:

  • Decide if you will operate as a sole trader or as a limited company
  • Register as self-employed or incorporate your company
  • Open a business bank account
  • Apply for appropriate business insurance
  • Decide how you will maintain your records; spreadsheet or accounting software
  • Put the accounting deadlines in your calendar so you ensure you meet all requirements

A great idea before deciding on any of the above, would be to speak to us about becoming a freelance graphic designer. We will make sure you understand exactly how to get started and ensure you are being tax efficient and complying with all the rules and legislation.

If you would like to get in touch with us, we offer a free no obligation consultation where we can discuss all of the above steps and support you in your journey to becoming a freelance graphic designer.

Related questions 

What is a confirmation statement?

A confirmation statement (CS01) is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders, share capital and people with significant control.

What is a Limited Liability Partnership?

A Partnership is an arrangement between two or more people to manage and operate a business and share its profits. The profits are shared in line with the agreed partnership terms, for example if there were two partners this could be 50% for each partner or 75% for one partner and 25% for the other.

For example, Accountants, Doctors, Dentists or Solicitors often operate in a partnership.

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Should I register as Self-Employed or a Limited Company?

Self-Employed vs Limited Company

Setting up a new business is an exciting period, though often we hear from business owners that they aren’t sure which structure is right for them. This guide will explain the high level advantages and disadvantages of each structure so that you can make an educated decision as to which structure suits you best.

As a self-employed individual you would be personally responsible for the businesses debts, meaning your personal assets could be at risk. Whereas operating as a limited company offers limited liability therefore reducing the risk to personal assets. This is because you and the company are seen as separate legal entities.

Generally speaking, limited companies stand to be more tax efficient than self-employed businesses, as instead of paying income tax companies pay corporation tax on their profits. Additionally, there is a wider range of allowances and tax deductible costs that a limited company can claim against its profits compared with a self-employed business.

Both self-employed individuals and directors of limited companies are required to submit a Self-Assessment to HMRC, but those operating a limited company must also submit extra paperwork to regulatory authorities (CT600, Annual Accounts to Companies House, Confirmation Statements, VAT returns if VAT registered and Payroll submissions if operating a Payroll). The administrative burden of a self-employed individual is therefore considered less than that of a limited company.

Key points to consider when determining whether to register as Self-Employed or a Limited Company?

  1. Expected income and profits of the business
  2. Your other earnings and personal tax position
  3. The level of personal risk or financial liability you are comfortable taking
  4. Brand perception and customer preferences
  5. Future plans and flexibility required for the business

Deciding on the best legal structure for your business is a crucial decision and one we recommend you consider carefully, where possible taking the advice of an appropriately qualified accountant.

There are a number of advantages and disadvantages for each structure that you will need to weigh up in order to determine which business structure is best for you.

What does being self-employed or a sole trader mean?

A self-employed individual, often known as a sole trader, does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals earn an income by offering their services or products directly to customers or businesses. They are required to win work or customers themselves and take responsibility for the success or failure of the business

Sole traders often have multiple customers at one time, and are responsible for determining their own working pattern and place of work. Additionally, they are generally required to provide any tools or equipment required to complete their service or product offering.

Examples of self-employed individuals are:

  1. A hairdresser or beautician that provides their services from home, is responsible for buying the products required for treatments and for marketing their services to potential customers.
  2. A photographer that purchased their own photography equipment, schedules their own shoots and has multiple clients they take photos for.
  3. A coach that advertises their services, pays expenses such as insurance, zoom etc. and organises their coaching sessions directly with their clients.

What does operating as a limited company mean?

Many of the indicators of a sole trader also apply to owners of a company, however, instead of being self-employed you are considered both an owner (shareholder) and employee (director) of a limited company.

A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets.

This means, that should the company fall on hard times and be unable to pay suppliers for example you as the business owner would not be responsible for settling the company’s debts with your personal funds.

Limited companies come in all shapes and sizes, some examples are:

  1. A marketing and branding company, that is owned 50/50 by 2 shareholders and directors, that employees 2 administrative staff on a casual basis and subcontracts specific client projects to self-employed individuals.
  2. A graphic design company that is owned by one shareholder and director that works with multiple clients on a fixed price project basis and from time to time subcontracts work during busy periods to other designers.
  3. A service provider that sells a variety of trade services to business and consumer customers

Self-employed/ sole trader vs limited company

Setting up as either structure will bring its own advantages and disadvantages, so starting with the self-employed option let’s delve into the detail.

Benefits of being Self-Employed

  • Relatively straightforward and easy to set up and register HMRC, the registration is also free
  • A simple way to operate your business without the administrative burden that comes with running a limited company. For example only required to file a self-assessment tax return for HMRC annually
  • Offers greater privacy than that of a limited companies whose details are published at Companies House
  • Broadly speaking self-employed businesses are easy to close and also simple to transition to a limited company in the future

Considerations of being Self-Employed

  • Sole traders or self-employed individuals have unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As such, self-employed individuals could lose personal assets if things go wrong
  • Raising finance can be tricky, as banks and other investors tend to prefer a limited business. This limits the expansion opportunities of sole traders or self-employed individuals
  • Tax rates on self-employed individuals aren’t always as favourable as they are on limited companies. When you reach a certain level of earnings, it might not be as lucrative to stay self-employed as the tax rates are higher
  • Clients or customers may see sole traders or self-employed businesses as less attractive than a limited business, this is because there is a certain prestige that comes with being limited

Benefits of being a Limited Company

  • Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company
  • Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection, it is worth noting though that it does not give you the same protection as a trademark.
  • Generally speaking, limited companies stand to be more tax efficient than self-employed businesses, as instead of paying income tax companies pay corporation tax on their profits. Directors then extract personal income from the company through a combination of relatively low salary and dividends. You could for example take a salary below the tax-free allowance, and assuming you have no other income (e.g. from another job or a rental property) it would not be subject to tax and only attract minimal national insurance contributions if any. Then you could take the remainder of your required income as dividends assuming there is adequate profit generated, which are subject to lower tax rates than income tax. Additionally, there is a wider range of allowances and tax deductible costs that a limited company can claim against its profits compared with a self-employed business
  • A limited business has a certain level of prestige in terms of brand image that sole traders do not. Generally people consider a limited business as an established business, often making them appear more professional than sole-trader businesses, though in reality this may not always be the case
  • Operating as a limited company can make it easier to attract clients, investors and obtain debt compared with other business structures
  • As a director of a limited company, you can make company contributions to a personal pension scheme. This means the company gets the tax deductibility of the pension cost and the director doesn’t have to pay to take the money out of the company and then invest it into a pension, resulting in tax savings

Considerations of operating as a Limited Company

  • Operating as a limited company brings added responsibilities. These come in the form of what’s called the Director’s Fiduciary Responsibilities, which basically outline what a limited company director must do legally. You’ll need to file a yearly annual return for one, as well annual accounts
  • These added responsibilities of being a limited create a layer of cost as you will need to hire an accountant, compared with being self-employed where it is possible to do your tax return yourself (though many self-employed people opt to use an accountant due to the tax advisory element)
  • It can also be more time-consuming to operate a limited company, as you’ll need to deal with this extra responsibilities and paperwork, you will also need to pay a fee to register the company
  • In contrast to sole traders information on your business can be found via the company register, details on directors and your company’s earnings required to be shown publicly (though do bear in mind ‘small companies’ as defined by the Companies Act 2006 have less disclosure requirements). This sort of transparency may not appeal to all

Simple summary Self-employed vs Limited Company:

Sole trader/ Self-Employed

Limited company: you are director & shareholder
You are the business. The business is a separate legal entity.
You are the owner. You are a shareholder; you hold all or a proportion of the company’s share capital.
You are the manager or proprietor. You serve the company as its officer as a director.
In the event of any legal dispute, you will be sued personally unless you have suitable insurance e.g. products and services liability, professional indemnity, employer’s liability etc. In the event of any legal dispute, the company will be sued unless it has suitable insurance cover. It is exceptionally difficult and rare under UK law for anyone to sue a director personally for a company’s wrongdoing. It is worth noting however, that there are exceptions where the ‘corporate veil’ may be pierced and a director may be held personally accountable.

Employment status

You are self-employed; you cannot be your own employee.

Employment status

A director is an office holder, this does not automatically make you an employee in terms of employment law, the National Minimum Wage or for Tax Credits.

For Income Tax and National Insurance purposes company officers are treated as employees.

Insolvency

If the business fails you will be personally (or jointly with your partners) liable for its debts. You may go bankrupt.

Insolvency

If the company fails, your liability is limited to the amount unpaid on your shares (if any) unless you have made a personal guarantee for the company’s borrowing (which is often required by banks).

As a director, you can be held personally accountable if you continue trading when your company is insolvent and this causes financial loss to creditors. This could result in your personal bankruptcy.

Tax on profits

You pay Class 2 & 4 National Insurance and Income Tax on the taxable profits of your business.

Your profits are subject to income tax rates in the year you earned it.

Tax on profits

The company pays corporation tax on its taxable profits. Company tax rates are lower than higher rates of Income Tax.

Employees and officeholders are subject to PAYE and NICS on their earnings from employment and many benefits attract Income Tax too.

Shareholders are subject to Income Tax on Dividends.

Accounts

There is no requirement that you prepare accounts for tax purposes. You may find that it is difficult to keep on top of your business, collect debts and work out profits without keeping accounts.

You may need annual accounts to complete your personal tax return which includes a balance sheet section.

Your taxable profit under Self-Assessment must be prepared in accordance with Generally Accepted Accounting Practices (GAAP) for tax purposes unless you are cash accounting.

Accounts

You must prepare annual accounts under the provisions of the Companies Act, these can be abbreviated for filing with Companies House.

HMRC require full accounts for the CT600 which must be submitted online in iXBRL format.

Accounts must be prepared in accordance with accounting standards.

Related questions

What is a shareholder?

A share is a piece of a company, each piece represents a certain percentage of the company. Anyone who owns shares in a limited company is called a ‘shareholder’. The number of shares held by each shareholder determines how much of the company they own and control.

If you intend to be the sole company owner, you will need to be the sole shareholder of the company. However, if you intend for two or more people to own the Company you will need two or more shareholders. It is very important you consider what the share ownership structure will be and what the value of the shares will be.

Take note that if you have more than one ordinary shareholder any dividends you decide to take will be split by the percentage of your shareholding, for example, if two of you both have 1 share each then any dividends paid would be split 50% each.

What is a director?

A company must have at least one director. Directors are legally responsible for running the company and making sure accounts and reports are properly prepared.

This includes:

  • the confirmation statement
  • the annual accounts
  • any change in your company’s officers or their personal details
  • a change to your company’s registered office
  • allotment of shares
  • registration of charges (mortgage)
  • any change in your company’s people with significant control (PSC) details

You can hire other people to manage some of these things day-to-day (for example, an accountant) but you’re still legally responsible for your company’s records, accounts and performance.

When must I register as a sole trader/ self-employed person?

You must register as self-employed if you earned more than £1,000 from self-employment in a tax year. We recommend you register as soon as you have reached this limit, but the absolute latest you can register is 5th October following the end of the tax year.

When do I need to register a limited company?

You must register a company before you start trading, as effectively if you don’t you are just operating as a sole-trader/self-employed.

Am I self-employed if I have a limited company?

As a director of a company there are specific rules that mean you are treated as an office holder by HMRC, rather than self-employed. This means any payments you receive for your role as a director must be as salary and subject to PAYE.  This does not change the fact that if you are also a shareholder you can receive dividends from the company which are taxed as investment income rather than income tax.

Does a limited company have to be VAT registered?

A limited company does not need to VAT register automatically. The same rules apply whatever your business structure, they stipulate that you must register for VAT if your VAT taxable turnover goes over £85,000 (the threshold) or you know that it will. Your VAT taxable turnover is made up of the total of everything sold that is not VAT exempt.

You must register for VAT if:

  • You expect your VAT taxable turnover to be more than £85,000 in the next 30 day period
  • Your business had a VAT taxable turnover of more than £85,000 over the last 12 months

You may also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.

Book a free consultation

Ultimately which option is right for you and your business depends on a number of factors, and is often a complex decision with lots of pros and cons of either business structure. That is why we always recommend speaking to an accountant before choosing either structure. We offer a free no obligation consultation so we can discuss your specifics, give advice and you will have the opportunity to ask questions so you feel confident and comfortable with your choice.