UKC

I have a pipe dream of starting up a small venture selling stuff on-line. But my only problem is that I work for an employer and I've never worked for myself.

What steps should I take to keep the Taxman happy, and what steps should I take to ensure the fewest beginner mistakes of a single person earning a living?

For example what is a Sole Trader and do I need a business bank account?

I have no intention of having other people work with for, or along side of me. But this could change if I make the Big Time and earn tens of pounds.

I'm sure there are many questions that I do not know about or have even considered but I'm after first steps advice sort of stuff.

I did send an email to HMRC but never got a reply.

Cheers muchly

Sorry I've not been around much.

I registered with HMRC as a sole trader and used to fill in a tax return to reflect this. I was also latterly working for an employer as well for a couple of years so still continued filling in the self assessment form. My income from self employment was never great so the form was usually pretty simple. Keep records of all your expenses. Being a techno dinosaur I used the green Simplex D account books (used to get them from WH Smiths). The physical act of writing in the figures every day/week/month I found helped order my thoughts. The books show you what categories the various expenses can be recorded under. Eg if I had a meal 'on the job' I think it went under 'Travel and subsistence'?

You're tax except for revenue under £1000 per year.

So if you dabble and it doesn't take off and you stay under £1000, the tax man doesn't need to know.

Above this it's all in the self assessment forms which are due 31st Jan on the following tax year.

Best tip, record everything, every sale, cost, anything and keep all receipts/invoices. Take notes of what the costs were.

Gentlemen, thank you.

I have one more question that confuses me, simply because I've never needed to worry or know about it, and its what is VAT and what do I need to know about it?

Is it simple or do I need to do a lot of research on the do's and dont's

Look up 'VAT threshold 2024'.

You've got a tidy sideline going if you become liable for VAT!

If your turnover will exceed £85k pa you will need to register for VAT, and charge it at the going rate to your customers, reclaim the VAT element from your suppliers invoices, and hand over the difference to HMRC. If you are purely UK based, not such a problem; if you import stuff, good luck........

I think you have to earn above a certain amount to bother recording/reclaiming VAT. I never did. As Monty says, keep good records and do them regularly. It's good sense and helps you see how things are going.

VAT doesn't kick in until you start turning over about £85,000 so not something to worry about until you hit the big time.

I started running my own business in 2005 as a sole trader. I’m currently still doing it part time, as well as being employed by a local University. 
 

The tax return seems simple. After registering with HMRC you just need to submit expenses, income, and details of interest on bank accounts, dividends from shares, and employment income etc. They calculate the tax and send you invoices twice a year. One thing to watch for is the first year it seems like you have lots of money as you haven’t yet paid the tax. Then you pay for the first year of tax, and half the second year of tax which knocks your bank balance down quite a bit. 
 

I never registered for VAT because my income is below the VAT threshold (apparently £85k at the moment). That means I don’t charge VAT when I issue invoices, and I don’t claim it back on expenses. Basically I just don’t need to worry about it. 

I got a business bank account just to keep things tidy and separate. It was free for a few years but now I get charged a £7 maintenance fee a month. There are also fees if someone pays me by cheque. Not really convinced I’d do the same if I I did things again but it’s a pain to change now.

Finally, as a sole trader insurance is important. I want cover so people don’t come after me personally if I make a mistake.

Hope this helps. 

Not much to add from my forty years of various forms of self-employment mixed with working for others.

The bank account thing is worth checking as many personal accounts have conditions in them that prevent business use.  I should say that I do put mine through one of my personal accounts now as has become simple, but used to have business accounts.  It does help to keep things separate, though it usually costs more.  More significantly, there are examples of banks closing personal accounts when they realise business transactions are included - possibly to do with risk (?).  It can also be a bit more of a mission to be approved for a business account, especially early on.

To keep taxman happy, just record sales and detail all your allowable expenses.  The tax return is actually very straightforward and they keep making things easier - annual investment allowance or the ability to lump all your expenses together if you wish.

Good luck!

I will be importing stuff. Will that make things interesting for me?

That does sound important. From what I've gleened, as a Sole Trader I am responsible for anything that goes tits up?

UKC comes through again.

You are all stars.

I've had my questions answered this morning. And I learned far more that what I read aimlessly over the internet for the last couple of weeks.

Don't think I'll be pulling in £85k, well not in this lifetime. But I can dream. 😂

Do I have to register with the Taxman if I want to be a Sole Trader please?

Yes, you do (unless your turnover is below the £1000 trading allowance limit).

Note: the VAT threshold is £85k TURNOVER, not EARNINGS.

And this is where my brain hurts. I don't know the difference.

Bit confused. Which of my questions does this apply to please?

Turnover or Revenue is the total money coming in. In otherward your total sales.

Earnings, or profit, is what you are left with after you deduct all your costs (like buying whatever you sold, paying insurance etc).

You pay VAT on your revenue.

And you pay income tax (or corporate tax if you set up a limited company) on your profit

Turnover is the total sales made by the business.  Earnings is what's left after you've subtracted all the costs from the Turnover.

Example:  Lemming Corp buys a widget from somewhere for £90.  Lemming Corp then sells the widget to Dave Todd Ltd for £100.  Lemming Corp has a turnover of £100, costs of £90, hence earnings of £10.

Hope the above is correct - I'm not an accountant!

Depends where from. I was importing stuff from the Germany and selling in the UK, but not over the VAT threshold so only had to pay German VAT on supplies, accounted for by the supplier (so no different from buying from a uk supplier). I dont think it has changed much post brexit on the VAT front, but there are other trade barriers put up that certainly has made life more difficult for small hobby / lifestyle businesses. I stopped trading as a result; it was no longer viable.

So I have a Turnover/Revenue of £100

Costs £90 Because that is what I paid for the widget.

Profit £10. This bit is not taxed in any way and I can trouser it?

So I pay VAT to the Taxman on the £100 Turnover/Revenue?

Very confusing but I will get my head around this.

I'm hoping to get stuff from China.

Is this a world of pain?

That's my understanding. I take out public liability insurance and professional indemnity insurance. The latter is expensive if you are considered high risk - mine originally cost £50 a month because I didn't have policies and contracts with companies I worked for. More recently I've found cheaper alternatives. It seems worth having for the peace of mind that I have insurance that covers me if I make a mistake that causes a customer loss of business or income.

Sole trader vs limited - if you have large jobs, or high value outlay. Limited protects you (mostly) and your house etc from being taken if it all goes wrong/ customer goes bankrupt etc.
If the business has a number of owners, then limited also makes it easier to carve up due to shares. 
Limited directors also get dividends which can be more tax efficient (currently) than paying PAYE type tax brackets, especially if youre a high earner.

Sole trader is cheaper and "easier" to run as a smaller business. But any debt which you accrue the debtors can hold you personally liable - enter "lost my house" territory if the debts are large enough. 

My advice - dont underestimate the time and effort it can take for the "back office" aspect of running a business - keep on top of it with efficiency. If you can, sell items rather than your time - number of items can be scaled up, your time can not exceed 24hr/day without becoming an employer. 
Debt is bad, risk is bad, customers can and will go bust/ not pay. Cash flow is king, as is the ability to take the money before giving the item/ service. 

Good luck. 

Not necessarily a world of pain, but its hard work! However, as they say, its not work if you enjoy what you are doing......

What sort of stuff are you looking to import?

Depends how you're trading - I run my own limited company, so my company has to pay tax (called Corporation Tax) on that profit.  Not sure how this works for a sole trader (but I'm sure someone else on here will know!)

If Lemming Corp had a turnover above £85,000 per year then Lemming Corp would have to be VAT registered.  Which would mean that they would have to add VAT to the cost of the widget that they sold to Dave Todd Ltd.  Let's keep it simple and pretend that Lemming Corp still want to make £10 profit on that widget.  They now sell the widget to Dave Todd Ltd for £100 + VAT.  If the VAT rate on widgets is 20% then Dave Todd Ltd pays £120 to Lemming Corp.  Have Lemming Corp just made a profit of £30?  Sadly not, because Lemming Corp has to pay that VAT (£20) to HMRC.

You're doing fine - it's not a race!

Not quite.

So in this scenario we're assuming you are a VAT registered sole trader.

The numbers above need to change as you'll be operating at a loss.

You bought widget for £50.

When imported you had to pay VAT on it at 20%, so the item has not cost you £60 (£10 VAT).

You sell it for £96 to the public. You must include the VAT when you do this as you are VAT registered.

At 20% the VAT owed by you on this item is £16.

As you are VAT registered, you get to claim your original £10 VAT on the item back. So your total VAT bill is £6.

So the maths is: £96 - 6 - 60.

Your profit is then £30.

You will need to pay income tax on this.

Income tax varies based on earnings, but I've found 25% is about typical.

So you get to buy £22.50 worth of chips.

I hear Sex Traffic is a good business model. There is a chap called Andrew Tate and I've seen a few YouTubes he's done. Seems he's living the dream. No Idea what he's up to now as I'm working my way through his older stuff.

No Spoilers please!

That analogy helped explain everything for me.

I'm guessing there was a typo in the last bit. I'm guessing the sentence should read "..., so the item has NOW cost you £60(£10 VAT)"

With the Public Liability Insurance.

I don't think that I will come into contact with anybody, unless this includes postmen and delivery drivers dropping stuff off at my door?

It's so hard to spot your own mistakes. I read my sentence about five times before noticing the "not". Yes, should be "now"

So glad that was cleared up. Started to poo myself.

Remember that it is £85 k of turnover (not profit), so it can be reached pretty quickly depending on how the business is organised.  If I'm a builder and I include materials in my quote, I'd get there with a couple of medium extensions.  It is why some smaller builders will ask the customer to pay directly for materials.

I think the VAT aspect is cleared up down thread, but another key point is that the turnover minus costs equals profit is indeed taxed!  Your net profit (assuming turnover is more than £1000) is taxed like any other income.  You can 'trouser it', but you are likely to owe tax on it.  This depends on all sorts (like other income - pensions, earned income from a job, share dividends, rental income and so on).  Add all these up to get total income, then deduct your personal allowance to give total taxable income.  You then owe 20% on the first block of this, until you reach the higher rate thresholds (40% etc.).

Thank you Derek and everybody who has helped. You have all helped my fuzzy brain get to grips on this.

Just one small point - in my experience, His Majesty's Revenue and Customs  aren't out to 'get' you. If you don't try and fiddle them, they won't come down on you. If you're honest, and keep decent records (what you've purchased, what you've spent on expenses, and what you've sold, preferably so you can show those outgoings and incoming in a bank account), then you're not their target and they can be surprisingly helpful. 

The HMRC chap on the phone was very helpful with me today asking rudimentary questions. Being an ex-civil servant who's worked on phones, I know how bored he must have been answering the same questions day in and day out. he was very helpful especially as I was so respectful and not trying to piss him off.

The only people that answer the Phone at HMRC are the "Taking money off you dept" , all other phone calls allow up to 60mins on hold.

I was on hold for 30-40 minutes.

Better than ringing my own GP Surgery which has an average of 50 minutes. Now that's shocking!

Wish my GP had the capability to keep you on hold that long. Their phone queue is a maximum of 10 people, so surprisingly quick IF you can actually get into it rather than just the 'sorry all our lines are busy, please try again later' message.

I’ve been a sole trader in the past and it wasn’t onerous - you need to keep sufficient records about your PAYE, your savings’ interest, and your sole trading to do self assessment.   (Also rental income if you’re in to that sort of thing; I’m not)

The UKC collective has all the advice for you on that, so I’ll take a slightly different angle - have you read through your employment contract to check that it doesn’t restrict you from additional employment/trading?  I know nothing about the ambulance service so I might be worrying about nothing, but I do know that every job contract I’ve ever signed has a had clause that I won’t take on other work without following some negotiation/agreement process with my then-employer.

Have no fear, I will be keeping my employer sweet and fully in the loop.

cheers

One small thing that I think has gone unsaid is that while the threshold at which you have to register for VAT is £85k, you can voluntarily register below that. Whether that is useful or not is a different matter; if you sell predominantly to other VAT-registered entities and have lots of expenses in your line of trading, it's probably worth it. If your customers are the general public, suddenly the price they're paying is 20% less attractive.

Anyway, welcome back - you've been away for a while haven't you?

Has anyone mentioned 'losses'? Not everyone who starts a business manages to show a profit at first. It can be expensive getting set up and then moving things forward. Unless things have changed, you can carry these losses forward into succeeding tax years to offset against (hopefully!) tax due in years when you do turn a profit. I think it took me a couple of years to start being profitable as a sole trader.

Hmmmm. Ambulance type......suddenly starting an import company.......

You're importing PPE and on the VIP list, aren't you?

Can I borrow your yacht? Pretty please? 

My GP has been brilliant recently. They changed system about a year ago. It was bad before the change.

All you do now, is fill an online form. They assess it, normally within an hour or two, then call you to make an appointment. Same day if it sounds critical, or in a few days if it's minor.

If you can't use the internet, reception will fill in the form for you over the phone, but the process is the same.

Keeps the lines free, as most patients would rather use the form anyway.

What was this thread about again?

Worth getting a separate bank account (business) some you can get for free (depending on income and features needed) but linked to this it is worth keeping an eye on the requirements for Making Tax Digital (MTD) -i.e having to use a HMRC approved software or bridging software to do your returns digitally. If you are VAT registered this has to be done already but the MTD deadline for sole traders keeps moving - currently it will be April 2026 if total income as sole trader (inc any property income) is £50k and 2027 for over £30k. This is important as some business accounts have free or cheap use of such software and so worth planning ahead for this.

Also for VAT it is important to know the £85k threshold is a rolling total and not per tax year - so for example if you have a really good January and a great May you might still go over in a 12 month period, even if the normal tax year turnover is below the threshold.

you'll need to read this and act accordingly 

https://www.gov.uk/guidance/tariffs-on-goods-imported-into-the-uk

the prices you see on alibaba do not include any import duties, and if you have already ordered small quantities you'll have noticed the low value on the sticker on the box - this is 'fraudulent' but tolerated for personal imports. Business will have to pay the import duty and pass that onto the end customer. However, I know of a small business that has outsourced the manufacturing of their products to china and once set up I think the import duty submissions are manageable. If you import a container full of whatever you are selling I'm sure the effort will be worthwhile. if you are re-selling from a range of different items you'll have to admistrate a lot of paperwork. And don't expect the seller or shipper to support you. The goods will arrive and get impounded until all import duties are recorded and paid. And if you sell into Northern Ireland I think you will have to administrate every sale accordingly now.

you'll need to read this and act accordingly 

https://www.gov.uk/guidance/tariffs-on-goods-imported-into-the-uk

the prices you see on alibaba do not include any import duties, and if you have already ordered small quantities you'll have noticed the low value on the sticker on the box - this is 'fraudulent' but tolerated for personal imports. Business will have to pay the import duty and pass that onto the end customer. However, I know of a small business that has outsourced the manufacturing of their products to china and once set up I think the import duty submissions are manageable. If you import a container full of whatever you are selling I'm sure the effort will be worthwhile. if you are re-selling from a range of different items you'll have to admistrate a lot of paperwork. And don't expect the seller or shipper to support you. The goods will arrive and get impounded until all import duties are recorded and paid. And if you sell into Northern Ireland I think you will have to administrate every sale accordingly now.

you'll need to read this and act accordingly 

https://www.gov.uk/guidance/tariffs-on-goods-imported-into-the-uk

the prices you see on alibaba do not include any import duties, and if you have already ordered small quantities you'll have noticed the low value on the sticker on the box - this is 'fraudulent' but tolerated for personal imports. Business will have to pay the import duty and pass that onto the end customer. However, I know of a small business that has outsourced the manufacturing of their products to china and once set up I think the import duty submissions are manageable. If you import a container full of whatever you are selling I'm sure the effort will be worthwhile. if you are re-selling from a range of different items you'll have to admistrate a lot of paperwork. And don't expect the seller or shipper to support you. The goods will arrive and get impounded until all import duties are recorded and paid. And if you sell into Northern Ireland I think you will have to administrate every sale accordingly now.

Watch this, some domestic banks take a dim view of any business transactions in personal accounts and have made life very difficult for some people - closing and freezing their accounts. It is so much easier to have a different account for the books.

That's what I said to do?

I hear its the way to get into the House of Lords.

I'd agree with Rob.  The last time I rang on behalf of my stepson, the wait wasn't excessive and they dealt with a difficult post-covid tax adjustment really well.

I work with GP practices and can only say that they are busting guts to handle what is thrown at them.  They simply aren't resourced for the work they have to handle and I don't imagine that will change quickly.  For comparison, the last time my bank asked me to ring 'urgently' on their fraud prevention line over a transaction I was trying to make, it took 80 minutes to connect (despite saying 40).  It was 5.20 in the morning and this is a service that I pay for...

Lord lemming of forumland.

I look forward to seeing an updated profile before too long.

Not sure if it helps but look up the concept of drop shipping.