Contractor friend

Sole Trader

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Introduction

If you are a Freelance Contractor who is legitimately in business on your own account, but do not want the hassle of running your own Limited Company, you are able to provide your services on a self-employed basis, as a Professional Sole Trader. This can be a particularly attractive option to those working on International contracts through UK recruitment companies but may not be resident in the UK for tax purposes.

As a Professional Sole Trader you will be responsible for registering as self-employed with HMRC in the UK or the relevant tax authority in your chosen jurisdiction, and for submitting your year-end tax return. As you will receive your income gross, you will be responsible for setting aside funds on account of your tax liability, as well as keeping records of expenses incurred whilst performing your duties.

UK Tax resident

As a UK tax payer, you will be required to register with HMRC within 3 months of becoming a self-employed worker. You can register as self-employed by telephoning HMRC on 0845 915 4515 or by using the following link http://www.hmrc.gov.uk/forms/cwf1.pdf. It is important that you do not miss this deadline, as if you do not register in time you could be subject to a penalty of £100.

Class 2 National Insurance

As a self-employed Sole Trader you will be required to pay Class 2 National Insurance contributions, currently £2.40 per week (2009/2010). The easiest way to pay this is by Direct Debit, you can download a form from the following link to HMRC’s website http://www.hmrc.gov.uk/pdfs/ca5601.pdf

Records

You will need to keep records of the following during your trading year to enable preparation of your income and expenditure statement:

A record of all your sales (the invoices that you have raised)
A record of all your business purchases and expenses

As self-employed Sole Trader you can claim for all expenses ‘wholly and exclusively incurred’ for your business. In practice, this is more complicated than it sounds and you may need to take advice from an accountant or tax practitioner.

VAT

If you are making taxable supplies and your turnover during a rolling 12 month period exceeds the VAT registration threshold, currently £70,000 (2010/2011), or it is likely to do so in the next 31 days, then you must register and account for VAT.

You can also voluntarily register for VAT, if you are making taxable supplies but do not expect your turnover to surpass the threshold limit, this maybe because you want to take advantage of the Flat Rate VAT Scheme, which could offer a financial incentive, dependent on your trading circumstances, whilst simplifying the administration requirements. Again we would advise that you take advice from an accountant or tax practitioner before deciding to register for VAT.

Tax Return & Tax Liabilities

All self-employed Sole Traders need to complete a Self-Assessment Tax Return for submission to HMRC. The deadline to submit paper copies is 31st October, and for electronic submissions 31st January of the following year. It is important to adhere to these deadlines as there is a late filing penalty of £100.

Payment of your Income Tax and Class 4 National Insurance liabilities are due on 31st January. HMRC will generally ask you to make a Payment on Account for the following year’s tax liabilities, this is set at half the liability of the previous year. The second payment on account is due 31st July. You should always set aside an amount on account of your tax liabilities each time you draw down funds, as a rule of thumb a figure of 20% of the total drawn should cover your liabilities subject to your earnings level. Again it is important to ensure that you meet the payment deadlines as if you are late paying your liabilities you could be subject to interest, and surcharges from HMRC.

Momentum Contracting Limited is an International Company with many years experience of the professional contractor market, you can find out more about the services that they offer by clicking here www.momentumcontracting.com or email them (JavaScript must be enabled to view this email address) to contact one of their advisors directly.

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