The process for formalising a business depends on the owner’s chosen form of legal structure. Sole traders and ordinary partnerships register as self-employed with HMRC, whilst limited liability partnerships (LLPs) and limited companies register the business with Companies House.
Sole traders and partnerships
Substantial penalties and interest charges may be imposed for failure to comply with the registration rules. Since the exact start date of a new business may be debatable, early registration is recommended. Registration is quite simple – the easiest way is to do it online at www.workingforyourself.co.uk/ self employed/form.asp. Alternatively you can download form CWF1 (www.hmrc.gov.uk/forms/cwf1.pdf) and send the completed form to HMRC.
The HMRC guide entitled Giving your business the best start with tax contains some useful information (www.hmrc.gov.uk/startingup/working-yourself.pdf, or call 0845 915 4515 and request a copy).
LLPs and limited companies
LLPs and limited companies must be registered with Companies House (www.companieshouse. gov.uk). The registration fee for limited companies and LLPs is currently £40 (£100 for same day registration). Both types of business will also need to file annual returns with Companies House – the charge for this is currently £40, although the charges for both registration and annual return filing are less if submitted electronically.
Sole traders and partners usually pay Class 2 and Class 4 National Insurance contributions (NICs) and you need to register with HMRC accordingly. Class 2 contributions are £2.65 per week for 2012-13 and are usually paid in two instalments on 31 January and 31 July each year. No Class 2 NICs are payable if profits are below £5,595 (for 2012-13). Class 4 NICs are linked to business profits. For 2012-13 they are charged at 9% on profits between £7,605 and £42,475, and at 2% on profits over that limit.
If you trade through a limited company, you’re usually treated as an employee and pay Class 1 NICs (known as primary contributions). The company also has to pay Class 1 NICs on your earnings (called secondary contributions). See the HMRC website at http://www.hmrc.gov.uk/rates/nic.htm for further information.
Registering for VAT
All traders, whether sole traders, partnerships, or limited companies, must register to charge and pay VAT once annual sales reach a certain threshold (£77,000 from 1 April 2012). The annual VAT threshold is determined by total sales and is not the same as total profits (which is generally sales minus expenses). You can make a loss and still need to register for VAT.
The threshold operates on a rolling month-by-month basis, so you need to check at the end of each month to make sure that the annual threshold has not been exceeded in the previous 12 months. You also need to think about whether you’re going to go over that limit in the following 12 months. If you think your total sales may exceed the VAT threshold, you need to register.
You must register with HMRC within 30 days of being aware that you’re going to exceed the threshold. If you fail to register you’re charged a penalty, which can eventually be up to 15% of the VAT owed and is in addition to the actual VAT due. So make sure that you register on time and avoid incurring costly penalties.
Practical Tip :
The HMRC Business Education Support Team runs free workshops designed to give practical advice in areas such as record-keeping, filling in tax returns, and becoming an employer. To arrange a workshop call 0845 603 2691 or book online at www.hmrc.gov.uk/bst/index.htm.