Self Employment Rules and Regulations
The majority of small businesses begin with one self employed individual setting up as a sole trader. This is particularly true of the more solitary creative industries such as photography. Self employment law offers a number of significant advantages, from both a tax and an administrative perspective. Self employed tax payers are subject to less stringent accountancy procedures, and may in fact pay less tax than they would as an employee of a company. However, there are still a number of rules and regulations that self employed individuals must adhere to.
In the first instance, self employed individuals must register as such with the Inland Revenue. Currently, you must register as self employed within three months of the end of your first month of self employment. If you fail to do so, the Inland Revenue may perform a check on your accounts and, if they find that you were operating as a self employed individual prior to this period, you will become liable for the relevant tax plus a £100 penalty.
Once you have registered as self employed, you have a responsibility to complete a self employed tax return each year, known as self assessment. The forms for self assessment are posted every April, and must be completed by October if you are making your return on paper. Alternatively, you may file as late as January if you are carrying out the process online. In either case, you will also face a financial penalty if you fail to make your return by the relevant date in January. Furthermore, you will be required to make arbitrary Class 2 National Insurance Contributions, currently levied at a rate of £2.30 per month if your annual profits exceed £5,435 in the 2008/09 tax year. When you register as self employed you will be asked whether you want to pay these monthly or quarterly; you can set up a direct debit to pay these automatically.
Self employed tax payers also have a right to register for VAT. This means that, while you will be granted an exemption for VAT on any business purchases, you will be obliged to charge VAT on any goods or services for which you are paid. Indeed, if your turnover exceeds £67,000 per year, self employment law obliges you to become VAT registered. Again, you will be offered the relevant forms for VAT registration when you register as self employed.
Accountancy procedures for self employed individuals are not particularly onerous; essentially, you have a responsibility to keep any records that you require to complete your self assessment. You should make sure that you keep receipts for any business expenditure, as you will be able to write this off against income tax on your return. Self employed people are also allowed to employ individuals in the same way as any other business would. However, this has added associated responsibilities. Primarily, you will be legally obliged to operate a Pay As You Earn (PAYE) scheme, which will deduct tax from your employees’ pay at source. This can be a complex area, and you should seek advice from an accountant before taking any further steps regarding becoming an employer.