What is a sole trader?
Sole traders, franchises, limited companies, partnerships etc are all descriptions of the type of business you run, whereas ‘self-employed’ is used to describe how a person works, rather than what their business structure is.
A self-employed person can choose which jobs they wish to do and are responsible for succeeding or failing in their chosen business.
Sole traders are the sole owners of their business and are self-employed. They don’t have a board of directors or partners which is why the responsibility lies with them as the sole trader. They can, however, choose to employ other people as long as tax and National Insurance contributions are collected through the PAYE system.
Sole Trader Businesses
Sole traders, also referred to as ‘one-man bands’ come in a variety of trades, many of which offer household services, for example, electricians, plumbers, builders, plasterers, decorators and gardeners to name a few. Most tradesmen are skilled in their trade and operate by recommendations and ‘word of mouth’.
Sole Trader Advantages
There are many sole trader advantages and the idea of being ‘your own boss’ can sound very attractive. With no one to answer to, you make all business decisions, choose your own hours, can choose to work for more than one client, set your income and, with luck, collect all the profit. Why don’t more people take the sole trader route? Well they are doing. In 2001, 3.3 million of the labour force were sole traders as compared to 4.8 million in 2017. It is a growing trend and a good route to take for many.
Sole Trader Insurance
However, whilst the advantages to becoming a sole trader are clear, it is important to remember that the sole trader will also be responsible for any losses, accidents, injury or damage to property. This may sound daunting, but it doesn’t have to. There are many types of insurance and with these in place the sole trader can have peace of mind if anything does go wrong.
What type of sole trader insurance is required?
Damage to property
The standard of your work may be excellent, but accidents can and do happen. For instance, if a plumber incurs water damage to a customer’s property whilst putting in a new bathroom, a customer can claim compensation. Without appropriate cover the plumber could encounter serious financial difficulties. However, with public liability insurance cover in place, any cost of compensation and legal costs are taken care of.
Injury to a customer
Public liability insurance will also cover compensation and legal costs in the event that a customer is injured during the course of a tradesman’s work. Can you afford not to have this in place?
Injury or death of an employee
If you have any employees or subcontractors who are working for you under your direction, you may also need employer’s liability insurance. This policy will cover for injury or death of an employee whilst performing duties for your business. It may be a legal requirement depending on your circumstances.
Lost, damaged or stolen tools
Can any tradesman afford to lose their tools? Not only is it expensive to replace the tools but it may result in loss of work as the tradesman has no tools to work with. It therefore pays in more ways than one to have tool insurance. If tools are lost or damaged whilst being loaded/unloaded, carried by or temporarily housed in your vehicle you will have peace of mind that you will be able to replace them.
Tax enquiry by HMRC
HMRC are better placed than ever to investigate or make enquiries into tax returns, especially those of tradesmen. There does not need to be any wrong doing in order for them to open an enquiry, so it is wise for tax enquiry insurance policy to be in place. This will cover accountants’ fees, and where required, specialist representation. This is another insurance that will help to get a good night’s sleep.
What about sole trader finances?
All sole traders will need to complete and submit an annual self-assessment tax return to HMRC at the end of the financial year. Consequently, sole traders need to be aware of bookkeeping in order to keep records of receipts and invoices. It is important to record business expenses as the cost of these can be claimed back from HMRC. For example; costs of equipment, rental charges of business premises along with heating and lighting, stationery costs and more.
Whilst it is not a legal requirement for sole traders to have a separate business bank account, it may be easier to record income and business expenses in a separate account – making it less time consuming for the year end accounts
Some sole traders do their own accounts during the year but at the end of the year when the tax return needs filing, many choose to hire an accountant. When it comes to the tax bill, accountants can be most helpful offering advice which may reduce the tax bill.
Whatever your tax or VAT question, the Rhino qualified tax consultants will be able to help you. The Rhino consultants are ex HMRC and so will be able to give you in-depth tax advice on tax issues that affect tradespeople, such as HMRC tax investigations, VAT registrations, exemptions, IR35 questions and more.
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