You can only charge VAT if your business is registered for VAT.

VAT is charged on things like:

• business sales - for example when you sell goods and services
• hiring or loaning goods to someone
• selling business assets
• commission
• items sold to staff - for example canteen meals
• business goods used for personal reasons
• ‘non-sales’ like bartering, part-exchange and gifts

These are known as ‘taxable supplies’. There are different rules for charities.

Responsibilities

VAT-registered businesses:

• must charge VAT on their goods or services
• may reclaim any VAT they’ve paid on business-related goods or services
• must account for import VAT on their VAT return if they use import VAT this way (known as ‘postponed VAT accounting’)

If you’re a VAT-registered business you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every 3 months.

You must account for VAT on the full value of what you sell, even if you:

• receive goods or services instead of money (for example if you take something in part-exchange)
• haven’t charged any VAT to the customer - whatever price you charge is treated as including VAT

If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.

IR35 tax legislation is nothing new. In fact the legislation was introduced in 2000 in order to identify ‘disguised employees’ in businesses.

IR35 rules ensure that off-payroll and on-payroll workers are taxed fairly. This means that if a contractor is working under exactly the same conditions as an employee (effectively a ‘disguised employee’), IR35 regulations ensure that the contractor pays the same tax and national insurance as an employee would.

The difference that came into force since April 2021, is who will make the IR35 determination. At the past, contractors themselves were responsible for determining whether or not they are working inside or outside IR35 rules. After April, this determination will be made by the end client (i.e. the receiver of services). The outcome and reasons behind the determination will need to be documented and communicated to the contractor prior to the work commencing. Liability for collecting the correct amount of tax and national insurance will then lie with the fee-payer, which could be the end client or a recruitment agency if one is involved in the supply chain.

The IR35 reforms won’t apply to all businesses. Small businesses are currently exempt from the changes, as are sole traders and PAYE agency workers. It will however affect medium and large-sized businesses that engage with self-employed contractors operating under a Personal Service Company. 

There are four main factors that will determine IR35 status:

1. Mutuality of Obligation
2. Substitution
3. Supervision and Control
4. Part and Parcel

These will define whether an off-payroll worker is inside or outside IR35. By considering how a contractor works in your business, you can determine whether they are in fact treated like an employee and therefore should be taxed as such.

If you’re a sole trader, you run your own business as an individual and are self-employed.

You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business.

When you need to set up as a sole trader

You need to set up as a sole trader if any of the following apply:

• you earned more than £1,000 from self-employment between 6 April 2020 and 5 April 2021
• you need to prove you’re self-employed, for example to claim Tax-Free Childcare
• you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

How to set up as a sole trader

To set up as a sole trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return every year.

Register for Self Assessment.

Your responsibilities

You’ll need to:

• keep records of your business’s sales and expenses
• send a Self Assessment tax return every year
• pay Income Tax on your profits and Class 2 and Class 4 National Insurance - use HMRC’s calculator to help you budget for this

You’ll need to apply for a National Insurance number if you’re moving to the UK to set up a business.

VAT

You must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.

Working in construction industry

Register with HMRC for the Construction Industry Scheme (CIS) if you’re working in the construction industry as a subcontractor or contractor.

Naming your business

You can trade under your own name, or you can choose another name for your business. You do not need to register your name.

You must include your name and business name (if you have one) on official paperwork, for example invoices and letters.

Business names

Sole trader names must not:

• include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
• be offensive
• be the same as an existing trade mark

Your name also cannot contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you get permission.

Costs you can claim as allowable expenses include:

• office costs, for example stationery or phone bills
• travel costs, for example fuel, parking, train or bus fares
• clothing expenses, for example uniforms
• staff costs, for example salaries or subcontractor costs
• things you buy to sell on, for example stock or raw materials
• financial costs, for example insurance or bank charges
• costs of your business premises, for example heating, lighting, business rates
• advertising or marketing, for example website costs
• training courses related to your business, for example refresher courses

You cannot claim expenses if you use your £1,000 tax-free ‘trading allowance’.

Costs you can claim as capital allowances

If you use traditional accounting, claim capital allowances when you buy something you keep to use in your business, for example:

• equipment
• machinery
• business vehicles, for example cars, vans, lorries

You cannot claim capital allowances if you use your £1,000 tax-free ‘trading allowance’.

If you use cash basis

If you use cash basis accounting and buy a car for your business, you can claim this as a capital allowance. However, all other items you buy and keep for your business should be claimed as allowable expenses in the normal way.

If you use something for both business and personal reasons

You can only claim allowable expenses for the business costs.

ExampleYour mobile phone bills for the year total £200. Of this, you spend £130 on personal calls and £70 on business.

You can claim for £70 of business expenses.

If you work from home

You may be able to claim a proportion of your costs for things like:

• heating
• electricity
• Council Tax
• mortgage interest or rent
• internet and telephone use

You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.

Example You have 4 rooms in your home, one of which you use only as an office.

Your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4).

If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).

Simplified expenses

You can avoid using complex calculations to work out your business expenses by using simplified expenses. Simplified expenses are flat rates that can be used for:

• vehicles
• working from home
• living on your business premises

One of the biggest announcements in the Budget on 3 March 2021 was the news that the main rate of Corporation Tax will increase to 25% from 1 April 2023. Alongside this announcement was the introduction of a small profits rate of 19% to “provide protection to the smallest businesses”.

When the rates apply will depend on the “augmented profits” of a company for the relevant accounting period. Broadly speaking, augmented profits are taxable profits plus any exempt distributions received (excluding dividends received from 51% subsidiaries).

The small profits rate of 19% will apply where augmented profits for the accounting period do not exceed the lower limit of £50,000.

The main rate of 25% will apply where augmented profits for the accounting period exceed the upper limit of £250,000.

For companies with profits in between these thresholds, tax is calculated at the main rate then Marginal Relief applies to reduce the liability.