Commencement of trade must be notified by 5 October following the end of the tax year in which the first day of trading falls. There are penalties for failure to notify which can be accessed via: https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed
Note that commencement of trade is when the business is ready to accept its first customer. At the latest, this would be when you start working for your first paying customer, but it could be earlier. This notification commits the sole trader to submitting a tax return after the first tax year’s trading and all years thereafter.
If total income, before any costs, is less than £1,000, then there’s no tax payable and no need to submit a tax return.
Accounting period
Most sole traders adopt a 5 April year end. This is the simplest approach and avoids having to allocate one year’s worth of results over two different tax years. It is best to use this date as it is treated in exactly the same way as a tax year end of 31 March.
Submitting accounts
Annually, a sole trader must submit a self-assessment tax return (SA100). This will show the net profit or loss after deducting all relevant and allowable costs from revenues. This determines the amount of tax and National Insurance due.
It is still possible to submit a paper copy of a tax return which has a deadline of seven months after the end of the accounting period (31/10/20xx for an accounting period ending 5/4/20xx or 31/3/20xx).
The alternative is to submit an electronic SA100 ten months after the end of the accounting period (ie typically 31/1/20xx+1).
Allowable expenditure – exclusively for business
The key rule is to identify which costs have been incurred exclusively for the purposed of running the business. In this case they’re allowable and thus reduce both profits and the tax thereon. Examples include the following:
Sub-contractors or any staff (employed or used to run your business)
Business premises costs (rentals, insurance, maintenance and utility costs)
Consumables (raw materials for products created, stationery, protective clothing etc)
Advertising and marketing costs (telemarketing campaigns, google ads, website costs etc)
Financial costs (bank fees, interest and insurance)
Training (eg external courses bought)
Indirect costs (fees for membership of network groups, subscriptions for business magazines or approved trade bodies)
Travel – mileage in your own car @£0.45pm, bus, train, taxi , parking and hotel costs for any business related activities, such as meetings, conferences, networking etc.
Business Assets – These typically have an enduring benefit for the business over several years and include computers, printers and any equipment required to provide services or make items for sale. They can also include intangible assets such as websites. Note that the cost of very large items of expenditure on assets, may be spread over many years rather than just the year in which the cost was incurred.
Allowable expenditure – mixed business / private use
The trickier costs are those that relate both to private and business use. The key to claiming these is to have a credible method of allocating actual costs between private and business use for items such as if you work from your own home:
Utility bills, rental payments or interest on mortgage payments, council tax – these can be allocated by identifying both floor space and time devoted to business activities. As an alternative, it’s possible to claim an HMRC fixed amount based on hours worked at home. These rates are low however (starting at £10 pm for 25 to 50 hours pm and capped at £26 pm for 101 hours or more pm).
Telephone and internet charges – these can be allocated on the basis of the ratio of business calls to all calls.
Allowable expenditure – timing
Every revenue and cost needs to have a date which allots them to one specific tax year. The simplest method uses the date on which the money either came into or left the bank account and this is called cash accounting. Sole Traders can use this method providing their annual turnover is no greater than £150,000 pa
The alternative it to use accruals accounting, this is usually the invoice date. Alternatively, the date when the cost or revenue occurred and when the unconditional obligation to pay arose.
Pre-trading expenditure
For a sole trader, expenditure incurred in the seven years prior to trading is deductible in the first accounting period. However, the expense must be allowable were the business to have been trading.
Taxes due
Income Tax and National Insurance become payable on the net profit generated by the business and must be paid ten months after the end of the tax year (same as the electronic submission of the tax return). For example, for a year ending 5/4/2020, any tax due must be paid to HMRC by 31/1/2021. On top of this you may well have to make an advance payment for the following year at the same time (see below)
For the tax year 2019/20, tax rates are as follows:
Income Tax
First £12,500 – No tax payable on these earnings (unless you’ve earned £12,500 from other sources or your total income exceeds £100,000)[1]
Next £37,500 – payable at 20%
Next £112,500 – payable at 40%
The rest – payable at 45%
National Insurance class 2
First £6,364 – No tax payable (also other earnings not relevant)
Class 2 NI is fixed at £156 for total net profit in excess of £6,365
National Insurance class 4
First £8,632 – No tax payable (also other earnings not relevant)
Next £41,368 – payable at 9%
The rest – payable at 2%
[1] If income exceeds £100,000 the £12,500 tax free amount is reduced – by £1 for every £2 earned above the £100,000. Thus an income of £125,000 means no tax free amount
