Do sole traders have to file accounts?
Small businesses can take a variety of legal forms including sole trader, partnership, Limited (Ltd) company and And Limited Liability Partnerships (LLP). Legal protections and responsibilities are different for each form of business, and that includes the way in which business accounts and taxation are handled.
What is a sole trader?
A sole trader is someone who runs their own business and is categorised as self-employed for income tax purposes. The business may be their only source of income or they may have another source of income too. For example, a person who is employed either full or part-time by another business but also has a “side hustle” that generates income is both employed and self-employed.
The owner of a sole trader business pays income tax and national insurance on the profit it generates from the business. The business owner is also personally liable for any debts of the business.
A sole trader business can trade under a business name, but cannot add Limited, Ltd, LLP or Plc to the name they use.
Sole traders and income tax
All businesses must keep accurate accounts. Business income must be recorded, and allowable business expenses are then deducted before the amount of profit is calculated. It is essential to be able to prove the expenditure, so all receipts should be filed and kept for a minimum of seven years.
Keeping a box file of paper receipts for the business expenses can be cumbersome. We recommend using DEXT, a cloud-based invoice capture software. DEXT enables business owners to store the receipts digitally, in the cloud. This ensures good record keeping so that all invoices and expenses can be verified if necessary. It means no more archive boxes of expense receipts!!
We recommend that a sole trader has a dedicated business bank account. A bank account reserved specifically for the business makes it easier to track and account for business income and expenditure, showing that it has been kept separate from the personal expenditure.
Every year self-employed people file self-assessment tax returns with HMRC, detailing their income and expenses from the financial year that falls within the tax year ending 6th April to 5th April. This return forms the basis for their tax liability.
In the year, where a self-employed individuals’ tax liability is more than £1,000, the taxpayer also has to make ‘payments on account’ for the following tax year. This is because HMRC assumes that the profit from the business in the following year is going to be the same as the profit from the business in the previous year. The payments on account made are taken into account when calculating the tax liability for the following year. Any under or overpayment for the tax year is calculated thereafter.
Other returns
If a sole trader is employing people, then they must use the PAYE system to account for all payments including salary, expenses and benefits. The correct monthly and annual returns must be made to HMRC.
A business must register for VAT if its annual turnover is above the threshold (currently £85,000 until at least April 2022). A business owner can also choose to register voluntarily if their income is lower than that, but it is beneficial for them to do so. Any VAT registered business must keep VAT records for both income and expenses, and file their VAT returns on time.
These returns are only filed if they apply to the business, and do not require a full set of accounts.
Sole traders do not have to file accounts with Companies House as Limited Companies do. They only have to submit a full set of accounts to HMRC if they are requested to do so, for example, if there is a query about the figures they have submitted. It is advisable to prepare a balance sheet and profit and loss account at the end of each year, both to have the information ready to hand in preparing the self-assessment tax return, and in case it is needed for other purposes such as applying for a mortgage.
Passman Leonard offers great value, fast, accurate accounting support to individuals and small-medium-sized businesses from all industries in and around London. Our qualified, diverse team is here to take the strain. You can find out more about Filing Accounts click here or email us at info@passmanleonard.co.uk
