Small Business VAT Registration Threshold Explained
Everything you need to know about the VAT registration threshold after April 2024.
Key Takeaways
- A sole trader is a business structure in which one individual runs and owns the entire venture, is personally responsible for any losses the business incurs, and takes home all the after-tax profits.
- Limited companies are subject to more extensive financial reporting obligations than sole traders, including filing annual accounts with Companies House.
- Some may prefer to run a business as a sole trader due to the simplicity of formation and the reduced burden of compliance requirements.
What is a sole trader?
A sole proprietor, also known as a ‘sole trader’, is a type of business structure with one entrepreneur who runs their business with complete autonomy. Since the venture and the owner are legally inseparable, they bear unlimited liability, meaning the individual is personally responsible for any outstanding debts or legal obligations.
While such a structure offers significant advantages in decision-making, allowing the business owner to guide the business in any direction they choose, it comes with a significant trade-off: personal liability. If the business faces financial difficulties, the trader’s personal assets, like property or savings, could be at risk.
See also: GOV.UK Construction Industry Scheme (CIS) Explained
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Advantages of Being a Sole Trader
As mentioned earlier, running your business as a sole trader may include advantages such as increased flexibility and the freedom to structure the whole operation to align with your unique approach to business. Additional benefits include —
- Easier and more cost-effective — You are not required to register your business with Companies House. However, you must inform HM Revenue and Customs that you are operating as a solo trader by enlisting for their online services. You will pay your taxes through a self-assessment tax return.
- You keep all the profits the business makes — Since the company is yours and you operate under your name, you get to keep all profits after tax.
- Increased privacy — All the financial information of a sole proprietorship is privately held, unlike company financials published by Companies House.
- Flexibility — As a sole trader, you’re self-employed, which means you have full control over your business operations. Consequently, the venture can enjoy rapid growth without the restrictions that sometimes impede a limited corporation.
Related content: Limited Liability Partnerships (LLP)?
Disadvantages of Sole Proprietorships
Besides being directly responsible for business losses, liabilities, and obligations, additional disadvantages of operating as a sole trader type of business include —
- There is no legal distinction between you and your business — unlike limited companies, in case of mishaps, you are personally accountable for any harm suffered by individuals or entities interacting with your business. It’s imperative to exercise caution and consider how your actions may affect other parties involved in your business transactions.
- Raising startup capital is challenging — Funders and banks will likely perceive your business as a one-person show with no formal decision-making process. Furthermore, the business structure makes it impossible for them to offer you money in exchange for equity or a stake in your company.
- Constraints in tax planning — In a sole proprietorship, business profits are treated as personal income and subject to tax in the same year earned. Sole traders have few options for differing or reducing tax liability.
- Personally liable for business debts — The business owner bears direct responsibility for the business’s financial obligations. Personal assets, including savings and property, are exposed to potential risk if the business faces financial challenges and lacks the resources to meet its commitments, such as paying employees.
Warning
As a sole trader, you don’t just focus on your business interests—you also take on the responsibility of safeguarding the interests of those you do business with. It’s your duty to ensure that your transactions are fair and free of any potential harm to your counterparties. This adds another layer of responsibility to your role, reinforcing the need for transparency and careful management in every business deal you make.
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How to Register as a Sole Trader Business In the UK
To register your business entity, follow the relatively simple steps below —
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- Choose a business name.
- Inform HMRC you are self employed and fulfil your income tax and national insurance contribution obligations.
- Sign up for VAT if your taxable turnover surpasses £90,000 within 12 months or voluntarily.
- Obtain any necessary licenses or permits required for your business activities.
- Before trading, open a business bank account to separate your personal and business finances.
- Keep detailed records of your business income and expenses for tax purposes.
- Consider registering for the Construction Industry Scheme (CIS) if you work in the construction industry.
- If you plan to employ staff, you must register as an employer with HMRC under the Pay As You Earn (PAYE) payroll scheme and comply with employment laws and regulations.
- Assess whether you need business insurance, such as public liability insurance or professional indemnity insurance, to protect your business and assets.
- Stay informed about any tax law or regulation changes affecting your business operations.
Naming Your Business
When it comes to naming your business, you need to decide whether to operate under your legal name or a separate brand name. If you opt for a business name, it becomes your trading name, often written as “T/A” (Trading As). For example, if your legal name is Connor James, and your business is called Boots and Sandals Ventures, you would officially present it as “Connor James T/A Boots and Sandals Ventures” on invoices, contracts, and tax returns. This ensures clarity in legal and financial documents, making it clear that the business and its obligations are tied to you personally as a sole trader.
Fast Fact
Use a company name check tool to ensure no other entity uses your preferred trading name. Further, before finalising your business name, thoroughly search the UK trademark register. Use specific keywords or phrases to ensure your preferred name is not already protected.
Further, you are required to follow the naming rule applicable to the UK Ltd names, such as —
- Do not include words such as ‘limited,’ ‘Ltd,’ ‘limited liability partnership,’ ‘LLP,’ ‘public limited company,’ or ‘PLC,’ which may mislead as to the structure of the business;
- Avoid using offensive words, inappropriate or terms likely to cause harm or offence to any individual or group of people;
- The preferred name must not suggest any illegal or criminal activity;
- Do not use any sensitive words or expressions such as ‘chartered’ or
- Your trading name should not imply any connection to the government or its agencies.
There is no requirement to formally register your trading, so it’s available to anyone who finds it. However, you can protect it by filing it as a trademark with the intellectual property office.
Related content: How to Register for Self Assessment Tax Return Using HMRC SA1 Form
Register for VAT
According to the law, mandatory VAT registration is necessary if your turnover surpasses £90,000 or you anticipate surpassing it in the next 30 days.
However, given the numerous advantages of VAT registration, you may opt to voluntarily register for VAT, which will not only elevate your business’s professional image but also introduce flexibility to your tax planning, enabling you to reclaim VAT on goods and services.
How do I register as self-employed with HMRC for income tax and national insurance?
To sign up as a sole trader with HMRC for income tax and NI, follow these steps:
- Determine if you need to register — If you’ve earned more than £1,000 from self-employment in the last tax year, you must register as a sole trader with HMRC.
- Obtain a GOV.UK Government Gateway ID — Sign up for a self-assessment tax return with HMRC through the Government Gateway. You’ll need to create a Government Gateway ID and password.
- Complete the registration process — Once logged in, Follow the prompts to register for self-assessment. Provide the necessary information about your business activities and personal details.
- Receive your UTR number — After completing the registration process, you’ll receive an individual taxpayer identification number from HM Revenue and Customs. This number is essential for taxation purposes and to identify you.
Following these steps, you’ll successfully register as self-employed for income tax, national insurance, and Class 2 NICs. You can calculate and pay income tax and national insurance by completing a self assessment tax return every year.
Insight
From April 2024 onwards, most sole traders will no longer need to pay Class 2 NICs. However, those with profits between £6,725 and £12,570 will be treated as having paid Class 2 NICs to maintain benefit entitlements.
Find out more: Self-Employed Class 2 National Insurance Contributions Explained.
Sole Trader vs. Limited Company
Understanding the difference between self-employment and a company is essential when deciding which type of business structure best suits you.
| SoleTrader | LTDs | |
|---|---|---|
| Ownership and | The sole trader is the owner and | Shareholder(s) own the business. It is managed |
| Management | Manages the business. | By at least one director, who can also be a shareholder. |
| Legal status | There is no legal distinction between the business and the owner | The business is a separate legal entity distinct from its directors and shareholders. |
| Liability | The owner is personally responsible for business decisions and consequences.
However, self-employed individuals can consider buying insurance to cover themselves from personal liability. |
The company, and not its owners, is responsible for any harm done to other stakeholders.
The limited company director or senior manager may be held personally accountable for wrongdoing such as —
A Limited Liability Partnership (LLP) provides tax reporting flexibility and protects you from the consequences of your or your partner’s actions. |
| Insolvency | If the business fails, the owner is personally responsible for debts. | Should the business fail, liability is limited to the value of assets and paid or unpaid shares for LTDs.
Directors may be personally liable if they made a personal guarantee for the company’s borrowing or continued trading with an insolvent company. For LBGs, liability is limited to the amount guaranteed. In an LLP, liability is limited to the capital contribution of each partner. |
| Employment | Solo trader employment status is self-employed and is not considered an employee of the business. | Employment status is nuanced as follows —
|
| Tax on profits | The self-employed trader is required to –` `
|
Tax obligations of limited liability companies include —
You can decide to leave profits in your business and extract them in another financial year. |
| Borrowing from the business and by the business | Whether or not you operate a separate business account, you can borrow money from your business.
In case of overdrafts, tax relief on bank charges and interest is limited to the amount spent on business-related expenses. |
A director loan (money that is not an expense repayment, salary, or dividend). Borrowing terms include —
If a director lends money to the business with interest, the interest is treated as a business expense to the company and personal taxable income to the director. The company must deduct income tax at 20% and report the same to HMRC using form CT61. |
| Extracting profits | A sole trader can extract profits from the business in the following ways:
|
An LTD can extract profits in the following ways —
If your business is an LLP, then you have the following options —
|
| Filing requirements | Sole traders must only report their income to HM Revenue & Customs as part of their self assessment returns. | Filing requirements for limited liability businesses are as follows —
|
Further reading: What Is a Limited Company?
How to Change Your Business from a Sole Trader to an LTD
Transforming your business from a sole trader to an LTD marks a significant milestone in your entrepreneurial journey. Here is how to make the change —
- Set up a limited company — Company registration is easy. All you have to do is confirm the availability of your preferred company name . Next, provide a registered company address and appoint officials. As part of registration, Companies House will inform HMRC that a new company has been formed, and you’ll receive your unique taxpayer reference number (UTR) from them.Consequently, you must register your company for corporation tax within three months of starting your business. Additionally, evaluate whether you want to register voluntarily or wait until your business reaches the VAT threshold for mandatory registration.
- Inform HMRC that you’ve stopped being self-employed as a sole trader — You’ll do this by filing a last self assessment return before the deadline and telling them that you’ve stopped self-employment.
- Transfer assets — You may need to transfer assets such as inventory, machinery, or property to the new business. Consider creating a director loan account through which the LTD will compensate you for the transferred assets over time if funds are limited. Work with your accountant to determine the most tax-efficient ways to transfer your assets, as you may be required to pay capital gains tax or may be eligible for reliefs such as incorporation relief, entrepreneur relief, or holdover relief.
- Open a business bank account – Banks require limited corporations to operate from a business bank account to help accurately track and report on business-related expenses.
- Notify stakeholders on the structure change — Inform your employees, suppliers, bank, or landlord to ensure that all paperwork and contracts recognise the change of details and legal status.
How to Form a Limited Company
Setting up a business as a company is easy and straightforward. The first step
- Naming your business — Use our company name check guide to determine the availability and suitability of your preferred company name.
- Choose and compare a registration package — We have four main packages as follows —
- Digital Plan (£2.48): It includes the incorporating filing fee, digital incorporation certificate, digital articles of association, digital share certificates, digital company register, and a free accounting consultation. It also offers bank accounts with up to £55 cash back and a UTR number.
- Digital & Print (£6.98): Includes everything in the Digital Plan, including printed certificate of incorporation and share certificates. It also provides bank accounts with up to £55 cash back and a UTR number.
- Privacy (£17.48): The Privacy package includes a registered address and director address in London EC1, a free .co.uk domain name, a printed certificate of incorporation, printed share certificates, bank accounts with up to £155 cash back, and a UTR number. It also includes all the digital components from the Digital Plan, with an added £155 cash back.
- Fully Inclusive (£44.48): Encompasses everything in the Privacy package and adds a trading address in London EC1, VAT registration, and a confirmation statement. It includes bank accounts with up to £155 cash back and a UTR number. Like the previous plans, it provides digital incorporation elements, a free .co.uk domain name, and a free accounting consultation.
- Submit your details — Once you determine the best package for your needs, fill out your company details, including the UK registered office, directors, and shareholders information, and leave us to take care of the rest. If you have any questions, please review our UK Company Formation Checklist.
UK Sole Trader Business Explained
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