For most people the answer to this will be ‘Yes’. It’s so easy to get caught out when you’re trying to get a business off the ground, and there is so much to think about, but some things shouldn’t be ignored. There are legal requirements and as an individual you may need to pay tax on your taxable earnings. It can be complex but HMRC provide several online tools to help you through the process.
The information is this article relates to an individual running a part-time business as a sole trader. ‘Sole trader’ means you run your own business as an individual and are self-employed. It means you are responsible for the business, but you do not necessarily have to work alone - a sole-trader can employ staff. If your business is a partnership, limited company, or not-for-profit then things are different and you should seek further advice.
As an individual
Putting aside for a moment the terms ‘business’ or ‘part-time’, it’s important to recognise that any individual has a responsibility to declare to HMRC their earnings and liability for tax. Those earnings could be from employment, savings, royalties, rentals, or self-employed work to highlight just a few. As an individual (whether in business or not) you declare your earnings and liabilities to HMRC using a process called ‘self-assessment’. You may have seen the TV adverts - Tax shouldn’t be taxing. When registering for self-assessment you are issued with a Unique Taxpayer Reference (UTR) number.
There are exceptions and one typical example might be that if you are employed and have no other earnings or income then you would probably not need to complete self-assessment as your tax is paid using the PAYE scheme through your employer.
Generating profit from self-employment is basically another source of income that needs to be accounted for using self-assessment.
As a business
In addition to the self-assessment, you need to register your business with HMRC. The HMRC class you as self-employed and in business if you are receiving money for any goods or services (trading). This rule applies unless you are selling just a few unwanted items occasionally, doing the occasional odd job or don’t plan to make a profit.
A few examples where people should be registered but haven’t:
- selling items at car boot sales on a regular basis,
- selling items online that they’ve bought elsewhere to ‘make some extra cash’,
- doing car repairs for friends every weekend,
- regularly selling things they’ve made.
Your business is an additional source of income that you are declaring to HMRC and you will need to keep accounts of your business finances – records of your sales, receipts for your business expenses, and your bank transactions. These are always best kept separate from your personal finances. From these records, you (or your bookkeeper/accountant) will be able to produce a profit/loss statement that indicates what taxable profit or loss you have made. Figures from this statement are used in your self-assessment.
If you are also employed then your employer keeps records for this and provides a summary of your wages and tax (P60) at the end of each year. This has nothing to do with your business records but it is worth checking that your employer has no constraints to do with you working for yourself.
But it's a part time business...
Technically being part-time is irrelevant. If you are running a business, or making profit through your activities then you need to inform HMRC.
From a tax perspective, as a sole trader you are required to:
- register your business with HMRC,
- keep business records (accounts),
- complete a self-assessment tax return every year,
- pay income tax on your profits and pay National Insurance (Class 2 and 4)
In order to do this, you’ll first need to register with HMRC. There is deadline for registering which is currently 5th October in your second tax year.
If you haven’t registered for self-assessment or completed tax returns before then you will be able to do this at the same time as registering your business. If you’re already registered for self-assessment then you will be able to add your new business to this using your Unique Taxpayer Reference (UTR) number.
If you've not told HMRC...
If you have a part-time business and haven’t yet informed HMRC then you should do this straight away or seek professional advice. There are penalties for late registration which can soon add up.
Keep records: it is advisable to keep records throughout the year for all your earnings, not just for your business.
Get registered: as an individual for self-assessment and also your business.
Use a bookkeeper or accountant: unless you understand the accounts side, and enjoy working with figures then it’s advisable to use someone who does. A good bookkeeper or accountant will maintain your records and complete any requirements for HMRC