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Going solo: registering as self-employed

by
01 June 2017, at 1:00am

Adam Bernstein examines the ins and outs of self-employment, from deciding which type is best for you to which organisations you’ll need to register with

FOR THOSE WITH THE RIGHT APTITUDE, choosing self-employment and setting up their own practice will be the best decision they ever make. However, the move to selfemployment requires planning and shouldn’t be done on a whim.

Working for yourself

Being self-employed means different things to different people. The starting point, however, is what HM Revenue & Customs (HMRC) thinks of your situation; they are particularly concerned with individuals leaving an employer to go “self-employed” but who then effectively work for just one client – a practice – in all but name as an employee. To pass as someone who is truly self-employed, you will need to satisfy a number of HMRC tests. The tests revolve around a checklist. You are probably self-employed if you:
  • Run your own business and are responsible for its success or failure.
  • Have several clients at the same time.
  • Decide how, where and when you do your work.
  • Can hire other people at your own expense to help you or to do the work for you.
  • Provide the main items of equipment to do your work.
  • Are responsible for finishing (replacing) any unsatisfactory work
  • (goods).
  • Charge an agreed fixed price for your work.
  • Sell goods or services to make a profit. 

Interestingly, many of these checklist items also apply if you are running your practice as a limited company where effectively you are an employee of your own business.

Where you are not self-employed

The recent trend of firms to move staff off payroll and into “selfemployment” has led to the rise of the “gig” economy. Uber’s drivers or Deliveroo’s home food cyclists are classic examples.
For some the concept works well – the theory is that they can pick and choose when they work. However, the reality is that they have less freedom than they expect while the firm they “contract with” has lower overheads and few responsibilities. Case law has been catching up with this situation and is determining where people are or are not truly self-employed. In essence, the law and rulings have said that you are not likely to be self-employed if:

  • You are required to provide a service personally – you cannot hire someone else to undertake the work for you.
  • You are subject to supervision, direction or control over the manner in which the work is performed – you have no real freedom of action when it comes to how you work.
  • There is a mutual obligation of both parties – the firm (practice in our situation) you are contracted to is obliged to provide work and you are obliged to make yourself available to do it. 

Understanding your status is crucial as it will affect how you pay tax and whether you have any employment rights. To help, HMRC has recently made available an online employment status checking tool at https://www.gov.uk/ guidance/check-employment-status-for-tax. 

Business types

When working for yourself, you have three choices as to the “vehicle” you use – sole tradership, partnership, or a limited company. Each has different features and properties. 

  • Sole trader

If you want simplicity, a sole tradership is easy to set up and administrate – relatively speaking – and will offer lower costs to run. However, a sole trader will be liable for all practice debts and may find it harder to access finance. Sole traders have fewer options to legitimately tax-plan as tax is dealt with on a personal basis 

  • Partnership

A partnership, in comparison, offers a structure for two or more people to work together and share expertise. Like a sole trader, the partners will be liable for the practice’s debts, but also for each other’s business debts; partners will each account for tax personally.

  • Limited company

The third option is to form a company, a separate entity from you
and any other owners (shareholders) who are only liable for the shares they’ve bought (or agreed to buy). Unless shareholders offer a guarantee, personal assets are secure. The company pays tax on its profits and the shareholders pay tax on their dividend income.
A derivative of this is a limited liability partnership where the
partners have a liability akin to that of a company, but the flexibility of a partnership.

Which one should I choose?

There is no wrong or right answer as to which form to choose – it’s
a personal decision. However, it’s important to recognise that companies and limited liability partnerships and their business affairs are in the public domain (and have more expensive
compliance and reporting duties). Sole traders and partnerships
are more secretive as there is no obligation to publish business
information. If you are concerned about protecting your personal assets, then you should steer away from being a sole trader or a partnership.

How do I register?

No matter which route you take to self-employment, you will need to tell HMRC (http://bit.ly/19luzCw) immediately as you need to register for National Insurance, Income Tax and possibly VAT [which is obligatory if your turnover exceeds or is likely to exceed the VAT threshold (£85,000 during 2017/18)]. If you choose to operate via
a limited partnership or limited company, you will also need to
tell Companies House (http://bit. ly/6yyE8c). On top of this come responsibilities for pensions if you have staff (http:// bit.ly/1g7v1YJ) and possibly also health and safety reporting duties
(http://www.hse.gov.uk). Unless you intend to be a (mobile) locum vet, you’ll have premises and will need to register for business rates through your local authority. 

In summary, self-employment can be very rewarding, but the key to
success is choosing a good accountant as they will guide you through your responsibilities.