Registering for tax as a sole trader

How to register for VAT and National Insurance contributions, and what records to keep

Registering for VAT

If you expect to have a turnover of more than £79,000 a year, VAT is applied to your earnings, which also involves contacting HMRC. To register for VAT you’ll need to fill in one or more forms, depending on your business’ circumstances, and then submit them to HMRC. Most businesses only have to complete one form, with the exception of partnerships and groups of companies.

To apply for basic UK VAT registration, download and complete the form VAT 1 from HMRC. If you’re registering a partnership you’ll also be required to fill in VAT 2, although this is not as yet available to complete online.

If you’re planning on doing business internationally, you can download the form to register for VAT for acquisitions, although this cannot be completed online, and so must be sent by post to HMRC.

Maintaining records

It is important that you set up a financial record-keeping system, which includes maintaining all records that show your business income and expenses. This is vital for tax purposes but is also beneficial to help you stay on top of your finances.

Business records you need to keep:

  • annual accounts, including profit and loss accounts
  • bank statements and paying-in slips
  • cash books and other account books
  • orders and delivery notes
  • purchase and sales books
  • records of daily takings such as till rolls
  • relevant business correspondence

In general, you must keep the following VAT records:

  • Records of all the goods and services you buy or sell
  • Copies of all sales invoices you issue
  • All purchase invoices for items you buy
  • All credit notes and debit notes you receive
  • Copies of all credit notes and debit notes you issue
  • Any self-billing agreements you make as a supplier
  • Copies of self-billing agreements you make as a customer and name, address and VAT registration number of the supplier
  • Records of any goods you give away or take from stock for your private use including rate and amount of VAT
  • Records of any goods or services bought for which you cannot reclaim the VAT
  • Any documents dealing with special VAT treatment
  • Records of any goods you export
  • Records of any taxable self-supplies you make – for example if you sell cars and you use one of your cars in stock for business purposes
  • Any adjustments such as corrections to your accounts or amended VAT invoices
  • A VAT account

In general, you should retain all your business records that are relevant for VAT for at least six years. As long as your VAT records meet the requirements laid down by HMRC, you may keep them in whatever format you prefer (paper and/or electronic).

If your business is in the construction industry, you must retain sufficient business and accounting records to support your Construction Industry Scheme Return. You must tell HMRC each month about all the payments you’ve made to your subcontractors within the scheme by making a monthly return, either by paper or online.

You’ll need to keep the following details:

  • The gross amount of each payment you make to a subcontractor, excluding VAT
  • The amount of any deduction you made from a payment before you gave it to the subcontractor
  • If you made a deduction, the amount of any material costs, excluding VAT

You should retain your records for at least three years after the end of the tax year that they’re for. You’ll be required to make them available, should HMRC ask to see them.

National Insurance contributions

If you’re self-employed you must pay Class 2 and Class 4 National Insurance (NI) contributions. Class 2 NI contributions are paid at a flat rate of £2.70 a week, while Class 4 NI contributions are paid as a percentage of your annual taxable profits, which is 9% on profits between £7,755 and £41,450 (2013-14), and a further 2% on profits over that amount. However, if your profits are expected to be less than £5,725 (2013-14)you may not have to pay Class 2 NI contributions. Class 2 NI contributions can be paid either monthly by direct debit or by quarterly bill. You will pay Class 4 NI contributions when you pay your income tax.

All this may seem quite daunting at first, but if managed properly it’s really not as overwhelming as it seems. The best thing you can do is stay organised, maintain your paperwork and flag up any tax or self-assessment deadlines in your diary well in advance so you have adequate time to prepare for them.

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