Now the kids are back to school and you have some time on your hands, you could start up that businesses you always wanted, or are you simply looking for a change of direction?

HM Revenue and Customs (HMRC) has updated its process for individuals to register as being self-employed, which can now be done online. At what point do you need to register?

HMRC has announced a new process for self-employed individuals to register for tax and National Insurance contributions (NICs) purposes. This can now be done online, however, there are a few bits of information that you will require to hand before you complete the online registration. The online application form can be found here for sole traders and here for those going into partnership.

HMRC's guidance points out that you cannot register before you start self-employment but if you register too late then penalties could be imposed. So how do you know at what point you have started self-employment? Is it when you first think of an idea for your business?. Is it when you hand in your notice at work? What if you weren't previously employed? Could it be when you make your first profits? As you can see this is not as straight forward a question as it first seems.

When you consider that the initial outlay to set up a business in terms of equipment, material or research will often be a costly part of self-employment, it is wise to actually start your self-employment, together with collating the relevant business records as soon as possible. This will mean that you have accurate records as and when they are required and these can be invaluable when claiming pre-trading expenditure. For tax purposes the more allowable expenses that can be claimed, the more you can reduce your profits, delaying or reducing the payment of tax and NICs. Therefore, any real profits which you do make can be reinvested in your business.

Self-assessment
As a self-employed individual your income tax and NICs will be calculated by reference to your business profits. The calculation of tax and NICs due on your profits is done via the self-assessment system. After the tax year ends on 5 April you will need to complete a self-assessment tax return, which you can either do online or by submitting a paper return. If you are required to pay and tax or NICs for the year this will be due on 31 January, following the end of the tax year.

However, for subsequent tax years you will probably be required to make payments on account to HMRC. Payments on account are due on 31 January in the current tax year and 31 July following the end of the tax year and are calculated as each being half of your tax liability for the previous tax year. These payments will then be deducted from the amount due the following January, and so on. You will need to make payments on account if your tax liability for the previous year was greater than £1,000 and less than 80% of your tax liability was collected at source.

The rules for determining when your profits are taxed will depend on the accounting year end that you choose. In earlier periods, you may find that the same profits are effectively taxed twice. This creates 'overlap' profits which could be deducted from future profits if you were to change your accounting date or when you cease trading.

If you do not already submit a tax return, the process should be initiated once you have registered as being self-employed. HMRC will send you the relevant correspondence to complete the form following the end of the tax year. If you do not receive self-assessment tax return details following 5 April, you should contact HMRC.

National Insurance contributions
Self-employed individuals pay Class 2 and Class 4 NICs. Class 2 contributions are fixed at £2.40 per week, for 2009/10. Class 4 NIC is 8% on profits between £5,715 - £43,875, and 1% on any profits above £43,875, for 2009/10.

If you expect your net profit from the business to be low (less than £5,075 for 2009/10) for the tax year then you may not have to pay Class 2 NICs. In this case you would need to apply to HMRC as this exception is not granted automatically.

Construction industry
There are specific rules relating to those self-employed individuals who work within the construction industry. In addition, there are new proposals concerning 'deemed employees' in the construction industry. Please see our previous tax story on 3 August 2009, 'False self-employment in construction' for more details relating to the construction industry.

You are only required to register for VAT if your turnover for the previous 12 months is over a specific limit. From 1 May 2009, the limit is £68,000. However, there are also provisions that require you to register if you predict that your turnover will go over £68,000 in the next 30 days alone. Once registered for VAT you will be required to charge the appropriate rate of VAT on your sales. However, you may also be able to reclaim VAT on items you have purchased for your business.

You may wish to consider registering for VAT even if your turnover is below the specified limit, for example in order to reclaim VAT on purchases or as a way of inferring to your clients that your business is well established. The benefits of registering before you are required to should be compared to the potential administrative burden in respect of filing VAT returns. VAT is a complex area and specific advice should be sought if you are considering registering for VAT.

Mike Warburton, Tax Director at Grant Thornton says: "For practical purposes 'starting your self-employment', could be seen as being when you first start to take positive steps in your chosen self-employment, and one of those should be to register with HMRC. In addition, it is important to have good record keeping when starting a business and to continue this going forward as it will enable you to calculate your tax, NICs and VAT liabilities, if applicable, accurately. With good records and preparation it is possible to take advantage of tax reliefs and incentives available to you which can be invaluable when starting out in self-employment."

Contact us if you would like further advice on any of the above