What are my legal responsibilities as a sole trader?

As a sole trader, you have a lot of responsibilities, both for yourself and your business. It can sometimes be challenging to differentiate what may be legal. This guide will lay out individually what they are — giving you the ability to pay attention to each in the required way. Sole traders often cannot rely on anyone else, so having a guide to come back to could be very useful for you.

Informed by the UK Government, the responsibilities covered in this article include:

• Compliant business name
• Insurance
• Recording sales and expenses
• Self-assessment tax returns
• VAT

As you set up as a sole trader, your first legal responsibility is to name your business something compliant with specific rules. After that, you are allowed to use your name to trade with, or you can select one for the company.

As a sole trader, you are not legally allowed to use the incorrect hallmarks of a limited company. So, you cannot use the phrases or text:

• ‘Limited’
• ‘Private Limited’
• ‘Ltd’
• ‘Limited liability partnership’
• ‘LLP’
• ‘Public limited company’
• ‘PLC’

The Government also reserves the right to reject any names that seem offensive. According to the BBC, it declined over 800 titles in the last two years. Some examples of rejected names included:

• Fit as Fork Ltd.
• Fancy a Bomb Ltd.
• Just Weed Ltd.
• Pandemic19 Ltd.

Ensuring the Government accepts your name suggestion, it is best to avoid any terms about:

• Explicit language
• Violence
• Illegal drugs
• Insensitivity toward current and historical events

The legal responsibility of being a sole trader can include having the relevant insurance. While some insurance covers can be optional, some may be required by law, depending on how you operate. 

Depending on your circumstances, you may only legally need two types of insurance:

• Employer’s liability insurance — if your business has any employees, you are required to have employer’s liability insurance.
• Professional indemnity insurance — if your business must comply with specific industry regulators, you may need professional indemnity insurance to operate legally. Examples include accountants, solicitors, and certain healthcare professionals. 

For business insurance, see Countingup’s partner Superscript.

Another legal responsibility for a sole trader is keeping a record of your sales and expenses. Again, this is for your tax returns to be compliant. You can use two methods to record your financial activities:

Meaning, recording your income and expenses based on your invoiced or billed date. For example, if you invoice a customer on the 10th of March 2021, you would record that invoice for the tax year of 2020 to 2021 even if you do not receive the payment until the following tax year. 

Businesses with an annual income of less than £150,000 can record the revenue only when they receive payments or pay a bill. For example, if you invoice a customer on the 10th of March 2021 and receive that payment in July 2021, you would record the income for the tax year of 2021 to 2022.

Countingup allows you to record income and expenses. With features like receipt capture, you can take a photo of receipts, and the app automatically converts it to expense categories in line with HMRC.

For more information on recording sales and expenses, see what expenses can sole traders claim.

If you are a sole trader, you must make sure that you file your Self Assessment tax returns. It is a system that the HMRC uses to collect income tax. As a sole trader, you must register through the Government portal.

Once registered, you must complete a return at the end of every tax year. There are specific deadlines for registering, submitting returns and paying the tax.

The deadlines for the tax year between the 6th of April 2020 and the 5th of April 2021 are as follows:

• The 5th of October 2021 — for registering
• Midnight the 31st of October 2021 — filing paper returns
• Midnight 31st January 2022 — filing online returns
• Midnight 31st January 2022 — paying the tax owed

There are penalties for missing the deadlines set out by the HMRC. They issue penalties for missing the deadline, submitting the return or paying your bill. If your tax return is less than three months late, the penalty is £100. It then increases the later it takes you. You can appeal against the fines if you can prove a reasonable excuse.

For more information on self-assessment tax returns see what is self assessment and how to pay self assessment tax.

Another legal responsibility of sole traders is to register for VAT. For beginning the process for registering for VAT, there is a Government portal. Registering for VAT is only relevant if your business turnover exceeds £85,000. Registering for VAT provides a certificate that allows you confirmation of:

• VAT number 
• Instruction on submitting VAT returns and payments
• Date of registration

The benefit of registering for VAT is that it allows you to claim back certain VAT costs. Registering can mean recouping portions of the costs of paying for stock, equipment and services.

For more information, see when do you pay VAT as self-employed? and what taxes does a self-employed person pay?

Many of the legal responsibilities of sole traders revolve around managing the business finances. So, it falls upon the sole trader to understand which requirements they must follow. One of the best ways to ensure that you can maintain these responsibilities is through software that allows you to take care of everything seamlessly.

Thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like invoicing on the go, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags, or inaccuracies. Seamless, simple, and straightforward! 

To start your three-month free trial today, find out more here.