Sole trader question

tom.senex

Hi,

The wife of a friend has been making arts and crafts stuff and started selling her wares to friends and family as a means of bringing in an additional income while looking after her two kids.

Through family connections she then started supplying to a local shop and a few more after that. It's now got to the point when even my friend (her husband) no longer thinks the whole thing is a bit of a pub joke.

Not sure about exact figures but I think this little business is now generating something like 300-400 quid a month in net profit. So far so good. Now, as the whole thing did start as a bit of a joke and no one ever envisaged it to carry on for so long (3-4 years I think) they never registered either as a sole trader or as a limited company. This is now seen essential as they prepare to take it a step further and in fact they are thinking about producing a catalogue. This will enable them to approach other shops in nearby villages and hopefully sell more stuff.

The question therefore is what do they do next? They asked a few of us down the pub and I said I'd post something on this forum. What they are looking for really is some guidance.

Thanks in advance
Thom

Owain_Moneysaver

The important things are:

- register with HMRC as self-employed for tax purposes. This is now urgent as failure to declare untaxed income can land you(her) in jail.

- if this is being done from home, advise home and car insurers and get business cover. If she's caught using the car for business purposes and not having business car insurance, it's seizure of the car / fine / points.

- product and public liability insurance. It may only be handmade greeting cards (you don't say exactly what is being made) but if an embellishment falls off and a baby picks it up and chokes on it, that's a potentially expensive lawsuit.

tom.senex

No, it's not us - as I said I'm asking on behalf of a friend.

I know it's mostly village scenes paintings, some of which are transferred on greeting cards. No choke hazards there.

Also, can you register as a sole trader retrospectively, and say you have been doing it for 3-4 years or do you put down the date you fill out the application? How does it work? We are not talking about huge sums here, and they said one of the reasons they never really looked into it was because they wouldn't have to pay tax - is that right?

In answer to your other questions they rent and don't own a car.

Savvy_Sue

tom.senex wrote: »

Also, can you register as a sole trader retrospectively, and say you have been doing it for 3-4 years or do you put down the date you fill out the application? How does it work? We are not talking about huge sums here, and they said one of the reasons they never really looked into it was because they wouldn't have to pay tax - is that right?

If the friend's wife has not made a profit of more than the tax free allowance each year then no, no income tax is due.

However, being able to prove how much profit she's made is a different matter. Did she keep records? Sales made less materials used = profit.

Have they been claiming tax credits? That's another potential issue, if they under-reported their joint income.

Best advice is to be in touch with HMRC sooner rather than later. There is the potential for a fine, but if no tax is due then I think that's unlikely - "until now this has been a hobby business, but as it is now making a profit I need to register as self-employed."

tom.senex wrote: »

In answer to your other questions they rent and don't own a car.

Does the landlord know? Is it a social landlord or a private one? If a social landlord then she's almost certainly in breach of the tenancy agreement, but if she asks for permission to run a business of this kind then it shouldn't be unreasonably refused, as long as it's not going to cause 'nuisance'. So no excessive noise, nothing smelly, no procession of deliveries / visitors to the house and so on.

The advice about home insurance is important too: if they have contents insurance, then business stock will NOT be covered, and the business use of the home may invalidate the whole policy.

phill99

They will still need product liability / public liability insurance.

If they rent a home, they need to inform the landlord as most landlords ban businesses being run from rented properties as this is against their mortgage conditions.

Why do they think they wouldn't have to pay tax? It May be that the profit madewas below their income tax threshold, but that is not a reason not to register for self employed tax. The issuehereis that you need to prove to HMRC that your income was low enoigh not to pay tax, not just to act as judge and jury in the matter.

soolin

Paying tax and needing to register as self employed are two entirely different things.

Everyone running a business, however small needs to register, failure to do so is an offence. Then each year accounts are prepared, if the income is small then short accounts are submitted as part of the self assessment process. The total taxable income from all sources is then added up, personal allowances taken off and tax paid only on that balance.

National Insurance is slightly different and would need to be paid unless the person pays another form of NIC from a different income source.

Personally in this situation I would approach an accountant, get them to make the declaration to HMRC as they can do it in such a way to mitigate the late notification and perhaps avoid the worst of the penalties. Accounts can then be prepared for all the years, tax (if payable ) noted and paid and NI caught up with. A good accountant should be able ot get the person away merely with a few fines and late penalty charges (if appropriate)

However leaving this or burying your head under the sand may well result in serious repercussions later on when you get caught by HMRC.

firefox1956

And after they have done all the above the 300 - 400 quid nett profit per month suddenly becomes an awful lot less !!!

martindow

firefox1956 wrote: »

And after they have done all the above the 300 - 400 quid nett profit per month suddenly becomes an awful lot less !!!

Absolutely! It is easy to see the turnover as cash in your pocket, but once you deduct expenses such as the cost of materials, mileage at 45p/mile, maybe a small percentage of the gas, electricity and phone bills they may find it's a hobby rather than a business.

tom.senex

Thanks for all your replies - as mentioned any sort of guidance of this matter is greatly appreciated. Help not judgement is what I was looking for.

Could someone also possibly point out what forms would need to be filled in. For example, I have had a quick look at the HMRC website and find it all very confusing. Anyhow, I think this is probably the one that needs filling out:

https://online.hmrc.gov.uk/shortforms/form/CWF1ST?dept-name=CWF1&sub-dept-name=&location=40&origin=http://www.hmrc.gov.uk

soolin

tom.senex wrote: »

Thanks for all your replies - as mentioned any sort of guidance of this matter is greatly appreciated. Help not judgement is what I was looking for.

Could someone also possibly point out what forms would need to be filled in. For example, I have had a quick look at the HMRC website and find it all very confusing. Anyhow, I think this is probably the one that needs filling out:

https://online.hmrc.gov.uk/shortforms/form/CWF1ST?dept-name=CWF1&sub-dept-name=&location=40&origin=http://www.hmrc.gov.uk

That would have been the correct form when she first started and It can't hurt to have it done now- but I would still recommend going through a third party who may be able to suggest a way of mitigating penalties when the registration is back dated.

Savvy_Sue

soolin wrote: »

Paying tax and needing to register as self employed are two entirely different things.

Everyone running a business, however small needs to register, failure to do so is an offence.

Except that the 'hobby business' which makes no profit (and possibly even a loss) is of no interest to HMRC. And that is probably how this started.

I'm not suggesting this as a delaying tactic, but working out at what point she started making a profit could be worth doing.