AN INTRODUCTION TO SOLE TRADERS

(A) ABOUT SOLE TRADERS A sole trader or sole proprietor business is owned, controlled and managed by one individual. It does not have a separate legal personality from that of its owner, which means that sole traders are personally liable for the debts of the business and have unlimited liability.

Sole traders are not subject to numerous administrative or statutory requirements unlike other business structures such as limited companies. They can start trading immediately and do not need to register as a business. The only requirement is that a sole trader must register as self-employed with the tax authority, which in the UK is Her Majesty’s Revenue and Customs (HMRC). They must also choose a name to trade under. The restrictions on this are that it does not give the impression that the sole trader is an incorporated business, that the name is not offensive and that any trademark used does not resemble that of any other business. They must then submit an Annual Self-Assessment Tax Return which details all of the income and outgoings of the business. After deducting from the total income of the business all costs allowable for tax purposes, such as staff salaries, utility bills and insurance premiums, etc., the amount of remaining income is known as taxable profit and a sole trader must pay income tax and national insurance contributions on this amount. There is an additional requirement that if the business turnover exceeds a certain amount in any 12-month period, then the business owner must also register for Value Added Tax (VAT), which is a consumer tax based on the value of goods or services supplied. The annual VAT threshold is currently £85,000.

(B) MANAGEMENT (1) ….. sole trader can have employees, but he or she owns (2) ….. business and is responsible for its day-to-day management. He or she alone must raise all the necessary capital and if it becomes necessary to borrow any money (3) ….. authorised lender may be reluctant to give any credit unless the sole trader has some security; for example, the lender may require that he or she is (4) ….. home owner. What is more, while (5) ….. sole traders are able to keep all business profits they must also bear (6) ….. losses and although they can choose their own working hours, they must also consider that any time they are away from (7) ….. business they must either leave it in the hands of employees, if they have employees, or stop (8) ….. trading, which means there will be a period of time during which no profit is generated.

(C) A SOLE TRADER’S LEGAL CHALLENGE TO HMRC Sole trader Matthew Hodges, who failed to declare a tax liability of approximately £11,000, was charged almost £1 million by HMRC in a calculation error that a tax expert has described as a “wholly inappropriate estimate of one man’s income”. HMRC accused Mr Hodges of evading £529,536 in VAT due on work he had carried out as a scaffolder over a five-year period. In addition to the unpaid tax, HMRC issued a demand for £399,734 as a penalty for non-payment.

HMRC claimed that Mr Hodges, who often illegally took cash in hand as payment, failed to declare VAT on nine out of ten projects he had completed. However, a tribunal said he owed only £11,153, based on estimates of the reasonable number of jobs he could have completed during the relevant period. Andrew Hubbard of accountancy firm Baker Tilly said that the tax authority’s calculation seemed to be “little more than a simple back-of-the-envelope calculation with no thought being given to the reality of how one person could have achieved a turnover of that level.”

The non-payment was discovered during “street sweeps” carried out by HMRC in which tax officers patrolled the streets looking for the advertising signs that tradespeople such as builders and scaffolders often erect outside buildings they are working on. HMRC found that for every ten properties found displaying Mr Hodges’ signs he had submitted just one VAT return. HMRC calculated the tax due from this undeclared work by multiplying the VAT due by ten, arriving at an income for Mr Hodges of more than £4 million for the period in question. Mr Hodges was represented at the tribunal by Nichola Ross Martin who argued that this was “wholly unrealistic for a one-man operation.” Judge John Brooks, of the tax tribunal, agreed. However, the tribunal also found that Mr Hodges’ non-payment was “deliberate and concealed”, despite the scaffolder’s plea to be given special consideration on health and marital grounds. Mr Hodges was ordered to pay £7,807 in penalties on top of the tax due, a final total of £18,960.