Let's Get Down to Business
Considering that you’re visiting UKNA’s website, it’s likely that you want to pursue a creative career - perhaps as an artist; photographer; musician; performer. More often than not when , this career path requires you to be self-employed. Being self-employed has many perks - you are your own boss, work to your own schedule and you can choose which projects you take on. However, to go down this career path, you will need to ensure that you are registered as a business in the UK for legal and tax purposes. This can be a little overwhelming if it is new to you, so UK New Artists has put together a handy guide to your options and how to get started.
The options outlined below are some of the main business structures available to people in the UK, but do not include every single option. For example, if you work in partnership or as a collective/group, you might like to consider becoming a ‘cooperative’, a ‘social enterprise’ or ‘community interest company (cic)’. Links to further information can be found at the bottom, and some hyperlinks throughout this article provide further information or definitions.
UK New Artists is not a professional business advice company - there are many organisations (both national and local) out there that would be able to give you professional advice. We have included some at the end.
In this article, we will cover:
3 simple steps to becoming your own boss
The different categories and ways of registering
The pros and cons of each category
Tax return forms
Other bits and bobs
3 Simple Steps to Becoming your own Boss
There are 3 main things to take into consideration whilst setting up your business.
Decide on the best legal structure for your business - we will go into more detail about this below.
Inform HMRC - you can do this online here, or over the phone. You can access free training, with advice on record-keeping, tax returns and many other aspects here
Business Name - you can register your company name at companies house for free.
Categories And Ways Of Registering
There are a few different ways you can register as self employed:
Sole Trader
What: A sole trader describes any business that is owned and controlled by one person, although they may employ workers.
How: You’ll need to register for Self Assessment (tax return) and Class 2 National Insurance as soon as you can after starting your business. You can register online by clicking this link
You will then get a letter with your 10-digit Unique Taxpayer Reference and be enrolled for the Self Assessment online service at the same time.
PROS
Sole traders have much less paperwork to file than businesses run as limited companies. They have to file only one document with HMRC each year (the Self Assessment Tax Return - more on that later), and do not need to report annually to Companies House.
More control for you
You keep all the profit
CONS
Liability. Sole Traders do not have a separate legal existence from their owner who is personally liable for the firm's debts.
Access to finance. Sole traders often find it difficult to raise finance to fund their business but there are a number of grants you can apply for, for example The Princes Trust
Decision Making. All decisions are made by the sole trader which means that the success or failure of the business rests on the shoulders of one person
Limited Company
What: A Limited Company describes a type of business structure which has been incorporated into a legally distinct body or person. If you choose to run your business as a limited company, the business will be legally distinct from the people who run it. The business will also have separate finances from the owner's personal finances and be able to own assets and keep any profits it makes after tax.
How
1. The company must be registered at Companies House and the company’s annual accounts must be filed at Companies House
2. A Confirmation Statement must be submitted every year to ensure Companies House records the most up-to-date information about the company. It currently costs £13 to file your Confirmation Statement online, or £40 if you choose the paper route.
3. HMRC must be informed if the company has any profits or taxable income on an annual basis.
4. Every limited company must complete an annual Corporation Tax return (CT600).
5. All company employees must pay income tax and National Insurance Contributions (NICs) on any income they receive.
PROS
Status - the term 'limited' gives the company a bit more weight so it appears to hold more esteem and seems bigger, both for potential investors and consumers.
Investors are more inclined to take a chance on limited companies as their investment has more protection than a sole trader or partnership.
Security - as such, banks also tend to favour limited companies and they are given the chance to take out extra security by lodging a 'floating charge' over the company's assets. That means that if the terms and conditions of a loan are breached, the bank has the first claim on the assets.
Dividends - the dividends of a limited company are not subject to national insurance and are at a lower rate of tax than self-employment income.
Effective tax rates - if you intend retaining some of the profits within the business, then it might be best to go limited as this reduces the tax rate.
CONS
Liability - banks will still require personal guarantees from the directors, which means that the directors can still be liable for the company's debt.
Administration - directors are also expected to deliver statutory documents to Companies House, so anyone failing to do this is subject to late filing penalties and could be deemed to have carried out a criminal offence.
Less privacy - becoming a limited company means accounts and other details are held on public records so anyone, including competitors, can access company information, although it can be restricted.
Withdrawals - making withdrawals from the company can also pose a problem in terms of tax as it is difficult for shareholders and directors to separate their finances from those of the business.
Accountancy fees - one expense bound to be higher for limited companies is the accountancy fee as reporting requirements tend to be bigger.
Unincorporated Group/Association
An unincorporated association is a membership organisation. It can be whatever its members want it to be, and carry out whatever activity you choose. It is the easiest, quickest and cheapest way for a group to set itself up. This structure is suitable for groups such as playgroups, pensioners associations, film clubs, arts groups and campaigning groups.
PROS
This structure is simple and flexible. You do not need to have your constitution approved by any outside body.
An unincorporated association is cheap to run
If your aims are not charitable, and you don’t get any grant funding, you won’t need to submit accounts or reports to anyone outside your group
If your aims are not charitable, you have no obligation to any regulatory body and there are no particular rules about how you should run your group (so long as your activities are generally lawful)
You can still apply for a business bank account as an unincorporated group
CONS
Some funders only give money to charities. You can overcome this problem by being a charitable unincorporated association.
Your group has no separate legal existence – it is a collection of individuals. This means that:
Individual members of your management committee are personally responsible for the group’s obligations and debts, and are liable if, for example, it is being sued. While it is possible to insure against this liability it is often difficult to claim on such insurance. If you feel you may need insurance you may be better to look again at your structure and choose some form of incorporation.
The group cannot enter into contracts – if it wants to rent premises or employ people, this is done, in the eyes of the law, by individuals on behalf of the group
The group cannot own property in its own right.
Self Assessment Tax Return
The Self Assessment Tax Return is a form that self-employed people must complete annually, to let HMRC know how much money you have earnt, and any business expenses you have incurred. Once completed, you will be informed how much income tax and national insurance you need to pay. If you are employed on a PAYE (pay as you earn) contract through an employer, your tax and national insurance contributions are taken directly from your wages each month. However, being self-employed, the money that you are paid through freelance contracts or fees for services comes to you in full. When you are negotiating payment for services, ensure that you factor in the amount you will need to pay to HMRC, and if possible, put that aside when you have received payment so that you have the necessary amount saved up for your tax bill.
HMRC usually contact you in April or May (just after the financial year end) to let you know that your tax return is due. Essentially, the Self Assessment form asks you to enter your income (money paid to you) from self employed work, and any business expenses incurred related to this work. Expenses applies to things like mileage allowances, train/plane/bus tickets, specialist clothing or equipment, subscriptions to professional bodies, or household expenses if you work from home, including a portion of your utility bills and rent. You need to have all the receipts for these expenses, and keep them for seven years in case HMRC request to see them.
Once you have entered these, your total expenses amount will be deducted from your income. Any income above the ‘personal allowance threshold’ (£12,500 at the time of writing - Dec 2019) is taxable income and you will be subject to pay 20% of that income to HMRC, up to £37,500 earnings. Earnings over £37,500 will be subject to 40% income tax, up to 45% on earnings over £150,000.
If you are also employed on a PAYE contract, for example you are working part time in an organisation, shop, restaurant etc, you will also need to enter this. Your employer should provide you with a P60 which details all earnings and tax paid from that job. You can use this to enter the information into your Self Assessment. Sometimes, you will see that earnings/tax from this P60 have automatically been entered against your Unique Taxpayer Reference (UTR), in which case you will not need to manually enter them.
Filing your tax return for the first time can feel a bit daunting, but overall it is actually quite a simple process. We recommend that you keep on top of your finances throughout the year by:
Number your invoices and keep them all in one folder on your computer. If you have lots of them, you may want to sort the folder into subfolders by month
Keep all receipts for business expenses (train tickets, lunches, research events/trips etc) and number them to correspond with a spreadsheet (next bullet point!)
Keep a spreadsheet of your income and expenditure. Decide on a method that works for you to keep this up to date, for example you may want to update it with any expenses/income every two weeks, or you may want to do it as and when they occur
When the time comes to fill in your self assessment you will be able to use all the information recorded in your spreadsheet to fill out the form. There are various other questions and tick boxes that you'll have to answer, but each comes with an explanation.
Remember to keep the receipts for any business expenses that you've declared for seven years as HMRC can call on you at any point to provide them!
You'll first need to register online here
You can find out more information here
Other Bits And Bobs
Business Bank Account: This isn't essential if you’re a sole trader but it will help to keep your accounts in order. Any bank can offer this option but be careful as banks may charge for these accounts. If you ‘shop around’ you can usually find a bank offering free business accounts.
If you are a company/collective/group and you apply for funding from Arts Council England, or some trusts and foundations in the UK, you would need a business bank account for the funding to be paid into. Sometimes these can take a bit of time so make sure you plan this in when writing your application to ACE.
Get compliant - make sure that you satisfy all regulatory issues eg. health & safety, licensing, data protection.
Marketing and Communications - develop a brand identity, set-up a website and think about promotional material. Set up communications and ensure that your customers can easily contact you by phone, email and social media platforms.
Insurance - make sure to shop around to compare quotes, you may need public liability insurance or to insure goods and equipment if you are an artist. Try a comparison website to compare quotes
If you would like any further information or support with registering your business, you can access support from the government here: https://www.gov.uk/business-support-helpline
Further advice and support can be found here, including targeted advice for Women in Enterprise: https://www.greatbusiness.gov.uk/where-to-get-start-up-advice/
Here’s some information on different types of business structures if the above options don’t sound right for you: https://www.companyaddress.co.uk/post/38
We hope this helps you on your journey to becoming your own boss!