Self-employed - running a business and paying tax
It is important to ‘sign-off’ from self-employment when you have stopped being self-employed. The best course is to write to HMRC (or use the on-line form) and say that you have stopped being self-employed, as soon as this happens. HMRC will not know that you have stopped being self-employed simply because you now work as an employee, or are claiming out of work benefits.
When you stop being self-employed you should:
- Notify HMRC at once that you have stopped self-employment. This can be done via an on-line form
- If you are registered for VAT, consider when to cancel your VAT registration – https://www.gov.uk/vat-registration/cancel-registration
- If you are working in the Construction Industry – notify HMRC on the Construction Industry helpline (0300 200 3210) that you are no-longer working in Construction
- Complete a self-assessment tax return to cover your last period of trading. You will need to wait until the end of the tax year to do this
- Take advice if you have sold your business, business assets or business property – you could in some cases make a capital gain
- Consider if you need to make any special claims, for example loss relief, or Capital Gains Tax entrepreneur’s relief
- Pay any outstanding tax
- Keep your business records, usually for 6 years
- Ensure that HMRC has your correct address for the 12 months following submission of your final tax return. Give HMRC a forwarding address if you move within 12 months
Dangers of not notifying HMRC at once
If you fail to notify HMRC at once that you have stopped being self-employed, you could find that HMRC continues to send you self-assessment tax returns after you have stopped trading. If you ignore these returns you could be liable for penalties. In addition, HMRC may create an estimated tax bill if you do not complete and submit the tax returns on time. These estimated debts are legally due and can only be displaced by sending in a tax return within 3 years of the filing date for the return. Outside this time limit it may not be possible to change the bill.
Alan stopped trading on 30 May 2015 and took a job as an employee. He did not tell HMRC that he had stopped trading and moved house shortly afterwards without giving HMRC a forwarding address. Even though Alan was only trading for a few months in the tax year to 5 April 2016, he will need to complete a tax return for that year. It is likely that he will be sent a tax return for the tax year to 5 April 2017 as well, unless HMRC is made aware early in 2016/17 that he has stopped trading.
By 1 February 2017, HMRC can estimate Alan’s tax bill for his self-employed income for the tax year 2015/16. Alan would need to file a tax return for 2015/16 by 31 January 2020, or he will be unable to displace the estimated bill. As Alan did not notify HMRC that he had stopped trading, did not file the last tax return or give a forwarding address, it is unlikely that he will be able to successfully apply for Special Relief to reduce the debt (see tax debt guide http://taxaid.org.uk/guides/taxpayers/tax-debt/bankruptcy).