It is important to ‘sign-off’ from self-employment when you have stopped being self-employed. The best course is to write to HMRC 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
- If you are registered for VAT, consider when to cancel your VAT registration – http://www.hmrc.gov.uk/vat/managing/change/cancel.htm
- Cancel your class 2 National Insurance payments
- If you are working in the Construction Industry – notify HMRC on the Construction Industry helpline (0845 366 7899) 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, such as for loss relief, entrepreneur’s relief etc. http://taxaid.org.uk/info/capital-gains-tax/selling-your-business
- 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
For more details see the HMRC website – closing or selling your business – http://www.hmrc.gov.uk/dealingwith/changes/close-sell-business.htm
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 April 2011 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 25 days in the tax year to 5 April 2012, 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 2013, unless HMRC is made aware early in 2012/13 that he has stopped trading.
By 1 February 2013, HMRC can estimate Alan’s tax bill for his self-employed income for the tax year 2011/12. Alan would need to file a tax return for 2011/12 by 31 January 2016, 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 very unlikely that he will be able to successfully apply for Special Relief to reduce the debt (see http://taxaid.org.uk/guides/tax-debt/wrong).
Our helpline offers professional, free, confidential advice to people on low incomes