Index
Part 2: Managing Outstanding Taxes and National Insurance When Ending Self-Employment
Part 3: Managing VAT, Business Assets, and Legal Obligations When Ending Self-Employment
Part 4: Handling Contracts, Unpaid Invoices, and Finalizing Employee Matters
Part 5: The Role of a Personal Tax Accountant in Ending Self-Employment
Understanding the Process of Ending Self-Employment
Deciding to end your self-employment status with HMRC can be a significant decision, often driven by changes in personal or business circumstances. Whether you are a sole trader or part of a business partnership, you must follow specific procedures to ensure that your financial and tax affairs are correctly finalized. In this part, we’ll cover the core steps required to end self-employment, focusing on the obligations you have to HMRC and the practical steps involved in informing them of your decision.
1.1 Notifying HMRC When You Stop Being Self-Employed
The first step in ending your self-employment status is notifying HMRC. This is a straightforward but essential requirement. You can do this through several channels:
Online: HMRC offers an online service where you can log in and inform them that you are no longer self-employed. You will need your National Insurance number and your Unique Taxpayer Reference (UTR) number, which you should already have from when you initially registered as self-employed.
By Phone or Post: Alternatively, you can call HMRC's self-employment helpline or write to them to notify them of the change. Whichever method you choose, ensure you provide the correct date when you stopped trading.
It’s crucial to note that if you fail to notify HMRC promptly, you could still be required to submit annual self-assessment tax returns, leading to unnecessary tax obligations and potential penalties.
1.2 The Final Tax Return: A Key Responsibility
Once you have notified HMRC, the next step is completing your final self-assessment tax return. This process may seem daunting, but breaking it down can make it much easier.
When to Submit: Your final tax return must be submitted by the normal deadline following the end of the tax year in which you ceased trading. For instance, if you stopped being self-employed on April 5, 2024, your final return must be submitted by January 31, 2025.
What to Include: Your final tax return should detail your income up until the point you stopped trading. You will also need to include any allowable business expenses and work out your capital allowances for any assets used in your business. It’s also essential to account for any balancing charges (these occur if you sold any business assets for more than their written-down value).
Capital Gains Considerations: If you disposed of assets such as equipment or property during the process of closing down your business, you may need to consider Capital Gains Tax. This is especially relevant if you have sold business assets for a profit. In this case, you may be eligible for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief), which can significantly reduce your Capital Gains Tax bill.
1.3 Overlap Relief and Terminal Loss Relief: Reducing Your Tax Bill
HMRC offers a variety of tax reliefs to help reduce your final tax liability when you end your self-employment. Two of the most critical reliefs are Overlap Relief and Terminal Loss Relief.
Overlap Relief: Overlap Relief helps ensure that you do not end up paying tax twice on your profits. This relief comes into play when your accounting period overlaps the tax year. When you cease self-employment, you can claim this relief to offset any tax that was overpaid during the overlap period.
Terminal Loss Relief: If you made a loss in your final year of trading, you can claim Terminal Loss Relief. This relief allows you to offset the loss against profits made in the three previous tax years. This can be particularly beneficial if you have experienced a downturn in your business and are ending self-employment on a loss. By carrying back the loss, you may be able to secure a refund for tax paid in earlier profitable years.
1.4 Cancelling VAT Registration
If your business is registered for VAT, one of the steps you must take when ending your self-employment is to cancel your VAT registration. This is particularly relevant if your annual turnover exceeded the VAT registration threshold while you were trading. You can cancel your VAT registration through HMRC’s online service or by completing a VAT7 form. It’s important to keep in mind that you need to submit a final VAT return and settle any VAT due or reclaim any refunds due to your business.
1.5 Responsibilities if You Had Employees
If your self-employment involved employing staff, there are additional steps you need to take to wind up your business. You must close your PAYE scheme and submit final payroll reports to HMRC. These final reports should confirm that your employment obligations have ceased, and all taxes due have been settled. It’s also important to inform your employees in good time and ensure they are aware of any redundancy entitlements or other rights they may have under employment law.
1.6 What Happens if You Are Insolvent?
In some cases, businesses may close due to insolvency, where liabilities exceed assets, and the business cannot meet its financial obligations. If you find yourself in this situation, it’s crucial to understand that you are personally liable for business debts. Creditors can take legal action against you, including bankruptcy proceedings, if the debts are not repaid.
However, there are alternatives available, such as entering into an Individual Voluntary Arrangement (IVA). An IVA is an agreement with creditors to repay debts over a specific period, usually based on what you can afford. While an IVA can protect you from bankruptcy, it’s important to seek professional advice to determine whether it is the right option for you.
Managing Outstanding Taxes and National Insurance When Ending Self-Employment
When you end your self-employment, one of the most important steps is to ensure that all your tax and National Insurance (NI) contributions are settled correctly. HMRC will still require you to submit your final self-assessment tax return, and you need to consider any outstanding liabilities or reliefs you might be eligible for. Additionally, special situations such as voluntary National Insurance contributions and pension implications need to be carefully considered.
2.1 Final Self-Assessment Tax Return: A Step-by-Step Example
Filing your final tax return after ceasing self-employment requires careful attention to detail. Let’s walk through a practical example to help clarify how this process works.
Example: Let’s assume you are a sole trader who decided to stop trading on July 31, 2024. You’ve been self-employed for five years and your accounting period ends on March 31 each year. Your business income in the tax year 2023/2024 was £60,000, and for the part of the tax year 2024/2025 that you were trading (April to July), you earned £15,000.
Here’s how you would approach your final tax return:
Determine Your Income for the Year: For your final tax return, you will need to declare your income from both the full tax year of 2023/2024 and the part-year 2024/2025 when you were still trading.
2023/2024 Income: £60,000
2024/2025 Income (until July 31, 2024): £15,000
Claim Allowable Expenses: You will also need to deduct any allowable business expenses from your income. Let’s say your business expenses for 2023/2024 were £20,000, and for the partial year in 2024/2025, your expenses amounted to £7,500.
2023/2024 Expenses: £20,000
2024/2025 Expenses: £7,500
After deducting the expenses, your taxable income would be:
2023/2024 Taxable Income: £60,000 - £20,000 = £40,000
2024/2025 Taxable Income (until July 31, 2024): £15,000 - £7,500 = £7,500
Calculate Capital Gains (if applicable): If you sold any business assets, such as equipment or property, you may need to declare any capital gains. For instance, if you sold business machinery for £5,000 and its written-down value (after claiming capital allowances) was £3,000, you would have a capital gain of £2,000. If eligible, you could claim Business Asset Disposal Relief on this gain, reducing your tax liability.
Submit the Final Return: You’ll now need to submit your final self-assessment tax return. For the year 2023/2024, you would submit your return by January 31, 2025. For the partial year 2024/2025, your final return would be due by January 31, 2026, even though you stopped trading in July 2024.
By following this process, you can ensure that your self-employment income and expenses are properly accounted for, and any tax liabilities are settled.
2.2 National Insurance Contributions: What Happens When You Stop Trading?
As a self-employed individual, you are required to make Class 2 and Class 4 National Insurance contributions (NICs). These contributions help you build up your entitlement to the state pension and certain benefits, such as Maternity Allowance. However, when you stop being self-employed, your NICs obligations change.
Class 2 NICs: These are contributions that help maintain your eligibility for the state pension. For the tax year 2024/2025, the Class 2 NIC rate is £3.45 per week. If your profits are above the Small Profits Threshold (currently £6,725), you must pay Class 2 NICs. When you stop trading, you will no longer be liable for Class 2 NICs, but you may choose to continue making voluntary contributions to protect your future entitlement to the state pension.
Class 4 NICs: These contributions are based on your profits, with the rate for 2024/2025 set at 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270. Once you stop trading, you will no longer be required to pay Class 4 NICs on future income.
Let’s explore this through an example:
Example: Rachel has been self-employed for six years and is now ending her self-employment in July 2024. Her profits for the year up to the point she stopped trading were £20,000. Here’s how her National Insurance contributions would work:
Class 2 NICs: Rachel’s profits exceed the Small Profits Threshold, so she is required to pay Class 2 NICs. Since she traded for 16 weeks in the tax year, her Class 2 NIC liability would be:
£3.45 x 16 weeks = £55.20
Class 4 NICs: Rachel’s profits of £20,000 are above the lower limit for Class 4 NICs (£12,570). Therefore, she will pay 9% on the difference between her profits and the lower limit:
(£20,000 - £12,570) x 9% = £669.30
Once Rachel stops trading, she can choose whether or not to continue making voluntary Class 2 NICs to protect her future state pension. If she decides not to, she will no longer owe any further NICs.
2.3 Voluntary Class 2 National Insurance Contributions: Should You Continue?
After ending self-employment, one crucial decision you may need to make is whether to continue making voluntary Class 2 NICs. These contributions are essential for maintaining your eligibility for the state pension. Let’s look at the implications of this choice.
The state pension is based on National Insurance qualifying years. For the full new state pension, you need to have at least 35 qualifying years of NICs. If you do not have enough qualifying years, you will receive a reduced pension. For individuals close to retirement age who have gaps in their NIC record, continuing with voluntary contributions can be a good idea.
Example: John, a self-employed electrician, has 32 qualifying years of NICs but decides to retire early and end his self-employment in July 2024. To receive the full state pension, he needs 35 qualifying years, but he is three years short. John decides to continue making voluntary Class 2 contributions for the next three years at the rate of £3.45 per week.
The cost for three years of voluntary Class 2 NICs would be:
£3.45 per week x 52 weeks x 3 years = £538.20
By paying £538.20, John ensures that he will receive the full state pension when he reaches retirement age. If John had not made these contributions, his state pension would have been reduced proportionately.
2.4 Special Considerations for Pension Contributions
Ending your self-employment can also impact your pension contributions, particularly if you have been paying into a personal pension plan or a self-invested personal pension (SIPP). When you stop working, your income may decrease, but you can still continue contributing to your pension.
If you no longer have taxable income from self-employment, the amount you can contribute to your pension and still receive tax relief is capped at £3,600 per year (including tax relief). This is known as the net relevant earnings limit. If you have other sources of taxable income, such as investment income or a part-time job, you may be able to contribute more.
Example: Sarah, a freelance designer, has been contributing £8,000 per year into her SIPP while self-employed. She stops trading in October 2024 and no longer has taxable income. After ceasing self-employment, Sarah can continue contributing to her pension, but the maximum amount eligible for tax relief will be £3,600 per year. If she wants to continue maximizing her pension contributions, she will need to ensure she has other sources of taxable income.
Managing VAT, Business Assets, and Legal Obligations When Ending Self-Employment
When you end your self-employment in the UK, there are a number of additional obligations and administrative steps that may need to be taken, depending on the nature of your business. In particular, if your business is registered for VAT or if you own business assets, there are specific rules that apply. Additionally, if your business is facing financial difficulties, you may need to take steps to deal with creditors, insolvency, or legal obligations. This part will cover how to handle VAT registration, disposal of business assets, and dealing with insolvency if relevant, all explained with examples to make the processes clearer.
3.1 Cancelling Your VAT Registration
If you were required to register for VAT during your time as a self-employed individual, you will need to cancel your VAT registration when you stop trading. The threshold for VAT registration in the UK (as of 2024) is £85,000 in annual turnover, meaning if your business income exceeded this amount, you were likely registered for VAT. Once your business ceases, you can cancel your VAT registration, but this needs to be done in a specific way.
You can cancel your VAT registration through HMRC’s VAT online services. You’ll also need to submit a final VAT return and ensure that any VAT liabilities or refunds are properly handled.
Here’s an example of how this process might work:
Example: Let’s say Jenny is a self-employed marketing consultant who was VAT-registered because her turnover exceeded £85,000 in previous years. She decides to end her self-employment on July 31, 2024, because she’s taking a full-time job. Here’s what Jenny needs to do:
Cancel VAT Registration: Jenny logs into her VAT account on HMRC’s website and submits a request to cancel her VAT registration. She needs to do this within 30 days of stopping her business. HMRC will process her cancellation and send her confirmation.
Submit Final VAT Return: Even after cancelling her registration, Jenny must submit a final VAT return for the period up until July 31, 2024. This return needs to include all the VAT she charged her clients and any VAT she reclaimed on business expenses during that period.
Pay Outstanding VAT or Claim Refund: If Jenny owes VAT to HMRC, she needs to make sure it is paid by the normal deadline. Alternatively, if she’s entitled to a refund (for example, if her business had large expenses that led to more VAT being reclaimed than paid), she can request the refund as part of her final VAT return.
In this way, Jenny ensures that her VAT obligations are fully settled, avoiding any penalties for late submission or non-compliance.
3.2 Dealing with Business Assets When Ending Self-Employment
When you cease trading as a self-employed individual, you may need to sell or dispose of your business assets, such as equipment, vehicles, or property. How you handle these disposals can have tax implications, particularly with respect to Capital Gains Tax.
What is Capital Gains Tax? Capital Gains Tax (CGT) is a tax on the profit you make when you sell an asset that has increased in value. For example, if you sell a piece of business equipment that you bought for £2,000 and sell it for £3,000, the £1,000 profit is considered a capital gain and may be subject to CGT.
However, there are reliefs available to reduce the amount of CGT you have to pay. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) is a key relief that allows eligible individuals to pay a lower rate of CGT (10%) when disposing of business assets.
Example: Tom is a self-employed plumber who owns a van and several expensive tools that he used for his business. When he stops trading in December 2024, he decides to sell his van and equipment. Here’s how the tax implications would play out:
Selling the Van: Tom bought his van five years ago for £12,000. He sells it for £8,000 when he ends his business. Since the van was used for business purposes, the difference between the sale price and the value on Tom’s accounts (after deducting capital allowances) may result in a balancing charge. If the van was written down to £5,000 on Tom’s tax return, he would need to account for the £3,000 difference as a taxable balancing charge.
Selling the Tools: Tom also sells his tools for £2,000, which he bought for £3,000. In this case, because Tom sold the tools for less than their original cost, he does not need to pay CGT or account for any profit on these sales.
Claiming Business Asset Disposal Relief: If Tom had made a profit on the sale of his van or other business assets, he could claim Business Asset Disposal Relief, reducing his CGT liability to 10%. For instance, if he sold other assets for a total profit of £5,000, his CGT liability would be £500 (£5,000 x 10%).
By correctly calculating his capital gains and claiming the appropriate reliefs, Tom minimizes his tax liabilities when selling his business assets.
3.3 Ending a Partnership: Additional Considerations
If you are ending a business partnership rather than sole trading, there are additional steps to take. A partnership has its own tax filing requirements, including a Partnership Tax Return. The nominated partner is responsible for submitting this final return to HMRC, ensuring that all partnership income and expenses are properly declared.
Example: Emma and David run a small graphic design partnership, and they decide to dissolve the business at the end of the 2024 tax year. Here’s how they would handle the process:
Notify HMRC: As soon as Emma and David decide to dissolve the partnership, they notify HMRC. They need to provide the official date that the business ceased trading.
Final Partnership Tax Return: Emma, as the nominated partner, submits the final Partnership Tax Return, which includes all income and expenses up to the date the partnership ended. She also needs to ensure that any profits or losses are divided correctly between herself and David based on their partnership agreement.
Individual Self-Assessments: Both Emma and David must submit their own personal self-assessment tax returns, including their share of the partnership’s profits or losses.
Disposal of Partnership Assets: If the partnership owned any assets, such as office equipment or computers, these will need to be sold or distributed between Emma and David. If any assets are sold for a profit, they may each need to account for their share of the capital gains and pay CGT if applicable.
By following these steps, Emma and David can ensure that their partnership is dissolved in compliance with HMRC’s rules.
3.4 Dealing with Insolvency: What to Do If Your Business Has Debts
If you’re ending your self-employment because your business is insolvent (i.e., you can’t pay your debts), it’s essential to address this issue carefully. In the UK, self-employed individuals are personally liable for their business debts. This means that creditors can take legal action against you to recover what they are owed, even after you cease trading.
There are several options available if you are in this situation:
Negotiate with Creditors: In some cases, you may be able to negotiate repayment terms with your creditors. This could involve extending the repayment period or agreeing on a reduced settlement amount.
Individual Voluntary Arrangement (IVA): An IVA is a formal agreement with creditors to pay back your debts over a set period. It’s legally binding and can help you avoid bankruptcy. To set up an IVA, you will need to work with an insolvency practitioner, who will negotiate with your creditors on your behalf.
Declare Bankruptcy: As a last resort, you may need to declare bankruptcy if you cannot pay your debts. This can be a stressful and challenging process, but it may allow you to wipe the slate clean and start over. However, it’s important to understand the consequences of bankruptcy, including the impact on your credit rating and restrictions on future business activities.
Example: Tom, a self-employed electrician, ran into financial trouble when his business expenses exceeded his income. By the time he decided to end his business in July 2024, he had accumulated £30,000 in unpaid bills, including supplier invoices and loan repayments. Unable to meet his obligations, Tom sought the help of an insolvency practitioner, who helped him set up an IVA. Under the terms of the IVA, Tom agreed to repay £15,000 of the debt over the next five years, while the remaining £15,000 was written off by his creditors.
By taking these steps, Tom avoided bankruptcy and was able to resolve his financial issues in a more manageable way.
3.5 Legal Obligations: Informing HMRC and Creditors
When you cease trading, it’s crucial to ensure that all legal obligations are fulfilled. This includes informing HMRC of the business closure, as well as notifying any creditors (if applicable). Failing to meet these obligations could result in penalties, ongoing liability for debts, or other legal consequences.
Example: Lisa, a self-employed photographer, decides to stop trading in November 2024. She has a few outstanding contracts with clients and a loan she took out to purchase equipment. Lisa informs HMRC that she’s ending her self-employment and completes her final tax return, ensuring that any remaining taxes and NICs are settled. She also contacts her loan provider to make arrangements for the remaining balance of her loan, preventing any legal action for non-payment.
By handling her legal obligations properly, Lisa ensures that her business closure is smooth and without any legal complications.
Handling Contracts, Unpaid Invoices, and Finalizing Employee Matters
When you decide to end your self-employment, the process doesn’t just involve informing HMRC and submitting your final tax return. If you had contracts with clients, unpaid invoices, or employees, these aspects must be addressed carefully to avoid future complications. This part will explore how to handle existing contracts, manage unpaid invoices, and fulfill your legal obligations related to employees. All these aspects need to be considered when you bring your self-employed business to a close.
4.1 Dealing with Ongoing Contracts
One of the challenges of ending self-employment is managing existing contracts with clients or suppliers. If you have ongoing contracts, you need to consider how to end them legally and ensure you fulfill any outstanding obligations. Depending on the terms of the contract, you may need to provide notice or negotiate the terms of termination.
Example: Sarah, a self-employed web developer, decides to close her business in March 2024. She has a long-term contract with a client that is due to end in December 2024, but she no longer wants to continue with the project. Here’s how Sarah can handle the situation:
Review the Contract: Sarah needs to review the terms of her contract to understand the notice period required for termination. If the contract states she must provide 30 days' notice, she is legally obliged to give that notice.
Communicate with the Client: Sarah should reach out to her client to explain the situation and provide formal written notice of her intention to end the contract. She may also suggest alternatives, such as transitioning the project to another developer, to maintain a positive relationship.
Negotiate Terms (if necessary): In some cases, a client may be willing to negotiate an early termination if Sarah provides a handover or ensures that another professional can take over the project. Alternatively, she may need to compensate the client if an early termination causes any financial loss.
By handling the situation professionally and following the terms of the contract, Sarah can end her self-employment without damaging her reputation or breaching contractual obligations.
4.2 Managing Unpaid Invoices
Another issue that can arise when ending self-employment is dealing with unpaid invoices. If clients still owe you money for services rendered, you’ll need to take steps to collect payment before closing your business. It’s important to stay proactive in managing this process, as it can take time to settle outstanding debts.
Example: Mike, a self-employed graphic designer, stops trading in July 2024. However, he has several unpaid invoices totaling £5,000 from different clients. Here’s how Mike can manage this situation:
Send Final Invoices: Before officially ending his business, Mike sends out his final invoices, making sure that each client is aware of the amount owed and the payment deadline. Mike includes a clear note that he will be closing his business and requests prompt payment.
Follow Up with Clients: If any invoices remain unpaid after the due date, Mike follows up with polite reminders. He can do this via email or phone, emphasizing the importance of settling the debt before his business closes.
Consider Legal Action (if necessary): If clients continue to ignore payment requests, Mike may need to consider legal action, such as using the Small Claims Court or hiring a debt recovery agency. However, he should weigh the cost and time involved before pursuing this option.
Write Off Bad Debts (if applicable): In some cases, it may not be possible to collect payment, and Mike might need to write off the debt as a business loss. If he chooses to write off a bad debt, he can claim it as a deductible expense on his final tax return, reducing his overall tax liability.
By actively managing his unpaid invoices, Mike can ensure that he collects as much of the outstanding debt as possible before closing his business. If any debts remain unpaid, he still has options for legal recourse or writing off the amounts.
4.3 Finalizing Employee Matters
If you employed staff during your time as a self-employed business owner, you need to take specific steps to close your PAYE scheme and ensure your employees’ rights are respected. This includes final payroll submissions, redundancy payments, and notifying HMRC that you are no longer employing staff.
Example: Emma, a self-employed event planner, employs two part-time assistants to help with her business. She decides to stop trading in October 2024. Here’s how Emma can finalize her employee-related obligations:
Notify Employees in Advance: Emma should provide her assistants with ample notice that she plans to end her business. The notice period will depend on their employment contracts and statutory guidelines. If the contracts specify a two-month notice period, Emma is legally required to provide this.
Calculate Final Wages and Redundancy Payments: Emma must ensure that her assistants are paid for their final month of work, including any unused holiday entitlement. Depending on how long the employees have worked for Emma, they may also be entitled to statutory redundancy pay. In the UK, employees are typically entitled to redundancy pay if they have worked for an employer for two or more years.
Example of Redundancy Pay: Emma’s assistant, Joe, has worked for her for three years. Joe earns £1,500 per month. For redundancy pay, Joe is entitled to:
0.5 week’s pay for each full year he was under 22 years of age
1 week’s pay for each full year he was aged between 22 and 41
Since Joe is 25 years old, his redundancy pay would be calculated as:
1 week’s pay x 3 years = £1,500
Therefore, Emma needs to provide Joe with £1,500 in redundancy pay in addition to his final wage.
Submit Final PAYE Reports to HMRC: Once Emma has processed the final payroll for her employees, she must submit a final Full Payment Submission (FPS) to HMRC. This submission informs HMRC that her PAYE scheme is closing and that she no longer employs staff.
Close PAYE Scheme: After submitting the final FPS, Emma can close her PAYE scheme by informing HMRC through their online system or by sending a letter. Once this is done, Emma will no longer be required to submit PAYE reports.
By following these steps, Emma ensures that her employees are treated fairly and that she complies with her legal obligations as an employer.
4.4 Dealing with Client Obligations: Handling Refunds and Disputes
In some cases, you may owe clients refunds for services that you were unable to complete before ending your self-employment. Handling these refunds correctly is essential to maintaining your reputation and avoiding legal disputes.
Example: Ben, a self-employed personal trainer, has prepaid clients who paid for packages of 10 training sessions. However, Ben decides to stop trading after only completing 5 sessions with each client. To avoid disputes, Ben needs to provide partial refunds for the remaining 5 sessions.
Calculate Refunds: Ben calculates the refund amount based on the number of sessions that were not delivered. If each session costs £50, Ben owes each client £250 (5 sessions x £50) as a refund.
Communicate with Clients: Ben reaches out to his clients to explain the situation and offers to refund the remaining sessions. He provides clear documentation showing the payments received and the amount being refunded.
Address Disputes (if any): If any clients dispute the refund amount or request alternative arrangements, such as transferring the sessions to another trainer, Ben works with them to find a mutually agreeable solution. In this case, Ben could offer to refer his clients to another personal trainer and transfer the remaining sessions.
By proactively managing refunds and handling disputes with clients, Ben ensures that he leaves his business on good terms with his customers and avoids any legal complications.
4.5 Professional Services: The Importance of Seeking Legal and Financial Advice
Ending self-employment can involve a range of complex financial and legal issues. Seeking professional advice can help ensure that you handle everything correctly and minimize your risk of future problems.
Why hire a solicitor or accountant?
A solicitor or accountant can provide invaluable support when winding down your business. An accountant can help you with the financial side, ensuring that all your tax obligations are met, and any allowable deductions are claimed. They can also help with preparing final accounts, dealing with unpaid invoices, and submitting your final tax return. A solicitor, on the other hand, can help with legal matters such as contract terminations, employee rights, and disputes.
Example: Karen, a self-employed interior designer, decides to close her business after 10 years. She has contracts with clients, unpaid invoices, and a few employees. Karen decides to hire an accountant and a solicitor to assist with the process:
The accountant helps Karen prepare her final tax return, ensuring that all expenses, including redundancy payments and bad debts, are claimed. The accountant also helps Karen calculate the VAT due on the sale of her business assets and file her final VAT return.
The solicitor reviews Karen’s contracts with clients and suppliers, helping her terminate these agreements properly. The solicitor also assists with negotiating early contract termination and handles any potential disputes with clients.
By seeking professional advice, Karen is able to close her business smoothly, ensuring that she meets all her financial and legal obligations without unnecessary stress.
The Role of a Personal Tax Accountant in Ending Self-Employment
The decision to end self-employment involves a number of critical steps, and while some people may feel comfortable handling the process on their own, many find that working with a personal tax accountant can offer significant benefits. From navigating the complexities of tax filings to ensuring you claim all available reliefs, a tax accountant can help you avoid costly mistakes and make the process of closing your business as smooth as possible.
5.1 Why Hire a Personal Tax Accountant?
Closing a business, even if it is a small self-employed operation, involves a variety of financial tasks that need to be completed accurately. A tax accountant can help with these tasks, ensuring you meet all your obligations to HMRC and helping you navigate the more complex areas of tax law. Here are some specific reasons why working with an accountant can be beneficial:
Expert Knowledge: Tax accountants have a deep understanding of tax law and HMRC’s requirements. They can help you ensure that all your tax returns are accurate and submitted on time, avoiding the risk of penalties.
Tailored Advice: Every business is different, and a tax accountant can offer personalized advice based on your specific circumstances. They can help you understand which tax reliefs you are eligible for, how to handle business assets, and how to deal with outstanding debts or contracts.
Stress Reduction: Ending self-employment can be a stressful process, especially if you are dealing with multiple obligations like VAT, payroll, and capital gains. A tax accountant can take on much of the administrative burden, allowing you to focus on other aspects of winding down your business.
5.2 Maximizing Tax Reliefs and Minimizing Tax Liabilities
One of the most significant ways a personal tax accountant can help when ending self-employment is by ensuring that you take advantage of all available tax reliefs. This can make a big difference in reducing your final tax bill, especially if you are selling business assets or have made a loss in your final year of trading.
Let’s look at some key tax reliefs and how an accountant can help you claim them:
Business Asset Disposal Relief (formerly Entrepreneurs' Relief): If you are selling business assets like equipment or property, you may be eligible for Business Asset Disposal Relief, which allows you to pay a reduced rate of Capital Gains Tax (CGT) at 10%. A tax accountant can help you determine if you qualify for this relief and ensure that you claim it correctly.
Example: Emma, a self-employed consultant, is selling her office equipment for a profit of £10,000 after closing her business. With the help of her accountant, she claims Business Asset Disposal Relief, reducing her CGT liability to £1,000 (£10,000 x 10%). Without this relief, she would have paid a higher CGT rate of 20%, costing her £2,000.
Terminal Loss Relief: If your business has made a loss in its final year, you can claim Terminal Loss Relief, which allows you to offset that loss against profits from previous years. This can lead to a refund of tax paid in those earlier years. A tax accountant can calculate your final trading losses and ensure that they are applied in the most tax-efficient way.
Example: Steve, a self-employed carpenter, made a £10,000 loss in his final year of trading. His accountant helps him claim Terminal Loss Relief, which offsets the loss against profits he made in the three previous years. As a result, Steve receives a refund of £2,000 in tax paid in those earlier years.
Overlap Relief: If your accounting periods overlapped in previous years, you may have paid tax on profits twice during the overlap period. When you end your self-employment, you can claim Overlap Relief to ensure that you don’t overpay tax. A tax accountant will help you calculate this relief and apply it to your final tax return.
Example: Rachel, a self-employed marketing consultant, had overlapping accounting periods in her first few years of business. By working with her accountant, she claims £3,000 in Overlap Relief, reducing her final tax bill.
5.3 Navigating Complex Tax Scenarios
Ending self-employment can involve a range of complex tax scenarios, depending on the size and nature of your business. A tax accountant can help you navigate these complexities, ensuring that everything is handled correctly and that no important details are missed. Here are a few specific scenarios where a tax accountant’s expertise can be particularly helpful:
VAT Deregistration: If your business was VAT-registered, you will need to deregister for VAT when you stop trading. This involves submitting a final VAT return and ensuring that all VAT liabilities are settled. A tax accountant can help you complete this process, ensuring that your VAT obligations are correctly managed and any refunds are claimed.
Example: Anna, a VAT-registered self-employed IT consultant, stops trading in September 2024. Her accountant helps her complete her final VAT return, claim VAT on outstanding invoices, and deregister for VAT with HMRC.
Handling Business Assets: When you stop trading, any business assets you own, such as equipment or vehicles, may need to be sold or disposed of. This can have tax implications, especially if you sell assets for more than their written-down value. A tax accountant can help you calculate balancing charges or capital gains on these assets and ensure that you report them correctly to HMRC.
Example: John, a self-employed photographer, sells his photography equipment for £5,000 when he ends his business. His accountant helps him calculate the capital gain on the equipment and ensures that he claims the correct tax reliefs to minimize his CGT liability.
Dealing with Outstanding Debts: If you have unpaid invoices or outstanding business debts, a tax accountant can help you manage these effectively. They can provide advice on how to handle bad debts and whether you can claim them as a deductible expense on your final tax return.
Example: Mark, a self-employed builder, has £4,000 in unpaid invoices when he stops trading. His accountant advises him on how to pursue the unpaid debts and helps him claim them as a business loss on his tax return, reducing his final tax bill.
5.4 Avoiding Penalties and Late Fees
One of the biggest risks when ending self-employment is missing important deadlines or failing to meet your tax obligations, which can result in penalties and late fees. A tax accountant can help you stay on top of these deadlines, ensuring that everything is submitted on time and that you don’t incur unnecessary penalties.
Some common deadlines that an accountant can help you manage include:
Final Self-Assessment Tax Return: Your final self-assessment tax return must be submitted by January 31 following the end of the tax year in which you stopped trading. A tax accountant will ensure that your final return is accurate and submitted before the deadline.
Final VAT Return: If you are VAT-registered, you will need to submit a final VAT return when you deregister for VAT. A tax accountant will make sure that this return is completed correctly and submitted on time to avoid late fees.
PAYE Scheme Closure: If you had employees, you will need to submit final payroll reports and close your PAYE scheme. A tax accountant can help you complete these reports and notify HMRC that your PAYE obligations have ended.
5.5 Long-Term Financial Planning and Advice
In addition to helping you close your business, a personal tax accountant can offer valuable long-term financial advice. For example, if you are planning to retire or transition into a new job, an accountant can help you understand the impact of your business closure on your overall financial situation, including pension contributions, investments, and savings.
Pension Contributions: If you were contributing to a personal pension during your time as self-employed, an accountant can help you understand how your pension contributions will be affected by ending your self-employment. They can also advise on whether you should continue making voluntary contributions to protect your future state pension entitlement.
Example: Laura, a self-employed designer, decides to retire in 2024. Her accountant advises her on how to continue making voluntary Class 2 National Insurance contributions to ensure that she qualifies for the full state pension when she reaches retirement age.
Tax Planning for the Future: Even after ending self-employment, there may be tax implications related to other sources of income, such as investments or rental properties. A tax accountant can provide ongoing advice to help you minimize your tax liabilities and ensure that you are making the most of available tax reliefs.
Example: David, a self-employed writer, retires and starts receiving income from a rental property. His accountant helps him understand the tax implications of this income and ensures that he is taking advantage of all available deductions.
Ending self-employment is a multi-step process that involves a number of financial and legal obligations. While it is possible to handle these tasks on your own, working with a personal tax accountant can offer significant advantages. From maximizing tax reliefs to navigating complex scenarios like VAT deregistration and capital gains, a tax accountant can help you close your business smoothly and minimize your tax liabilities. By providing expert advice and ensuring that all deadlines are met, an accountant can also help you avoid penalties and ensure that your financial future is secure.
FAQs
Q1. What happens to your National Insurance contributions after ending self-employment?
A. Once you stop being self-employed, your Class 2 and Class 4 National Insurance contributions cease. However, you may choose to continue making voluntary Class 2 contributions to maintain your state pension eligibility.
Q2. How do you notify HMRC if you are ending self-employment and also retiring?
A. You must inform HMRC about the cessation of your self-employment through the online service or by phone. If retiring, make sure to check your state pension entitlements and consider any voluntary National Insurance contributions.
Q3. Can you continue to claim tax reliefs after ending self-employment?
A. Yes, certain reliefs such as Business Asset Disposal Relief or Terminal Loss Relief may still be available to claim in your final self-assessment tax return, depending on your circumstances.
Q4. What are the consequences if you fail to notify HMRC about the end of self-employment?
A. Failure to notify HMRC may result in penalties, and you could still be required to submit annual self-assessment tax returns unnecessarily, leading to ongoing tax obligations.
Q5. Do you need to notify HMRC if you earned less than £1,000 in a tax year before ending self-employment?
A. No, if your income is below the £1,000 trading allowance threshold, you do not need to register for self-employment, but it’s still advisable to inform HMRC of the cessation.
Q6. Can you claim unemployment benefits after ending self-employment?
A. Depending on your financial situation, you may be eligible for certain benefits like Universal Credit. It's important to check eligibility criteria with your local Jobcentre or the government website.
Q7. What happens to your business bank account after ending self-employment?
A. You should notify your bank to close or convert your business account. Ensure that all outstanding payments are settled before closing it, as you may need the account for final tax transactions.
Q8. How long should you retain business records after ending self-employment?
A. You are required to keep your business records for at least 5 years after the January 31 submission deadline for the tax year in which you stopped being self-employed.
Q9. Can you reopen your self-employment status after notifying HMRC of cessation?
A. Yes, you can restart your self-employment by re-registering with HMRC if your circumstances change and you begin trading again.
Q10. What happens to your self-assessment tax returns if you have foreign income?
A. If you have foreign income, you must continue to declare this in your self-assessment, even after ending self-employment, if you are required to submit returns based on other sources of income.
Q11. Are there any special procedures for ending self-employment if your business was part of the Construction Industry Scheme (CIS)?
A. Yes, if you were registered under CIS, you need to notify the CIS helpline and submit a final tax return, making sure all subcontractor tax deductions are correctly accounted for.
Q12. What happens to outstanding tax credits after ending self-employment?
A. If you were receiving tax credits, you must report your change in income to HMRC as soon as you stop trading. This will affect your tax credit award, and you may need to repay any overpaid credits.
Q13. Do you need to inform Companies House when ending self-employment?
A. No, self-employed individuals do not need to notify Companies House. However, if your business was structured as a limited company, you will need to follow the appropriate procedures for closing the company.
Q14. Can you still claim business expenses after ending self-employment?
A. Yes, you can claim expenses related to winding down your business, such as accountancy fees, final office rent, or utilities, on your final self-assessment tax return.
Q15. How does ending self-employment affect your personal tax code?
A. Ending self-employment may result in changes to your tax code, especially if you move into PAYE employment. HMRC will adjust your tax code based on your new sources of income.
Q16. Can you still use a trading name after ending self-employment?
A. Yes, you can continue using your trading name for future ventures, but you must ensure that it’s not used in ways that mislead people into thinking you’re still trading.
Q17. How does ending self-employment affect your eligibility for state pension?
A. Ending self-employment may impact your National Insurance contributions. If you do not meet the 35 qualifying years for the full state pension, consider voluntary contributions to fill gaps.
Q18. Can you backdate National Insurance contributions after ending self-employment?
A. Yes, you can backdate Class 2 National Insurance contributions for up to six years, provided you meet the conditions set by HMRC for voluntary payments.
Q19. Does ending self-employment affect your ability to claim Maternity Allowance?
A. If you have recently ended self-employment, you may still be eligible for Maternity Allowance, provided you meet the earnings and contribution criteria set by HMRC.
Q20. Can you defer your self-assessment deadline if you’re struggling to finalize it after ending self-employment?
A. In general, you cannot defer the self-assessment deadline. However, if you are facing exceptional circumstances, you may contact HMRC to request an extension, but it’s not guaranteed.
Q21. Are there any tax advantages to ending self-employment at the start of a new tax year?
A. Ending self-employment at the start of a tax year may simplify your final tax return as it will avoid having to split profits and expenses over two tax years.
Q22. What should you do with your insurance policies after ending self-employment?
A. You should cancel or adjust any business-related insurance policies, such as public liability or professional indemnity insurance, to reflect that your business is no longer trading.
Q23. How can you estimate your final tax bill when ending self-employment?
A. You can estimate your final tax bill using HMRC’s self-assessment tax calculator, or by consulting with an accountant who can help you include all income, expenses, and reliefs.
Q24. Can you still claim working-from-home expenses after ending self-employment?
A. You cannot claim working-from-home expenses for periods after ending self-employment. However, any relevant costs incurred before cessation can be claimed on your final tax return.
Q25. What happens if you forget to declare business income after ending self-employment?
A. Failing to declare income can result in penalties and interest. If you realize you’ve made an error, you should inform HMRC and amend your tax return as soon as possible.
Q26. How can you correct mistakes on your final tax return after ending self-employment?
A. You can correct mistakes by amending your tax return online within 12 months of the submission deadline, or by writing to HMRC if you filed a paper return.
Q27. Do you need to deregister your business with any professional bodies when ending self-employment?
A. If you’re a member of a professional body or trade association, you should inform them about your business closure, especially if membership fees are linked to your trading status.
Q28. How do you handle unpaid invoices from suppliers after ending self-employment?
A. You remain liable for unpaid invoices even after ceasing to trade. Ensure all debts are cleared or negotiate payment terms with your suppliers before formally ending your business.
Q29. Are there any implications for your credit score after ending self-employment?
A. Ending self-employment does not directly affect your personal credit score, but outstanding debts, such as unpaid loans or supplier invoices, could impact your credit if not settled.
Q30. How can you protect personal assets if your business had debts when ending self-employment?
A. As a sole trader, personal assets are not protected from business debts. However, you can explore options like an Individual Voluntary Arrangement (IVA) to manage debt before ceasing trade.
Q31. Does HMRC automatically close your tax records after ending self-employment?
A. No, HMRC does not automatically close your tax records. You must actively inform them of your cessation to stop future tax return requirements.
Q32. Can you reclaim VAT on expenses after ending self-employment?
A. You can reclaim VAT on allowable expenses incurred before ending self-employment, but you must do so before deregistering for VAT and filing your final return.
Q33. What happens to your business assets if you don’t sell them after ending self-employment?
A. If you retain business assets after ending self-employment, you may need to account for them in your tax return based on their market value at the time of cessation.
Q34. Are you required to file a tax return for the year in which you stopped trading?
A. Yes, even if you stop trading partway through the tax year, you must file a self-assessment tax return for that year, reporting all income and allowable expenses.
Q35. Can you still claim VAT relief on bad debts after ending self-employment?
A. Yes, you can claim VAT relief on bad debts that remain unpaid six months after the due date, but you must do so before filing your final VAT return and deregistering.
Q36. How does ending self-employment impact Child Tax Credit claims?
A. If your income changes due to ending self-employment, you must report this to HMRC, as it may affect your eligibility for Child Tax Credit or the amount you receive.
Q37. Do you need to inform your local council when ending self-employment?
A. If your business was liable for business rates, you should inform your local council that your business is no longer trading to stop further charges.
Q38. How can you handle inventory left after ending self-employment?
A. Any unsold inventory should be accounted for in your final tax return. You can either sell it, write it off, or donate it, and your accountant can advise on the best tax treatment.
Q39. Can you end self-employment if your tax records are incomplete?
A. You should try to complete your tax records before ending self-employment. If records are incomplete, seek professional advice to ensure you file accurate returns to avoid penalties.
Q40. Can you claim losses from a previous business after ending self-employment?
A. Yes, if you made losses in a previous business, these can sometimes be carried forward or back to reduce your tax liability in your final self-assessment. Consult HMRC or an accountant for guidance.
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