Select Page

This post is going to be a short one about the mechanics of how exactly you set up a business in the UK.

And I am writing it because I want to get over the excuse of ignorance. Loads of people have great ideas but fall at the first hurdle. They don’t know what the laws are or what they are required to report. And then get scared of the legislation and tax implications.

Well luckily most of those fears are ungrounded and the UK is actually very friendly to new businesses. So let’s dive in. Note I am not an accountant or a lawyer and this is a simple guide based on my experiences with small businesses. There are other types of businesses. And once you start turning over serious money or if you have a complicated business you should get professional advice.

You Don’t Need To Do Anything If You Make Less Than £1,000 A Year

The way most people start their business is to just do it and worry about the consequences later. And actually that is built into the rules. Until you are making £1,000 or more a year (As of 2018) from your new business then you don’t need to tell the government anything. You don’t need to register as self-employed or incorporate a business.

The easier it is to start the more likely you are to do it. Setting up a blog? Don’t worry about the legislation, just do it and worry about everything if it ever makes any money. Starting an Etsy shop selling your humorous knitted jumpers? Just do it, if it works out then you can deal with this stuff once it is making money.

This advice is especially true for the small, on-the-side businesses that we specialise in on this blog. If you are throwing yourself in with a large investment then you probably want to get professional advice. But 99% of businesses don’t start like that, instead, they start small and grow naturally. If they work out, then you can deal with these. If your business fails then you don’t have to spend money informing the government of your failure.

Sole-Trader vs Limited Liability Company

Once you hit that £1,000 a year you have a few choices on how to set up a business in the UK. Of which the two most popular are to set up as a Limited Liability Company (LLC) or register as a Sole Trader. Let me explain the differences and the pros and cons of both.

Pros Of A Becoming A Sole-Trader

Becoming a sole-trader literally just means you are informing the government you are self-employed. It is free to register and you can do it online in a few minutes. Then you just need to provide a bit more information every year when you submit your self-assessment tax return. You do not need to hire an accountant and will just pay income tax on any profits you make.

Here is a screenshot of the form you need to fill in as part of your tax return. Taken from a friend of mine who has a very simple side business:

self assesment set up a business in the uk

As you can see, you simply fill in each box and then pay income tax on the difference between your income and expenses. It is simple and perfect for small-time one-person businesses that don’t make much money, like the above.

Pros Of A Becoming A Limited Liability Company

But while sole trading does have the advantage of simplicity, once you grow to a certain size you will probably want to register as a Limited Liability Company.

  • More than one person can own an LLC. So an LLC is needed if you are going into business with friends and are starting to make money.
  • The taxes are more complicated, but above about £25,000 it normally works out cheaper if you’re an LLC.
  • An LLC is limited liability. That means that the company and not you are in trouble if the business gets sued or forfeits on its debts. The company can declare bankruptcy and you can keep your house (normally). But if you are a sole trader you are tied to the business and liable for its debts.
  • You can sell or take on investment with an LLC.
  • An LLC gives your business more credibility, and some companies won’t work with sole-traders.
  • You can own any number of LLCs. So for addicted entrepreneurs like myself, we can keep all our businesses separate.

All these advantages are offset by the extra hassle involved in owning an LLC. To set one up is actually very cheap and easy, you can do it online for just £12.

hmrc set up a business in the uk

But where the hassle comes is the yearly reporting that you need to do as an LLC owner. You can do this yourself but it is very complicated and 90% of the time it is advised to hire an accountant. And realistically you are not going to find an accountant for under £1,000 a year. Growing quickly with the complexity of your business.

If you’re interested I wrote a detailed post about how you can run a UK company without an accountant which I do for a few of my businesses.

The Dreaded VAT

Where it gets really complicated and confusing to set up a business in the UK is when VAT comes into play. VAT stands for value added tax. And is a 20% tax added to the price you sell your goods or services for.

It can get really complicated. Some goods are VAT exempt, some have a lower rate and most of your expenses will have VAT that can be reclaimed. And whether you are a sole trader or an LLC you still have the same VAT obligations.

Even more complicated is that you have to collect the VAT, file a VAT return every three months and then pay the VAT you owe. This is a huge headache and can cause havoc to your cash flow.

But luckily new businesses can start off ignoring VAT because there is a pretty high threshold before you need to register. The current threshold is £85,000. Which means you need to bring in revenue of £85,000 in one 12-month period before you have a legal requirement to register. When you set up a business in the UK you should remember that VAT exists and take it into account when doing your pricing. But luckily you don’t need to pay it until you are already doing well. And it shouldn’t scare you off starting a business.

NOTE: if you are selling primarily to other businesses or expect to still be losing money when you hit the VAT threshold, It may work out better to register anyway to reclaim some expenses. Most accountants should give you a free consultation.

NOTE2: If you are selling automatically downloadable data (such as video games or downloadable courses) then you might need to pay VAT in all EU countries you sell in due to new VAT MOSS rules. Check out HMRC’s mini one-stop shop for compiling this all in one place. It isn’t as complicated as it sounds.

Want To Set Up A Business In The UK? Just Get Started

So, in conclusion, the mechanics of how to set up a business in the UK is very straightforward and purposely set up so that small business can get going easily. It only gets complex once your business grows and gets more complex.

The beauty of this system is that you do not need to pick one from the beginning. You can start not registered as anything. Then once you make £1,000 you can go sole-trader. Then once you grow even more and are making enough money that it is worth the hassle and cost of running an LLC, you can incorporate and start using that. And finally, once you hit the VAT threshold you can register for VAT.


Further Reading