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Considering leaving self-employment or changing business structure? If you’re a sole trader planning to return to employment or operate under a different structure, you need to let HMRC know about it.
We’ve created a simple guide to help you keep HMRC in the loop and cover any other issues you might not have considered…
What you have to do
The actions you have to take depend on your current status and your plans for the future. If you’re returning to full-time employment, for example, you’ll need to do things differently compared to if you’re forming a limited business. In general, however, you’ll need to follow these basics:
- Tell HMRC you’re deregistering
- Submit a final tax return and pay any tax you owe
- Deregister from any schemes such as VAT or CIS.
- Keep any business records for up to 6 years
We’ll break down the most common reasons you might leave self-employment and list the steps you have to take for each so that you’ve got everything you need to know right here in front of you. You can also click the relevant scenario in the menu below to jump straight there.
Deregistering as self employed: the basics
Though the steps you take differ depending on your future plans, there are some shared steps that everyone has to follow. You don’t have to neccessarilly have another option lined up if you’re leaving self-employment. Some people may not earn enough to make being a sole trader worth it and wish to deregister to become eligible for benefits and other incentives.
To de-register as a self-employed person, you will need to do the following:
- Tell HMRC you’re no longer self-employed
- Submit a final Self Assessment
- Cancel VAT registration if required
- Deal with any insolvency issues
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Tell HMRC you’re no longer self-employed
The first step is easy – you just need to log into your online tax account via HMRC’s site and tell them you’re stopping self-employment. To do this, you’ll need your National Insurance Number and Unique Taxpayer Reference, or UTR. You’ll need to tell them the date you stopped being self-employed, which is important as it impacts potential taxes you have to pay.
Submit your last Self Assessment
You must submit a Self Assessment tax return before the deadline in the relevant tax year. You’ll need to do this in the same fashion as in previous years, detailing total income minus any allowable expenses to work out total profit. If you’re selling/disposing of assets related to your business, you might have to pay Capital Gains Tax so be sure to include them on your return.
You can, however, reduce your potential tax bill by claiming a few additional reliefs called overlap relief and terminal loss relief. Visit this HMRC page to learn more about them.
Cancel VAT registration
If you’re VAT registered, you need to cancel it with HMRC to avoid charges. Some business structures have trickier rules when it comes to cancelling VAT, but it’s easy for self-employed people – you can do it online via this link.
Deal with insolvency issues
If you’re stepping down from self-employment, you’re probably already aware of any insolvency issues as you’ll know you have debts. It’s important to recognise that de-registering as a sole trader doesn’t affect debt. You are personally liable for them and can be taken to court or made bankrupt.
If you’ve got unresolved debts and your self-employment is ending because you’re not earning enough, you won’t be able to repay your creditors. Rather than allowing things to come to a head, it might be more beneficial to try and negotiate an Individual Voluntary Arrangement, or IVA.
Leaving a construction trade
If you’re leaving the construction trade and you’re registered with the Construction Industry Scheme (CIS), you’ll need contact them to let them know you’re stepping down as a contractor or sub-contractor. You can call the CIS team Monday-Friday between 8am and 6pm via 0300 200 3210, or find other contact methods here.
Returning to employment
If you’re deregistering as self-employed to step back into traditional employment, you still need to follow the steps above. However, because de-registering as a sole trader doesn’t generate a P45, you can’t give it to your new employer for them to use to set your PAYE code.
Instead, you’ll have to complete a P46 form, which asks for information about second jobs, loans, benefits and other earnings. They will pass this to HMRC so you can have the correct tax code assigned.
Convering from a sole trader to limited company
Even though owning a limited company is just another form of self-employment, HMRC still requires you to deregister in the same way we’ve covered above. You can register the limited company before you step down as a sole trader, but you should deregister as soon as you can.
If you’ve got business assets as a sole trader and want to transfer them, you’ll need to ‘sell’ them to your new business. This can be done through a Director’s Loan – but it will affect capital allowances and capital gains taxes as part of your final sole trader Self Assessment. Speak to an accountant to help make this transition as smooth as possible.
Looking to close your limited company?
It’s easy to confuse deregistering as self-employed with closing a limited business, since people running limited companies are still often called ‘self-employed’. Though this guide has mainly focused on closing down as a sole trader, it’s also fairly straightforward to shut down a limited business too. Check out our handy and informative article “How to close a limited company down – Your options”.
Why not give self-employment another try?
If you’re reading this because your business hasn’t performed as well as you’d hoped and you’re considering deregistering, don’t beat yourself up. Lots of businesses fail in their first year – but you may want to try again in future. If you decide to have another pop at being your own boss, try out CrunchONE, our sole trader accountancy software that makes it simple for sole traders to track their finances.
