Welcome to the independent state

Every competent tradesperson has the choice of trying to go it alone. Many do and even more think about it. The following article talks about some of the joys and issues of taking the plunge.

The joys of being a Sole Trader

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The joys of being a one-man (or sometimes woman) band are firstly that you have no idiot to tell you what to do. Secondly you can set your own hours. This allows you to fit work around your lifestyle, for instance picking the kids up from school every day. Finally, you can do pretty well financially – “the man” is no longer taking a top slice of your income.

Unfortunately, this isn’t the whole story. Against the benefits you have the headache of paperwork, insurance and tax returns. You are the bottom line on everything, if you don’t do it, no-one else will.

Then you have to find work. If there is no work coming in, you don’t eat. And I can assure you that this can lead to sleepless nights.

There is the general hassle of running the business, getting the pricing right, dealing with difficult customers, chasing invoices and managing the cashflow. Mistakes here can completely derail you, no matter how good you are at doing the jobs.

Overall, though, life as a sole trader works for many people. There are, after all, around 700,000 self employed working in the field trade in the UK.

Lifestyle versus growth 

Most sole traders won’t grow their businesses. That’s a fact. Compared to 700,000 sole traders, there are only around 100,000 trade businesses with 2 – 10 employees. These numbers tell us that the majority of self-employed trade businesses will never grow larger.

If you do want to grow, there is the challenge of the first employee. Since the first employee will overnight double the amount of work you need to bring in, plus adds the headache of the pay-as-you-earn (PAYE) system, it’s a major hurdle to overcome. The best way to deal with this is probably to use sub-contractors. Then you can grow your business until there is enough work to take someone on permanently.

Better value

The problem with being a sole trader is that you have to compete with the big boys. However, there are some major advantages that you have over them. For instance, you can build a lifelong relationship with your customers. As gas engineer John McLaughlan says: “You grow old with your customers”. Word of mouth controls 70% of all work in the domestic market. When you get all of your work from recommendation, there is no marketing cost. 

You also don’t have any expensive central office cost and no over-paid directors to support.

All of this means that you have the potential to offer better value than bigger competitors, even while taking home more than you would if you were working for them.

However, the key thing to remember is that you mustn’t under-price yourself.

Quality of work

A few years ago, my daughter did a major renovation on her house before she moved in. As part of this, she used a plumber to do some critical work. Unfortunately, you could always tell when he had been there from the leak (really, not an exaggeration) that accompanied every visit. Not surprisingly, this led to threats of non-payment and confrontations. Looking at this from the plumber’s side, I’m sure it was all very unpleasant.

And that is the lesson from this particular example. If you are going to be a successful sole-trader and enjoy the work, you must do a quality job. It’s not just that this is what results in being paid, it’s also what leads to recommendations and the next job.

Pricing

Pricing is probably the single most important new skill that someone moving to self-employed status needs to master. The mistake that can easily be made is to under-estimate the effort that jobs will take. The other mistake is to estimate the price with a day-rate that isn’t sufficiently high enough. This happens when people do not factor in tax, national insurance, holidays, sickness and time spent either waiting for work or doing non fee-paying activities.

If there is one reason why sole traders move back to employment, it is from consistently getting their pricing wrong.

What you need to master

Everybody who is a sole trader must register as self-employed. That’s unless they create a limited liability company which comes with its own additional regulations that we won’t cover here. The result of being a sole trader is that you must complete an annual tax return. You should typically set-aside 20% of your earnings for the annual tax bill, or more to be safe. At the very least you should get some initial advice from an accountant. They will usually save you more in tax savings than their fee, all legally. 

If you subcontract for other contractors in the building trade you need to register for the Construction Industry Scheme (CIS).  You will normally have 20% CIS deducted from your invoices. You MUST keep track of this as it can be offset against your tax liability at the end of the year. The same applies to all of your costs. The paperwork associated with them should be treated as if it is bank notes – because all cost invoices will save you on the tax bill.

 If you have sales in excess of the annual VAT threshold, currently £85,000, then you must register for and charge VAT. You also must do quarterly VAT returns under Making Tax Digital (MTD). 

Theoretically you should also need to master the intricacies of GDPR. This is the regulation about storing other people’s personal information either on paper or computer. In practise, though, it is likely that unless you start doing aggressive marketing this will not be an issue.

Depending on which trade you operate in, there are other regulations that you must follow. The most demanding being gas and electricity. It is your responsibility to master and obey these regulations and some require formal qualifications. Ignoring them, particularly for gas, can and does lead to prison terms. 

The problem of the nationals

I was recently near Bideford in North Devon and suffered a flat tyre on the boat trailer that I was towing. Searching the internet for “Bideford breakdown”, the top result is the AA. As it turned out, I bumped into a local breakdown specialist and without any waiting, they sorted the problem out very quickly for £25. If it wasn’t for my good fortune, I would have called out a national, and probably waited several hours plus paid through the nose.

This illustrates the problem for any local trade company that get work some from emergency callouts, like locksmiths. When people search online, they will often end up with an expensive and sub-optimal result.

Taking services from trade-oriented technology companies may help to tackle the issue of large rivals using computer technology to target your prospects and customers.

Systems

There are now a good selection of apps and full systems that can help you to run your business. These, including those from my company Powered Now, are well worth investigating as they can save a lot of time and help guide you down the right path in terms of invoicing and keeping records.

Trusted Trader, My Builder, Rated People and Checkatrade

If you want to grow, there are a number of companies that purport to help you. These include Trusted Trader, My Builder, Rated People and Checkatrade. They may be particularly useful when you start out. The problem is that you can’t get business through them without some existing reviews, but you can’t get the reviews until you get some business.

All of them are commercial organisations and charge for their services. They will provide you with an online presence which can help counteract the heavy advertising of the nationals.

In summary

In deciding on whether to take the plunge to become self-employed, it’s important to be clear on what you want to achieve. There are big advantages, but there is a price to pay in effort and responsibility too. Many people make a success of their own business, but there are also plenty of people who find it stressful and get their fingers burnt. Key points are quality of work and charging enough. All of the best.

Download and start your free Powered Now trial here