The Legal Requirements to Start a Small Business in the UK Explained

Starting a new business is a busy time for an entrepreneur. You’re developing a business plan, getting your financial plan in order, and possibly pitching to investors or seeking funding. One thing that can be overlooked but is incredibly vital, is ensuring all legal obligations are met. The failure to do so can result in fines or possibly even court proceedings.

This guide should help you tackle the legal aspects of starting a business in the UK, from choosing a name for your business right at the start all the way to employing staff later on. You can work the relevant legal points into your traditional business plan, or even draw up a separate legal plan or checklist to ensure you have covered everything. 

While the legal processes covered are specific to the UK, the general categories are likely applicable no matter where your business located. That being said, let’s dive in.

Naming your business

You need to choose a unique name for your business, that is not being used already, to avoid running

into problems. If the name is too similar to other businesses, it can suggest there is a connection between the companies and you could be seen as trying to pass your company off as theirs, taking business from them as a result. If they complain or file for trademark infringement, you could be required to change your business name, possibly pay damages, and spend extra time and money re-doing signs, stationery, advertising, etc.

You can easily check to see if your name idea has been taken yet using Made Simple and it’s also wise to verify if a similar trademark already exists.

Choosing the legal status of your business

The legal status you choose determines whether you need to register your business with Companies House, which is the UK’s registrar of companies. The legal status also affects the records and accounts that you have to keep, the amount of tax and National Insurance (NI) you will pay, and your financial liability if the business were to go under. 

It’s also worth noting that in the UK employees pay NI contributions to qualify for certain state benefits and a state pension when they retire. This total will vary based on the legal status of your business. Here are the most common types of legal business structures to choose from when setting up a new business.

Sole trader 

This is the easiest option if you are the only owner (you can still employ people). There is no business registration with Companies House required and keeping records and accounts is simple. Many businesses start off as sole traders and change their legal status later on.

You can benefit from full profit retention and you can complete your own self-assessment tax return online each year, or get an accountant to do it for you. There will be more about paying taxes in the next section. 

If you want to protect the name of your business, you will still need a trademark as no formal registration happens. You will need to weigh up the cost of this to see if it is worth doing.

The downside of being a sole trader is that you have unlimited liability, meaning you are liable for any debts the business has. You could risk your own personal assets, such as your house and savings if the business got into financial difficulty. Sole traders also find it harder to get the funding they need from banks, but it could be the right option for you if your business is low-risk and does not need finance. 

Some people prefer to deal with sole traders over limited companies as the business tends to feel more personal, particularly if the nature of the work is sensitive.

Partnership 

This is the easiest option when there is more than one business owner, and two or more people share the costs, risks, and responsibilities. You do not have to have equal shares and each person’s liability is proportionate to their share.

The downside is that like being a sole trader, partners are not protected financially. If the business goes under you could become liable for your partner’s share of the debt. To avoid this scenario, you can become a Limited Liability Partnership (LLP) so that the LLP is then responsible for any debt and not the business owners.

Limited company 

Most limited companies in the UK are limited by shares. Setting the business up as a limited company means it is a separate legal entity that protects you financially, as the company finances are separate from your own personal finances.

It is more complicated than becoming a sole trader as you need to register the business with Companies House, submit accounts and annual returns to them, and adhere to their record-keeping requirements.

There can be financial advantages in terms of paying tax by becoming a limited company, and it can also be easier to obtain financing. It is best to discuss these specific benefits with an accountant before registering your business.

Paying tax and National Insurance

All businesses must be registered with HM Revenue and Customs (HMRC) as soon as you start trading so that you can pay income tax on your profit and Class 2 and 4 national insurance (NI).

This can be done online and the HMRC will set up an account for you to do your self-assessment. Once complete, they will contact you with a ten-digit Unique Taxpayer Reference (UTR) and send a letter in 2-3 weeks giving you an activation code to access the account.

In order to complete your self-assessment properly, you will need to keep records of your business sales and expenses. To help me stay organized, I have a separate business account that I use to buy the things I need for business operations.

Accepting payment by cash makes keeping track of earnings a bit trickier, and may require keeping and uploading receipts. You can also manage this with your accounting software and add the information to your business financial statements on a monthly basis.

If you are moving to the UK to start a business, you will need to apply for an NI number and can give this number a ring to apply: 0800-141-2075.

Value Added Tax (VAT)

Value Added Tax (VAT) is a tax added to most goods and services. You only need to register for VAT if your VAT taxable turnover is going to exceed the current limit in any rolling 12-month period. The limit is currently is £85,000, and you do not need to include any values from sales that are VAT exempt.

For example, VAT is not added to most food and children’s clothes. Additionally, a lower rate of 5% applies to certain goods and services such as home energy and children’s car seats. The standard VAT rate is 20%.

If you need to register for VAT, there is further information available via www.gov.uk/vat-registration.

Insurance

Some insurance policies are legally required, whereas others are available if you want to protect your business against certain risks. Parts of the business that you can insure include your vehicle, equipment, premises, employees, your products and services, your business idea, and even yourself.

Motor insurance 

Insuring vehicles is always required by law. If you are going to be using your vehicle for work, you will need to make sure you have insured the vehicle for the correct class of use. Any claims would be rejected if you use the vehicle for business purposes without amending your policy to reflect this.

There are other motor insurances available to cover things like tools in a van, that would require Goods in Transit cover. You can compare the costs of these policies via www.confused.com/van-insurance/goods-in-transit.

Professional indemnity 

This insurance is required for certain professions such as accountants and financial advisors. This protects them against claims for losses suffered by customers as a result of mistakes or negligence. Often other professional advisors decide to take this cover out for their own peace of mind in case their customers want to sue them.

Employer’s Liability Insurance

This is mandatory for all businesses with employees. This is to protect you from any claims an employee could make following an accident or illness suffered as a result of working for you.

Additional insurance coverage to consider

Here are some other insurance policies you may want to explore depending on the nature of your business:

• Buildings and contents
• Business Interruption —These policies typically cover any instance where you are unable to operate due to external factors such as inclement weather. The extent of policy coverage fully depends on limitations laid out in your insurance contract.
• Cyber cover — If you have access to information that would be valuable to fraudsters, this will help manage the cost of the incident and deal with enforcement against you from industry regulators.
• Employment Protection
• Keyman insurance
• Money in transit
• Product Liability
• Public Liability
• Shop insurance
• Theft

It is worth remembering that all business insurances are tax-deductible expenses.

As there are so many insurances to think about, it is helpful to go and speak to a local insurance broker to check you have the cover you need. The Association of British Insurers (ABI) website contains a section to help you choose the right insurance for your business.

Acquire industry-specific licensing

Certain businesses require a license from the local authority to be allowed to trade legally. Some examples include hotels, hairdressers, street traders, boarding kennels, and food outlets.

Contact your local authority and ask to speak to Local Planning or the Building Control Office to find out if you need to register or obtain a license, as failure to do so may qualify as a criminal offense.

Local authorities also have Trading Standards departments who help you understand how to be legally compliant in your business area. You will need to know who the regulator of your industry is and then find a way to keep your knowledge up to date to remain compliant.

Do I need planning permission?

While you investigate whether there is a need for a license from the local authority, also ask them if you need planning permission. Working from home or changing the use of a building can both require planning consent, even if you are not changing the physical building.

You can be fined if you set up a business at home without permission. If your work leads to extra foot traffic and a lack of parking, excess noise, etc. your neighbors may end up reporting you.

Ask the Local Planning or Building Control Office about the plans for your business as soon as you can. Planning consent can take time if it is needed and may cost some money, so it is good to have this figured out early on. 

Employing staff

If you’re going to take on staff you will need to ensure that you comply with certain pieces of employment legislation. Here’s what you need to establish.

Carry out applicant checks 

As an employer, it’s your legal responsibility to make sure you check that any staff has the right to work in the UK. Depending on which sector you work in you may also need to undertake a criminal records check known as a DBS check. Failure to do so can lead to you and your business being liable for a civil penalty.

Register with the HMRC as an employer 

You usually need to register with HMRC within 4-weeks of taking on your first employee. You’ll be responsible for deducting any tax and National Insurance contributions from your staff’s pay. You’ll also be responsible for paying any remaining employee or business taxes at the end of the year if you do not plan accordingly.

National minimum wage 

You must make sure that all staff is paid at least the current national minimum wage per hour for all the hours that they work. The rate does depend on each employees’ age and if they’re an acting apprentice.

Pensions auto-enrolment 

As an employer, you must enroll all eligible staff into a workplace pension scheme. There are different pension types that either require you or the government to add a specific matching dollar value to each employee pension. In most automatic enrollment schemes, employees will make contributions based on total earnings, including:

• salary or wages
• bonuses and commission
• overtime
• statutory sick pay
• statutory maternity, paternity, or adoption pay

Statement of employment 

You will need to issue all staff, who will be with you for more than a month, with a written statement of employment. This document sets out the conditions of their employment, such as hours and pay, and must be given to staff within 8-weeks of their start date. In addition, staff should be given a contract (which can be incorporated with the statement of employment).

The contract sets out details of their rights, responsibilities, and working conditions. Make sure the contract is clear on which terms are contractual and which are not, as this will affect how you can make any changes in the future.

Employers liability insurance 

We mentioned this before, but if you employ staff other than direct family members then you need to take out employers liability insurance. This type of insurance will cover will protect you from claims made by employees if they are injured or fall ill at the workplace.

Health and safety 

All employers are required to provide a safe working environment for their staff. If you have more than 5 staff you will need to have a formal written Health & Safety policy. This includes a safe place to work, safe access to work, safe systems of work, safe equipment procedures, safe interactions between workers, and protection from risks of injury.

Legislation that may affect your business

Legislations are rules and regulations that you must adhere to whilst running your business. I have not listed all of them as not all will apply to every business, but you will need to identify the ones that apply to you. We will touch on the more common ones, but to explore more legislation please visit www.legislation.gov.uk.

Employment law

Employment law is there to protect the rights of employees and their health and safety. We will touch on the main laws to consider for those employing staff.

Health and Safety at Work Act of 1974

Premises and machinery must be safe and not affect the health of workers. If you employ 5 or more staff you need to have a written health and safety policy and conduct risk assessments which need to be documented and communicated to the employees.

Equal Pay Act of 1970 

Employees must be paid equally to those who do work of the same value regardless of their sex.

Sex Discrimination Act of 1975 

Employees cannot be discriminated at any stage of recruitment, training, or employment.

Race Relations Act of 1976

It is illegal to discriminate against a person because of their color, race, or ethnic group.

Employment Protection Act of 1978

Employers must provide employees with a written contract of employment. This is to protect them from unfair dismissal and gives them the right to redundancy pay should their job no longer be required after 2-years.

Consumer Protection

Consumer Protection rights are there to protect customers from unfair business practices.

Sale and Supply of Goods Act 

Goods must be of a decent standard. This applies to any goods that are identified and agreed to be purchased by consumers.

Trade Descriptions Act 

Goods and services must be as advertised and you must not give misleading information.

Distance Selling Act 

Some selling methods, such as online shopping, require you to allow a ‘cooling-off’ period, during which time a customer can change their mind about a purchase and obtain a refund. 

Data Protection Act/GDPR

This will apply to anyone that needs to take any customer details, so it will apply to the majority of businesses. You’ll want to make sure you fully understand the extent of these protections and can check the Information Commissioner’s Office for specifics.

Develop internal legal documents

Developing internal legal documents helps to instill confidence in your business for the benefit of everyone — your customers, employees, and potential investors.

Privacy policy

A privacy policy is a statement that tells your customers how their data will be collected, used, stored, and protected. It should also detail if there may be a need to share any personal information.

Company handbook

Your company handbook is something you will probably change and add to as your business grows. In short, it is really a book to summarise how you do things in your business. It needs to be made available to staff at all times — you could either give everyone a copy or make it otherwise easily available for reference. Here’s what to include.

Your company mission statement

Your employees want to know the goals and reasons for your company’s existence. This is where your mission statement comes into play. Generally, it should include the history of your company, the vision, and the goals you want to achieve.

Your company’s policies 

Your company policies are typically extensions of required legal stipulations along with any additional company-specific policies. This can be anything that is important such as having a clear desk policy outside of office hours to help protect data or even just the way you want staff to answer the phone.

Human resources and legal information related to employment

If you don’t have an HR department to help you outline every policy, you’ll need to address the following:

• Joining the company 
• Employee benefits
• Working hours 
• Annual Leave and sickness absence
• Absence management –policy for managing short and long-term absence and requirements for reporting
• Bribery, confidentiality, whistleblowing, and data protection
• Equal opportunities and bullying and harassment policies
• IT rules (including areas such as social media use both inside and outside of work)
• Your Health and Safety policy including how you intend for you and your staff to implement this 
• Disciplinary/Grievance procedures
• Flexible family-friendly legislation policies
• Capability and performance management targets and procedures
• Termination of employment including retirement and redundancy

It is a good idea not to make any company policies contractual for staff so you can amend the staff policies in the employee handbook at any time.

Retaining legal counsel

It is useful to have a solicitor on retainer so that you can get advice whenever you need it. When starting and operating a small business you probably won’t need a solicitor often, but having phone support available for when you do will be beneficial.

There are large national organizations that offer this service such as Peninsula Group Limited, but you may prefer to ask a local solicitor or a more friendly and personal service.

Why develop a legal action plan?

Incorporating a legal action plan into your larger business plan may be necessary when pitching to investors or applying for funding. It’s also valuable to incorporate specific legal steps into your milestones to better use as a management tool.

Now, this guide has covered a lot of different legal components, so you may find it easier to write a separate legal action plan. Since Employment Law is such a large part of legal planning, if you do not plan to hire any staff and will operate by yourself, you might just need a simple legal checklist.

In any case, be sure that you have some sort of plan in place to be sure you address everything.

Don’t get overwhelmed by legal requirements

This all may seem daunting as there is so much to think about, but I hope that this guide helps you to plan and meet your legal obligations. It is best to start off small but keep the big picture in mind. Keep referring back to your traditional business plan so as not to lose sight of what you dreamed of.

If you ever have questions or concerns about specific legal requirements, check the official UK government website or reach out directly to a legal expert for assistance. Best of luck with your new venture!

Editors’ Note: This article is purely informational and should not be taken as legal advice. If you have questions regarding specific laws, licensing or protections contact your preferred legal counsel.