Freelancer’s Question: I started working on a freelance project (animation) in the summer for my first ever client. I have completed most of it but I still need to do some corrections before they can send me the full payment. So far I have received 2/3 of the payment with the last 1/3 being sent when I complete the corrections/finish the project.

I am currently a student, and it’s unlikely that I will work again until next summer. This is the only job I have done so far and it is not expected that I will have more than one or two smaller but similar jobs a year before I graduate. The total amount for this job is about £3,000.

So should I register, or not register, with HM Revenue & Customs as a sole trader? If I register now, I think will be fined for not registering within 3 months of my first payment. But I couldn't register earlier as I have just received my National Insurance number last week (as I am an EU national). However, I did telephone the small business helpline and was told that if I register as soon as I receive my NI number, than I wouldn’t be fined, on the understanding it was not possible to register earlier.

My other option may be simply not to be a sole trader, but instead to just to tell HMRC on my tax forms that I had other income. Would a good accountant advise me to take this route? As I said, I won't be doing much more freelancing work as a business before I graduate; I am talking about 1 or 2 jobs per year, generating a total of (maximum) £5,000. Do you think I am safe in the non-registered category?

Expert’s Answer: My suggestion would be that you do register with HMRC as a sole trader at this time.What I would do, in your shoes, is to submit form CWF1 "Registering for Self-Assessment" by post, with a covering letter explaining your circumstances as you did on the phone. Spell out that you have only just been issued with your NI number and have been advised by them that your late registration will not be penalised.

This is for several reasons:

1) Intention (and penalties)

You do intend to carry out more freelance work in the future so you would need to register as self-employed at some time, and if you do not register now then you could be penalised further when you do, for not registering now.It is always best to try and work with HMRC rather than against them.

2) Expenses

As a sole trader you can claim expenses of your trade against your income and pay tax only on the profit (the income less the costs).For example, as an animator you may have had to buy specialist software to create your designs, and you could potentially reduce the income you pay tax on by the amount that the software cost.

3) Tax relief

Also, given your expected low earnings (below £5,315 in the tax year to 5th April 2012) you can also apply not to pay Class 2 National Insurance, which sole traders and partners normally pay at a flat rate of £2.50 per week in the current tax year.You would do this by completing form CF10 and submitting it to HMRC. If you opt to do this, do not fill in the direct debit section of form CWF1.

I hope my guidance helps; good luck with both your business and degree course!

The expert was Emily Coltman ACA, chief accountant to an online accounting solution, FreeAgent.