Will your employer find out about your business?


Many small businesses start while the owner is fully employed elsewhere, particularly for the first year or two. During this time, the business owner is often keen that their employer does not find out about this business. Even if the 2 businesses are not in direct competition, most employers take a dim view of their employees having interests in other businesses due to the conflicts of interest that can arise. If you are in this situation, what are the risks of your entrepreneurial sideline being discovered, and what steps can you take to hide your involvement in the business?

Hiding behind blindsIt does not matter if the business is one that sells goods, such as an eBay business, or is more in the form of providing services through part-time freelance work. References to businesses here will include all types of self-employed work.

A small business is likely to take one of 2 different legal forms: a sole trader (or partnership; the difference is not important for this purpose), or a private limited company.

Self-employed sole trader

If you are a sole trader, there is no legal separation between the business and you. You are the business.

All sole traders must register their new business with the tax office within 3 months of starting the self-employed work. This does NOT mean that the tax office will tell your employer about your sideline, as your own tax affairs are strictly confidential between you and the tax office. On registering the business, a self-assessment tax return will need to be completed each year, and you will need to include details of your employment income and business income. This tax return, and any other correspondence from the tax office, is sent to your home address, and again all such matters are strictly confidential between you and them.

A sole trader may use his own name (John Smith), or an invented business name (Premier Widgets). If a business name is used, it can be completely different from the real name, but certain paperwork, such as invoices and correspondence, must disclose the proper name of the owner of the business. It is also a requirement to show the person’s proper name at the place where the business is run. So, while adopting a business name that is sufficiently different from the owner’s name can help, this can still represent a risk, particularly if all the laws about disclosing the name are complied with. The level of risk depends on the visibility of the business. Is it likely that your employer is going to come across one of your business letters or invoices?

Employees often receive a PAYE Notice of Coding from time to time, which notifies them of changes to their PAYE code. This often makes adjustments for extra income that is not related to the business, for example rental income on a second property. At the same time, your employer will receive a coding notice, but his notice will not show any of the details of the adjustments that have been made - it will only show the final total. If an adjustment for business income is included in such a PAYE code, it would be easy to explain it away as being another form of income. For example, it could be savings income, rental income, or a taxable state benefit that you might plausibly receive. It is also usually possible to notify HMRC that you want to pay any extra tax on your self-employed work through your annual self-assessment tax return rather than through your PAYE tax code, though this means paying the tax earlier. To do this, tick box 2 on page 5 of the tax return before filing it.

Private limited company

A limited company is a separate legal ‘person’, which can be formed (’incorporated’) almost out of nothing for a particular purpose. It will have its own name and address, and though the company will be owned by someone, it can carry on a business, employ staff, borrow money and own assets in its own name.

Companies must generally be considered to be a more transparent way of running a business. In exchange for the privilege of limited liability, the company is required to submit details of its registered office address, directors, shareholders and principal activities to Companies House, and this information is then accessible to any member of the public for a small fee.

For example, it is possible to search Companies House for a particular name, and be told the companies of which that person is a director or company secretary. Credit checking agencies have access to the same information, and often publish on the internet brief details of the information that is publicly available in order that you might purchase the full report. Such taster-information is indexed by Google, and will show up on their search pages.

While this is a risk, the employer would need to be actively searching for you on the Companies House database, or on the internet, to discover your record. He is unlikely to find it while looking for something else.

The option of leaving yourself off the company record by appointing other people as directors and shareholders should not be taken without specific professional advice, as there are many pitfalls.

Income is taken out of the limited company either by salary or by dividends. As with a sole trader, it is possible that this extra income will be accounted for on an abbreviated PAYE coding adjustment sent to your main employer by the tax office, but again this should be easy to explain away if necessary. Being a limited company has a slight advantage here in that the income can be left in the company, and not withdrawn, until a time of your choosing, which may be a few years into the life of the business.

Limited companies have similar rules about trading names. A trading name can be used, that is different from the registered company name, as long as the proper company name is also disclosed where necessary. As the company’s registered name can be different from your own name, it is unlikely that using a business name offers much additional advantage.

Limited companies offer an advantage over being a sole trader, in that only the company name, number and registered office address need to appear on business stationery. The names of the directors or shareholders do not need to be shown. So if it is possible that your employer may see one of your business letters or invoices, they may well see the company’s registered name but it should not be immediately obvious that the company is connected with you. Careful choice of the company registered office address will also help with this. You could use your accountant’s address, for example.

Conclusion - can a business be hidden?

The most likely way that an employer will first discover your after-hours business is through your marketing - after all, most businesses need to make themselves well known in order to attract new customers.

Once an employer’s suspicions are aroused, he is more likely to be able to establish the details of the arrangement if you are trading as a limited company rather than as a sole trader.

If your employment contract expressly forbids having an interest in another business, you will have to judge for yourself whether it is worth the risk of them finding out, as no arrangement offers complete secrecy.




6 Comments (oldest first)

  1. Vicky

    Hi,

    I have a question concerning a partnership.

    My husband and his friend have developed an app which will be ready to launch later in the year.

    My husband is employed and his friend is self employed. Do they register as a partnership as the profit will be split 50/50 (as was the work load) or does my husband need to register as self employed and his friend file a separate self assessment form, from that of his current business venture?

    They will have a joint bank account where earnings will be sent via PayPal or through the app stores.

    They don’t have any business expenses as they are using home equipment (computers, tablets etc).

    If, for tax purposes, it is classed as a partnership do they just file one joint tax return for the business or do they need to file separate ones as well recording their other earnings from their full time work?

    9 June 2015

  2. Admin

    It certainly sounds like a partnership. In which case:

    - The partnership registers for tax, using SA400.

    - Your husband registers as an individual member of that partnership, using SA401.

    - Your husband’s friend also registers as an individual member of that partnership, using SA401.

    At the end of the year, the partnership files one partnership tax return, which shows how the income is split.

    Each partner then includes their share of income on their individual tax return, along with all their other sources of individual income.

    9 June 2015

  3. Tom

    If the employee registers a company and registers that company for VAT would the employer be more likely to find out?

    31 July 2015

  4. Admin

    A VAT registration will not make any difference.

    31 July 2015

  5. john

    Hi…

    My question is about being an employee and earning an income as a reseller second income.

    I know I have to declare that as tax but I’m a little confused about the ruling on this situation…I’m under the impression that my tax is calulated as *one income*…but if I have already paid tax on my full time employment as an employee…does this mean I have to pay more tax on that income after on top of my *self employment* tax?

    May sound dumb but its kind of cloudy to me on that issue!

    Thanks John.

    30 December 2015

  6. Admin

    Everything you could ever need to know on this topic:

    http://www.brighton-accountants.com/blog/tax-self-employment-still-employed/

    31 December 2015