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client asks me for my VAT number
Thread poster: MariusV

MariusV  Identity Verified
Lithuania
Local time: 06:41
English to Lithuanian
+ ...
Dec 3, 2013

Dear colleagues.

I am sorry for not reading previous related posts about the issue (I think there should be more info on this), but I have a quick question and I need a quick clear answer.

Practically, I am free-lancing, but formally, I am working as a "one-person" company (sole shareholder, company owner, director, manager, and, of course, translator "all in one"). Naturally, my company is a small and its turnover is also small. That means I have not reached (nor, actually, want to reach) the "threshold" for mandatory (EU) VAT registration.

Some time ago I did a job and issued my invoice to one of my international (EU) clients and the client asks me for my VAT registration number “Because this information is important for the invoicing.“.

Does anyone have any idea what they actually want from me and why they are asking me for this at all??? Because the invoice is fully correct, it contains all requisites as defined under my country laws (i.e. company name, company registration number, company registration address, etc.). Let alone that this is not the first invoice (in 5 years of my company existence, I have issued many “identical” invoices to dozens of “identical” clients and never had any demands like this.


 

Sheila Wilson  Identity Verified
Spain
Local time: 04:41
Member (2007)
English
+ ...
As you suspect, this has been discussed and discussed and... Dec 3, 2013

You say you "have not reached (nor, actually, want to reach) the "threshold" for mandatory (EU) VAT registration.".

Well, that may be the case for you, in your country, but there isn't an EU-wide threshold. For example, here in Spain (on the mainland, at least) absolutely everyone who wants to issue an invoice has to be registered for VAT. That's why Spanish outsourcers are amazed to find freelancers/agencies who can't give them a VAT number. France (where not everyone has to register) has recognised the problem and allocates a number just to satisfy the need to have one; the UK don't allocate numbers and leave their freelancers with headaches when they do work for other EU countries.

I'm afraid I don't know exactly what you should do about it, though.icon_frown.gif


 

MariusV  Identity Verified
Lithuania
Local time: 06:41
English to Lithuanian
+ ...
TOPIC STARTER
well... Dec 3, 2013

Sheila Wilson wrote:

You say you "have not reached (nor, actually, want to reach) the "threshold" for mandatory (EU) VAT registration.".

Well, that may be the case for you, in your country, but there isn't an EU-wide threshold. For example, here in Spain (on the mainland, at least) absolutely everyone who wants to issue an invoice has to be registered for VAT. That's why Spanish outsourcers are amazed to find freelancers/agencies who can't give them a VAT number. France (where not everyone has to register) has recognised the problem and allocates a number just to satisfy the need to have one; the UK don't allocate numbers and leave their freelancers with headaches when they do work for other EU countries.

I'm afraid I don't know exactly what you should do about it, though.icon_frown.gif


Here the law tells in plain text - if you reach the annual turnover of 49 000 EUR (and in my case the "turnover" is my income in reality), you MUST get VAT-registered. This means that for your "national" clients you have to add / include 21% VAT in your invoices (then to issue VAT reports each month, etc.). If you are NOT VAT-registered (an no law prohibits to be such), then you have nothing to do with VAT at all - you neither you include nor add it to your invoices for your "local" nor your "international" clients (whethere these are from EU, China or even planet Mars). If you GET VAT-registered, then to your local clients - 21% VAT, to another EU client who is VAT registered (provides you their VAT number) - 0% VAT, who is not VAT registered (or does/can not provide the number) - 21% VAT. As simple as that. And here I am speaking about "legal persons" - any types of companies.

With "natural persons" (e.g. if a free-lancer translator is working as "self-employed"), he/she cannot even become VAT-registered because his/her annual income / business activity is limited to the above mentioned amount (above it, he/she must register as a business, i.e. legal person, and this legal person shall become VAT-registered.

This info was checked and cross-checked at least a couple of dozen of times.

But now the bizzare point from elementary logics. EU law (directives, regulations, etc.) on all and any issue SHALL govern the national laws of member countries, and that means that the national laws of the member countries shall be "harmonized" upon EU laws, i.e. EU regulations, directives and other legal acts (together with their principles) MUST be implemented into the national laws. And IF some national laws or provisions of some laws contradict the corresponding EU law/laws, then it means the client demands a thing which cannot "exist" as such. Otherwise, the national laws contradict the governance of the EU law...??? Can it be really so ??? Was it on the issues of "harmonization" of shades of colors of vegetables for sales in local farmer markets, would still understand it could be so as the issue might appear of the "secondary importance"...But here it is one of the CORE things in business affecting thousands, if not millions, business entities (both companies, and self-employed)...














[Edited at 2013-12-03 17:51 GMT]


 

Sheila Wilson  Identity Verified
Spain
Local time: 04:41
Member (2007)
English
+ ...
I agree it's crazy Dec 3, 2013

I think a lot of people in a lot of places would agree, but your country is clearly similar to the UK in the way VAT is handled for some translators (not all). And I believe the only solution for some in the UK has been to voluntarily register for VAT, if they want to do business with other EU countries, or restrict themselves to their own country and outside of the EU.

Somebody in your authorities ought to be able to help, but it may be difficult to find the knowledgeable one. You shouldn't go on what I say because I was salaried (in another industry) when I lived in the UK.icon_smile.gif


 

Steven Segaert
Estonia
Local time: 06:41
Member (2012)
English to Dutch
+ ...
More reading materials Dec 3, 2013

Not wanting to start a discussion on that topic, I'm just going to say that the European VAT Directive is not meant to provide for a harmonised system, but to clarify the rules in an internal market and to make sure that market isn't sabotaged by national law.

You can read more about it here (http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/) and here (http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/vat_on_services/index_en.htm#supply_services).

Here is how I understand the whole mechanism. I write it down with a big fat disclaimer attached: I'm a law professional, but not a financial specialist nor a bookkeeper. What I know I found out through my own research. And I do have a VAT number, so I'm in a different situation than you are.

The bottom line is that you are providing a business-to-business service, which is taxed at the customer's place of establishment. You, as a business provider, are theoretically obliged to charge the VAT rate of that country and to send it to the tax authorities there - whether you are VAT registered or not in your own country is not relevant.

But because you don't have a legal presence in that country (and therefore can't fulfil that obligation), a reverse charge mechanism can apply: the VAT is then owed by the recipient of the goods and not by the foreign service provider/supplier.

The reverse charge mechanism is something that is set out in national legislation and is of no concern of yours. If you would have been VAT registered, then you would have to provide the VAT number of your client to justify to your own tax office why you didn't charge VAT, but that is another story.

Now, from the side of the customer, they need to fulfil their tax obligations just like you do and they will need to show that they are not cheating the system. For that, they will need two things you can help them with:

a) They need to know that you are a business (otherwise we're not talking to business-to-business services). If you would have a VAT number, everything is clear. If you don't, you'll need to provide them with something else. A company registration, registration as self-employed, ... which I would argue is something you need to have in your company files anyway. I myself for example am registered in Estonia, and if so required, I provide a "print-out" of the trade register information about my company. I can easily get that online; maybe you can get that too without too much hassle.

b) You need to put on your invoice "VAT reverse-charged" or similar (I'm not sure if there is a formula they like to hear in Spain). That will tell them that they have to use that mechanism (if it exists under Spanish law) and that the lack of VAT on the invoice is "normal" (as opposed to no mention at all).

All said and done, I would suggest that you ask your client if they could ask for instructions from their own bookkeeper. I'm sure you'll get a straight and workable answer out of that - they may for example tell you what they need to be able to prove to the Spanish tax office that everything is above-board.

If there is a bookkeeper in the room: please let us know if all this is correct!icon_smile.gif


 

MariusV  Identity Verified
Lithuania
Local time: 06:41
English to Lithuanian
+ ...
TOPIC STARTER
thank you, Steven Dec 3, 2013

Steven Segaert wrote:

Not wanting to start a discussion on that topic, I'm just going to say that the European VAT Directive is not meant to provide for a harmonised system, but to clarify the rules in an internal market and to make sure that market isn't sabotaged by national law.

You can read more about it here (http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/) and here (http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/vat_on_services/index_en.htm#supply_services).

Here is how I understand the whole mechanism. I write it down with a big fat disclaimer attached: I'm a law professional, but not a financial specialist nor a bookkeeper. What I know I found out through my own research. And I do have a VAT number, so I'm in a different situation than you are.

The bottom line is that you are providing a business-to-business service, which is taxed at the customer's place of establishment. You, as a business provider, are theoretically obliged to charge the VAT rate of that country and to send it to the tax authorities there - whether you are VAT registered or not in your own country is not relevant.

But because you don't have a legal presence in that country (and therefore can't fulfil that obligation), a reverse charge mechanism can apply: the VAT is then owed by the recipient of the goods and not by the foreign service provider/supplier.

The reverse charge mechanism is something that is set out in national legislation and is of no concern of yours. If you would have been VAT registered, then you would have to provide the VAT number of your client to justify to your own tax office why you didn't charge VAT, but that is another story.

Now, from the side of the customer, they need to fulfil their tax obligations just like you do and they will need to show that they are not cheating the system. For that, they will need two things you can help them with:

a) They need to know that you are a business (otherwise we're not talking to business-to-business services). If you would have a VAT number, everything is clear. If you don't, you'll need to provide them with something else. A company registration, registration as self-employed, ... which I would argue is something you need to have in your company files anyway. I myself for example am registered in Estonia, and if so required, I provide a "print-out" of the trade register information about my company. I can easily get that online; maybe you can get that too without too much hassle.

b) You need to put on your invoice "VAT reverse-charged" or similar (I'm not sure if there is a formula they like to hear in Spain). That will tell them that they have to use that mechanism (if it exists under Spanish law) and that the lack of VAT on the invoice is "normal" (as opposed to no mention at all).

All said and done, I would suggest that you ask your client if they could ask for instructions from their own bookkeeper. I'm sure you'll get a straight and workable answer out of that - they may for example tell you what they need to be able to prove to the Spanish tax office that everything is above-board.

If there is a bookkeeper in the room: please let us know if all this is correct!icon_smile.gif


Thank you, Steven. Just one more straightforward question (before I get the answer from their bookkeeper as you well sugested):

1. If both entities are VAT registered, it means A (the supplier) issues its invoice to B (the client) for the amount C + 0% VAT;

2. If the A is NOT VAT registered, but B is VAT registered, then A issues its invoice to B just for the amount C, and B at the end has to pay VAT in its own country which is then + x% (x - the rate of VAT of the client's country) to the invoice amount C?

3. And more. 1-2 items are for "legal persons", but if A is a "self-employed freelancer" providing his/her services to a VAT registered EU company abroad, it would mean that from the invoice amount C the self -employed A would have to pay taxes to his/her own country (income/profit, social security, and other taxes, e.g. C - 40% based on tax rates here) and B would have to pay +20% from the amount C? E.g. if C = 1000 EUR, the service provider only gets some 600 EUR after taxes, and the actual cost of the services to the client would be 1000 + 20% (200) = 1200 EUR?


 

Steven Segaert
Estonia
Local time: 06:41
Member (2012)
English to Dutch
+ ...
A bit more background Dec 3, 2013

MariusV wrote:

(...) Just one more straightforward question (before I get the answer from their bookkeeper as you well sugested):

1. If both entities are VAT registered, it means A (the supplier) issues its invoice to B (the client) for the amount C + 0% VAT;

2. If the A is NOT VAT registered, but B is VAT registered, then A issues its invoice to B just for the amount C, and B at the end has to pay VAT in its own country which is then + x% (x - the rate of VAT of the client's country) to the invoice amount C?

3. And more. 1-2 items are for "legal persons", but if A is a "self-employed freelancer" providing his/her services to a VAT registered EU company abroad, it would mean that from the invoice amount C the self -employed A would have to pay taxes to his/her own country (income/profit, social security, and other taxes, e.g. C - 40% based on tax rates here) and B would have to pay +20% from the amount C? E.g. if C = 1000 EUR, the service provider only gets some 600 EUR after taxes, and the actual cost of the services to the client would be 1000 + 20% (200) = 1200 EUR?


It helps to keep in mind what VAT is for. It's a tax on value added during the production process. Wikipedia explains that nicely: http://en.wikipedia.org/wiki/Value_added_tax

We are of course more bothered by the practical implications in a European market.

For VAT purposes, a taxable person is any individual, partnership, company or whatever which supplies taxable goods and services in the course of business. The concept of a taxable person covers anyone who independently carries out an economic activity, even if that person is not identified for VAT purposes. So, if you buy something in a shop, the shopkeeper is the taxable person. If you provide a translation service, then you are the taxable person.

However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the Member State, the person does not have to charge VAT on their sales. You, for example, are not a VAT-paying business under Lithuanian law, but you are a taxable person under the EU Directive - because you provide taxable services in the course of business.

Now, when we are talking goods and services in the EU, the rules are:

- Within the country: follow the rules of the country. For me, that means I have to add VAT. For you , that means that you wouldn't add VAT.

If the person who pays me the VAT is a VAT-registered business, then they can claim that cost back - because they use my translation to add value themselves (economically speaking). If it is an individual, they just have to pay the VAT and that's it. In the end, they pay for it all, and I am playing tax man for the government.

- Outside of the EU, VAT doesn't exist. I don't pay VAT on goods and services from the US, and I don't have to charge VAT there.

- In the EU, between countries, I have to add VAT to the bill if the customer is not a business. They pay the Estonian VAT to me, I send it to the tax office.

But if the customer is a business, and if we are talking about services (not goods), then a different rule applies: the service is in principle taxed at the customer's place of establishment. Meaning they will have to pay Spanish VAT - which, as they are a business, they can claim back (usually at the same time).

So, the logic is:

- Are you a business? Yes you are, because translating is a business activity for you.
- Is the client a business? Apparently yes.
- Are these the services for which this rule applies? Translation is, yes.

=> You shouldn't charge VAT (even if you could), but you should let the other one know that reverse charges (may) apply.

The answers:

1) Technically, the invoice is without VAT, stating that reverse charges apply. As a lawyer, I would say there is a difference with "0%". Then again, lawyers are strange folks.

2) The business client in the other country pays the VAT to the tax office there and can compensate it with VAT paid. With me, at the end of the month, I count how much VAT I have paid on business expenses and deduct that from how much VAT I have collected from clients.

3) For what B has to pay, see number 2. What you have to pay by way of income tax and the likes is of course separate from the VAT issue. Mind you, business and the persons who get paid by them also pay taxes. It's just a different type of tax, so you can't count it like that.

I hope that makes things clearer. Or noticon_smile.gif.


 

Tom in London
United Kingdom
Local time: 04:41
Member (2008)
Italian to English
no Dec 4, 2013

Sheila Wilson wrote:

.........I believe the only solution for some in the UK has been to voluntarily register for VAT, if they want to do business with other EU countries,.........


Not so. In accordance with the law in the EU Member State in which I am a taxpayer (the UK) I am not required to register for VAT unless/until my turnover reaches the VAT threshold.

My invoices simply state "VAT not applicable".

I am always paid. Nobody in any other EU Member State, including Spain, ever queries that statement. I believe there is a problem with some accountants in Spain who do not understand European law. However their incomprehension is not my concern, since I am not resident in Spain.

The same would apply to anyone in any EU Member State where there is no automatic obligation to register for VAT.

[Edited at 2013-12-04 13:27 GMT]


 

Giles Watson  Identity Verified
Italy
Local time: 05:41
Italian to English
VIES Dec 4, 2013

What your customer would like to see is a number that shows up in VIES (VAT Information Exchange System).

Someone at your local tax office ought to be able to tell you whether you can register for VAT solely for the purposes of trading in the EU or whether registration would also have implications for your overall tax position even if your turnover remains below your local VAT threshold.

As Steven rightly points out, you wouldn't be applying VAT at 0% because reverse charge taxation is "outside the scope" of VAT altogether from the point of view of the supplier. There will be some boilerplate to that effect to include in your invoice, which will have to contain your and the customer's VAT numbers, both of which should appear in VIES.


 

Neil Coffey  Identity Verified
United Kingdom
Local time: 04:41
French to English
+ ...
Same situation as Tom Dec 4, 2013

Tom in London wrote:
My invoices simply state "VAT not applicable".


Same here, and various European agencies, from France and Spain included, have managed to pay me without problems-- or occasionally have queried, but then upon looking into the situation, have been able to pay me. So it does seem that it may be a question of how au fait individual accountants are with the fine details of the VAT regulations (which I admit seem needlessly overcomplicated-- the people who worked them out seem to be the kind of people who also work out train fares and mobile phone tariffs...).

What I don't know-- and suppose I don't care terribly much other than that it then affects my competitiveness-- is if under the reverse charge rule said agencies then end up paying VAT on those payments later down the line. Maybe that's essentially what the issue is-- when the agency says they "need" the VAT number, what they mean is that they don't *want* to pay the VAT?


 

Christine Andersen  Identity Verified
Denmark
Local time: 05:41
Member (2003)
Danish to English
+ ...
This used to cause a lot of hassle... Dec 4, 2013

In Denmark the threshold for VAT registration is very low, but on the other hand there is a fairly simple procedure for small companies to make VAT returns online, as long as everything fits into the boxes provided.

These used to be:

clients/customers in the EU with VAT numbers - no VAT

clients/customers in the EU without VAT numbers - liable for 25% VAT

Clients customers outside the EU came in different categories.

In Denmark the VAT rules are painfully simple - 25% on practically EVERYTHING...

And if you don't fit in one of the prescribed categories, you end up with a lot of administrative hassle or paying 25% VAT on top of what many people regard as an already steep fee.

However, the tax authorities have finally conceded that translation is (usually) a service delivered entirely electronically, so they suddenly decided it is not subject to VAT anyway.

Danish authorities do not always seem to interpret EU rules in exactly the same way as everyone else, but you might be able to find something about not being liable.

Why HMRC apparently cannot find a simple answer for British small companies has always puzzled me, but the ways of tax authorities are not always easy to understand.

icon_smile.gificon_smile.gificon_smile.gif


 

Sheila Wilson  Identity Verified
Spain
Local time: 04:41
Member (2007)
English
+ ...
It is odd Dec 4, 2013

Christine Andersen wrote:
Why HMRC apparently cannot find a simple answer for British small companies has always puzzled me, but the ways of tax authorities are not always easy to understand.

But I suppose we must present a rather non-standard case. Can anyone else think of another type of solo trader who's likely to export 100% of their goods/services? They're much more likely to know most of their clients, or at least they'll be in the same country.

My own circumstances after working for nearly two years in Spain are
Spain: 30€;
Rest of the world: the rest of my income (sorry, I really don't know how much is EU and how much outside of the EU).

But it's good to hear that most EU countries are accepting that translators export even though they might not be VAT-registered, and allowing them to simply mark their invoices as such.

Danish authorities do not always seem to interpret EU rules in exactly the same way as everyone else, but you might be able to find something about not being liable.

I don't think any country interprets them in the same way as any other country, Christine.icon_frown.gif


 

Tom in London
United Kingdom
Local time: 04:41
Member (2008)
Italian to English
Answer Dec 4, 2013

Christine Andersen wrote:

Why HMRC apparently cannot find a simple answer for British small companies has always puzzled me...



That was exactly what HMRC did, all those years ago: a "SIMPLE ANSWER" for small traders that simplifed everything by making VAT registration unnecessary up to a threshold of (currently) £79,000.

I can't see what's puzzling about that - and I'm willing to bet that translators in other countries wish they could have it too !



[Edited at 2013-12-04 19:45 GMT]


 

Giles Watson  Identity Verified
Italy
Local time: 05:41
Italian to English
VAT thresholds Dec 4, 2013

Tom in London wrote:

I can't see what's puzzling about that - and I'm willing to bet that translators in other countries wish they could have it too !



How right you are!

The problem is that a number of local tax authorities - among them some of the Hacienda offices in Spain, apparently - do not admit the possibility that you might be providing a service quite legally without a VAT number.


 

2G Trad  Identity Verified
Italy
Local time: 05:41
Member (2000)
English to Italian
+ ...
Easy solution Dec 5, 2013

Christine Andersen:
Why HMRC apparently cannot find a simple answer for British small companies has always puzzled me, but the ways of tax authorities are not always easy to understand.


HMRC should simply assign all UK freelancers and small companies willing to make business (sell and buy) in the EU a European VAT number, just like almost every EU country.

They can remain VAT exempt in their own nation, but at least they are the same as the others on a EU level, applying the reverse charge procedure (see also Council Directive 2006/112/EC).

Finally, unlike VAT registered businesses, anyone who is non VAT registered must pay VAT when buying goods or services from EU businesses.

Bye!
Gianni


 
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