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The Pros & Cons of UK VAT registration
Thread poster: Dan Lucas

Dan Lucas  Identity Verified
United Kingdom
Local time: 18:53
Member (2014)
Japanese to English
Jun 30, 2015

I would much appreciate some input on the advantages and disadvantages of VAT registration in the UK, preferably from those with first-hand experience. I know this is an issue that gets discussed frequently on ProZ.com, perhaps most recently here.

I am the owner of a small UK company, the only employees of which - at this point - are myself and my business partner. There is a small but real tax benefit to incorporation and a few other advantages. As our revenues are well below the 2014/15 threshold of £82,000, I have not registered for VAT.

A promising German client - trials done and passed, everything set up - has asked for my VAT number. I don't have one.

I suggested that I simply invoice with a disclaimer as described in this thread, something like "nicht umsatzsteuerpflichtig gemäß "paragraph 3 of Schedule 1 of the Value Added Tax Act 1994 as amended by the statutory instrument 2009/1031". This potential client feels this would not be sufficient and says that an order cannot be given without a VAT number.

So, despite reading many threads, I still have multiple unanswered questions related to this issue.

1) Is there any way for this agency to get round this legally and ethically? I have had dealings with (apparently very respectable) French and German agencies in the past and this has not been an issue. If there is an entirely legal way round the VAT number issue for UK companies that are, like mine, exempt, I would like to hear it. If there isn't, I will consider VAT registration.

2) As a UK firm, how burdensome is being VAT registered? It seems easy to apply for a number, but doesn't this mean more admin work? (Related to 3 and 4 below I suppose.) My thinking is that if it makes it easier to work with European clients it might be worth it. Also if I ever share or outsource jobs I could end up hitting the VAT threshold fairly quickly.

3) Would I have to charge VAT to all UK customers? I don't want my invoices to increase by 20%, but is that a problem or am I just confused? If I had an invoice for £100, before VAT registration it would just be £100. After VAT registration it would be £120, but presumably a corporate customer would just be able to claim the VAT back, is that correct? So from a customer's perspective it would be no big deal?

4) Would I have to charge VAT to all non-UK customers? I'm unclear as to which clients in which parts of the EU would be subject to VAT. And what about the US and Japan?

5) Are there any other benefits? I suppose I can claim VAT back on corporate purchases, e.g. travel and accomodation costs?

6) Are there any major disadvantages?

If you can advise on the above questions I would be most grateful. At the risk of offending readers outside the UK and EU I would like to prioritise contributions from those with first-hand experience in this topic.

Regards
Dan

PS I will also be asking my accountant, of course, but I'm hoping to get some input from translators who have already taken this path


 

Angela Rimmer  Identity Verified
United Kingdom
Local time: 18:53
Member (2014)
German to English
+ ...
I'm VAT-registered in the UK Jun 30, 2015

Dan Lucas wrote:

1) Is there any way for this agency to get round this legally and ethically?


I believe that most companies are confused when they say they can't issue POs etc. without a VAT no. The rule is that it has to be B2B business, and most European authorities/agencies use the VAT number as definitive proof that you are indeed a business. If you can provide other evidence of being a business as opposed to an individual, it's fine, but unfortunately most companies' accountants do not know this or do not explain it properly to their clients and then you get this situation where the company thinks they need a VAT number from you.


2) As a UK firm, how burdensome is being VAT registered?


I have an accountant so I can't really say, but yes, paperwork does increase.


3) Would I have to charge VAT to all UK customers? ...presumably a corporate customer would just be able to claim the VAT back, is that correct? So from a customer's perspective it would be no big deal?


Correct. You have to charge VAT to all UK customers, but VAT-registered customers can simply reclaim their VAT expenses, so it's no skin of their nose. If you have a lot of individuals as customers, that will effectively increase their invoices by 20%. However, you don't have to charge VAT -- you could always pay it yourself (i.e. include the VAT in your rate rather than charge VAT on top of your rate). In the UK you can register for flat-rate VAT, which is what I've done. Essentially you can't reclaim your own VAT expenses but you pay only 14% instead of 20%. You still have to charge 20% so what ends up happening is that you essentially pocket the remaining 6%. In this case if you have a few individuals as clients and don't wish to put them off, you could include VAT in your rate for those customers and make up the cost from the 6% you keep from all your other customers' VAT payments. I hope that made sense.


4) Would I have to charge VAT to all non-UK customers? I'm unclear as to which clients in which parts of the EU would be subject to VAT. And what about the US and Japan?


You have to mention VAT on your invoices to EU-based customers, but it's zero-rated which means it is 0%. You have to charge 20% VAT to individuals even if they are based outside of the UK, but you charge 0% reverse VAT to all businesses based in the EU. If clients are based outside of the VAT area, they do not have to be charged VAT. For instance, I have a client based in New Zealand. I do not charge her VAT of any kind.


5) Are there any other benefits? I suppose I can claim VAT back on corporate purchases, e.g. travel and accomodation costs?


You can reclaim VAT on expenses unless you are registered for flat-rate VAT. The biggest benefit for me is that I am not charged VAT by suppliers based in other EU countries when I outsource. That saves a ton of money! Also, being VAT-registered is less hassle than having to argue with clients about whether or not you need a VAT in order for them to do business with you.


6) Are there any major disadvantages?


Extra paperwork? More frequent filing of paperwork? That's all I can really think of, for me personally.

[Edited at 2015-06-30 15:46 GMT]


 

Thomas T. Frost  Identity Verified
Member (2014)
Danish to English
+ ...
VAT Jun 30, 2015

1) "Is there any way for this agency to get round this legally and ethically?"
Legally, you are strictly supposed to have a VAT number for intra-Community trade both ways even if you're VAT-exempt. Are there legal ways to get around it? Not as far as I know. Ethically and legally, the VAT is due in Germany in any case, so I don't quite understand why this client is making such a big deal out of it, but since they are, your choice seems to be to either get your VAT affairs in order or lose the client.

3) "Would I have to charge VAT to all UK customers?"
Yes.

"I don't want my invoices to increase by 20%, but is that a problem or am I just confused? If I had an invoice for £100, before VAT registration it would just be £100. After VAT registration it would be £120, but presumably a corporate customer would just be able to claim the VAT back, is that correct?"
Correct. It makes no real difference for VAT-registered businesses in the UK, whether "corporate" or not.

"So from a customer's perspective it would be no big deal?"
Only for VAT-exempted customers and consumers in the EU's VAT area. As for the VAT-exempted customers in the EU's VAT area outside the UK, they are supposed to have a VAT number if they trade outside their own country, but many are unaware of this obligation, not least because of poor or lacking information about this by their local authorities.

4) "Would I have to charge VAT to all non-UK customers? I'm unclear as to which clients in which parts of the EU would be subject to VAT. And what about the US and Japan?"
VAT is a consumption tax in the EU's VAT area. It does not concern the rest of the world, so you never add VAT for customers outside the EU's VAT area. As for invoicing to the EU's VAT area, you add UK VAT unless the client gives you a valid VAT number (you must verify it in the EU's VIES system and keep proof).

5) "Are there any other benefits? I suppose I can claim VAT back on corporate purchases, e.g. travel and accomodation costs?"
Yes, you can reclaim VAT on expenses, subject to any restrictions in UK law. As for VAT paid when travelling abroad, you have to reclaim it from each country, something that can be cumbersome and not worthwhile for small amounts. There are agencies that do this on your behalf against a fee.

6) Are there any major disadvantages?
"If your customers are mainly consumers or VAT-exempted businesses in the EU's VAT area, then the additional 20 % is a major disadvantage. Otherwise, I can't think of any."


 

Thomas T. Frost  Identity Verified
Member (2014)
Danish to English
+ ...
Nit-picking, perhaps Jun 30, 2015

Angela Rimmer wrote:

You have to mention VAT on your invoices to EU-based customers, but it's zero-rated which means it is 0%. You have to charge 20% VAT to individuals even if they are based outside of the UK, but you charge 0% reverse VAT to all businesses based in the EU.


This is absolutely correct what the monetary result is concerned, but legally and technically speaking, it's not exactly correct.

"You have to mention VAT on your invoices to EU-based customers, but it's zero-rated"

No, it's not zero-rated, because there is no UK VAT to zero-rate. VAT is due in the client's country, so there is no UK VAT. That's strictly speaking not the same as saying UK VAT is zero-rated, the latter applying when VAT is due in the UK but is zero-rated.

"but you charge 0% reverse VAT to all businesses based in the EU."

Same as above. You cannot charge a tax that is not due, even at 0 %.

Instead of VAT, one simply mentions the client's VAT number, as you said, and mentions "Reverse VAT charge" (in French: "Auto-liquidation de TVA par preneur"; in German: "Steuerschuldnerschaft des Leistungsempfängers"). It would be wrong to state "VAT: 0 %".

As I said, you may consider it nit-picking, as the monetary result is the same, but it may help some people that things are explained precisely.


 

Thomas T. Frost  Identity Verified
Member (2014)
Danish to English
+ ...
When to charge VAT Jun 30, 2015

Here is what I explain on my own website to try to make it as simple as possible:

"VAT Information
Value-added tax is not due in the following cases:
1. if you are a business domiciled in the European Union's VAT area except Germany, and on condition that you present your VAT number (reverse VAT charging),
2. if you are a consumer or business domiciled outside the EU's VAT area.
In all other cases, German VAT of 19 % is collected."

The link to the definition of the EU's VAT area is http://ec.europa.eu/taxation_customs/resources/documents/customs/procedural_aspects/general/sadguide/1619-08annexI_en.pdf .

[Edited at 2015-06-30 16:43 GMT]


 

Angela Rimmer  Identity Verified
United Kingdom
Local time: 18:53
Member (2014)
German to English
+ ...
Thanks Jun 30, 2015

Thomas T. Frost wrote:

As I said, you may consider it nit-picking, as the monetary result is the same, but it may help some people that things are explained precisely.


I agree, it is better to explain it more precisely. I was being lazy and didn't want to look up all the correct terminology and was perhaps not very exact in my phrasing, so I'm glad you are able to explain it more precisely.


 

Sheila Wilson  Identity Verified
Spain
Local time: 18:53
Member (2007)
English
+ ...
The EU's VAT area Jun 30, 2015


Thank you for providing that reference, Thomas. It makes it so clear that the Canary Islands are not within the VAT area. It's always such a pain convincing people that some of us with an ES address are excluded from the scope of VATicon_frown.gif. I shall be circulating that link quite widely.

[Edited at 2015-06-30 16:29 GMT]

[Edited at 2015-06-30 16:55 GMT]


 

markusob
Local time: 19:53
English to German
Get a VAT registration number! Jun 30, 2015

I am pretty sure that you can get your VAT registration number from the UK authorities without having to charge VAT to your costumers. Having a VAT number and actually charging VAT are two different things. The VAT number is not for charging VAT, it serves the purpose of making it more easy for the authorities to check whether the reverse charge mechanism within the EU is complied with. Therefore your German business partner needs your VAT number.

[Edited at 2015-06-30 16:43 GMT]


 

Thomas T. Frost  Identity Verified
Member (2014)
Danish to English
+ ...
(skip this) Jun 30, 2015

(problem solved)

[Edited at 2015-06-30 17:20 GMT]


 

Michael Beijer  Identity Verified
United Kingdom
Local time: 18:53
Member (2009)
Dutch to English
+ ...
No need to register (save yourself the paperwork) Jun 30, 2015

I've been working as a freelance translator, and paying my taxes, in the UK for over 5 years now, and am not VAT registered and do not plan to become so. I work for agencies all across the globe, but mostly in Belgium, the Netherlands, France, Germany and the US. Very rarely, an agency will tell me I need a VAT number. I then explain to them that I am not required to register for VAT, as, sadly, I earn quite a bit under the annual threshold. Sometimes, they will ask me for proof that I am legit and pay my taxes. I usually mention that I have a so-called UTR (Unique Taxpayer Reference). Sometimes I give it to them, although technically speaking it is none of their business and of no real use to them.

I stick the following on all my invoices: "VAT-exempt: HMRC Reference:Notice 700/1 (Apr 2010)"

PS: Just emailed my tax accountant and will report back with anything useful
PS: I don't outsource work and do not plan to start doing so.

[Edited at 2015-06-30 20:24 GMT]


 

Angela Rimmer  Identity Verified
United Kingdom
Local time: 18:53
Member (2014)
German to English
+ ...
Think to the future Jun 30, 2015

Hi Dan,

If you are planning on starting to outsource work in the nearish future, I would recommend registering for VAT, but go for the flat-rate option. This is because:

- Your expenses are not bound to be THAT high where reclaiming VAT expenses goes beyond the 6% you keep on the flat-rate scheme (since our industry generally has low overheads).

- The VAT threshold is so high in the UK that most translators you outsource to in the UK are unlikely to be VAT-registered and thus won't charge you VAT, again keeping your VAT expenses low.

- Translators in other EU countries are likely to be VAT-registered and will thus charge you VAT if you are not VAT-registered, so you can save tremendous amounts of outsourcing costs by being registered yourself and taking advantage of the reverse EU charge.

Otherwise if you think outsourcing is not likely to be a factor for you, it all comes down to how willing you are to have this "VAT-exempt" discussion with clients who think they need your VAT number versus how willing you are to increase your accountant's workload.

That's my take on it.

Edited to add: don't forget that you can still claim your business expenses through your annual HMRC tax assessment, so going flat-rate does not mean you can't claim any expenses, it just means you can't reclaim any VAT paid.

[Edited at 2015-06-30 19:57 GMT]


 

Michael Wetzel  Identity Verified
Germany
Local time: 19:53
German to English
just curious about ... Jun 30, 2015

the flat-rate scheme and the reverse-charge process for inner-EU invoices.

If you are VAT-registered in the UK and get a reverse-charge invoice from Germany, then you have to report and pay the UK VAT on it just like a business without a flat-rate scheme, don't you? It wouldn't make any sense if you had to pay 20% (minus 6% flat rate) if you bought a computer at an electronics store down the street, but 0% (potentially 0% minus 6% flat rate) if you order a computer from an online shop in Germany.

Did I misunderstand something?

And the government of the UK has simply made things difficult for UK businesses in this case: The UK VAT-exemption threshold is astronomically high and - unlike every other (or almost every other) EU country - you can't get a VAT number in the UK if you are VAT-exempt. Both look clearly wrong to anyone familiar with the EU VAT system, but unfamiliar with the strange UK regulations. An inner-EU invoice without both the supplier's and the purchaser's VAT numbers is theoretically not valid and thus theoretically means that the client would have to return their refunded VAT to the tax office if he or she were audited. Practically speaking, that's probably not the case, but I think that's why people are annoyed by the missing VAT number.


 

Dan Lucas  Identity Verified
United Kingdom
Local time: 18:53
Member (2014)
Japanese to English
TOPIC STARTER
So far so useful Jul 1, 2015

Dan Lucas wrote:
I would much appreciate some input on the advantages and disadvantages of VAT registration in the UK

Just a quick thanks to Angela, Thomas, Sheila, markusob and both Michaels for their responses. Much to digest there, so still mulling over my responses. Hoping for a view from my tax accountant soon.

Regards
Dan


 

Tom in London
United Kingdom
Local time: 18:53
Member (2008)
Italian to English
Deleted Jul 1, 2015

Sorry -wrong topic

[Edited at 2015-07-01 07:42 GMT]


 

Angela Rimmer  Identity Verified
United Kingdom
Local time: 18:53
Member (2014)
German to English
+ ...
Good question Jul 1, 2015

Michael Wetzel wrote:

the flat-rate scheme and the reverse-charge process for inner-EU invoices.

If you are VAT-registered in the UK and get a reverse-charge invoice from Germany, then you have to report and pay the UK VAT on it just like a business without a flat-rate scheme, don't you?


That's a good question. I've been going by what my accountant had been advising previously when I was deciding whether or not to get a VAT number. At that time I spoke with two or three different accountants (one was my own, and the other two were friends or acquaintances, both of whom work as accountants for translation agencies). But perhaps I got confused myself. At the time when I registered, my expenses were very low and I wasn't outsourcing as much. I may need to talk to my own accountant soon and see if the flat-rate scheme is still the right one for me!

Thanks Michael!

[Edited at 2015-07-01 07:44 GMT]


 
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