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VAT Threshold implications for freelancer

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Dog

I'm actually hoping this is a stupid question as if not the implications are not great for me. I'm not business-minded (as you'll shortly see) and I need to understand the consequences for being VAT registered while working on fixed-price gigs for non-EU companies.

My situation is that I'm a freelancer and I'm not VAT registered as I don't earn anywhere near the threshold (let's say I earn £30K/annum). However, I'm considering a Kickstarter which will, if successful, bring in say £60K gross in one fell swoop. Therefore I'll need to register for VAT for that 12 month period.

I understand that I'd have to factor VAT into my Kickstarter campaign (which basically means taking the hit), which is bad enough, but am I correct in thinking I'd also have to pay VAT on my day-to-day freelancing work without any chance of getting it back? My clients are outside the EU and although I submit invoices the fees are fixed and there is no possibility whatsoever of those companies paying the VAT. Therefore, my freelancing income is immediately cut by 20% too?

Can it be correct, in my example, that by not working for half of the year I would actually earn MORE than working full time? (£15K+£60K) > ((£30K+£60K)*0.8)?
 
Dog said:
However, I'm considering a Kickstarter which will, if successful, bring in say £60K gross in one fell swoop.
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What does that mean?
 
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STDFR33 said:
Kickstarter is a crowdfunding platform.
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So presumably the income does not relate to the provision of goods or services, so can be ignored for VAT?
 
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It wont have VAT attached obviously, but it will more than likely have to be taxed via corporation tax. This is because it is NOT a gratuitous receipt because it does not fulfill the requirement of being unexpected and unsolicited - by putting up a crowdfunding site, this is solicited.

So a the end of the year this will be taxed as business sales.
 
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STDFR33 said:
Are you certain?
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If it is a donation then no it wont have VAT.

If you are offering a reward, if it something substantial such as "a year worth of Free service" then that is straight up sales and VAT would need to be recorded

If you are offering a reward along the lines of a symbolic gift like a hat then this is obviously still a donation and you wont need to apply VAT.
 
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The Kickstarter sum would be the sum I'd receive (roughly speaking) should the campaign be successful. I would receive that in one single sum once the Kickstarter had expired, that's the way it works.

This sum would be subject to VAT, assuming my total earnings are above the threshold, but not corporation tax as I'm not a company. Case law shows more equivocal Kickstarters were deemed liable (can't post link by search for crowdfunding triggers vat registration), so I think it's a given that mine would be, as it's essentially pre-payment for defined products.

What is less certain from my perspective is would I really have to pay VAT on ALL my income, which as I've explained I cannot adjust for VAT, without any hope of reclaiming it in some way, resulting in the absurd situation where the less I work the more I earn?
 
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Dog said:
so I think it's a given that mine would be, as it's essentially pre-payment for defined products.
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So you are giving products with realistic value to people who crowdfund you? So yes, this would breach your threshold. You dont have to go back and apply it to your previous earnings, but in the future that 30k would need to be grossed up to have vat.
 
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I have just read you are supplying non-EU companies, you dont apply VAT to out of scope sales.

So only EU and UK sales require VAT.
 
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YourCloudAccountant said:
So you are giving products with realistic value to people who crowdfund you? So yes, this would breach your threshold. You dont have to go back and apply it to your previous earnings, but in the future that 30k would need to be grossed up to have vat.
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So that means I'd wait for the Kickstarter funds before registering for VAT and this would affect only current and future earnings?

YourCloudAccountant said:
I have just read you are supplying non-EU companies, you dont apply VAT to out of scope sales.

So only EU and UK sales require VAT.
Click to expand...

But would I not need to pay VAT on that income. So I receive an assignment from the company for which I freelance, I do it and invoice them £3K. Now, I just pay tax on that sum, but if I was VAT registered I'd surely need to pay 20% VAT on that income too, VAT that I couldn't add to the invoice and therefore would lose?
 
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Dog said:
The Kickstarter sum would be the sum I'd receive (roughly speaking) should the campaign be successful. I would receive that in one single sum once the Kickstarter had expired, that's the way it works.

This sum would be subject to VAT, assuming my total earnings are above the threshold, but not corporation tax as I'm not a company. Case law shows more equivocal Kickstarters were deemed liable (can't post link by search for crowdfunding triggers vat registration), so I think it's a given that mine would be, as it's essentially pre-payment for defined products.

What is less certain from my perspective is would I really have to pay VAT on ALL my income, which as I've explained I cannot adjust for VAT, without any hope of reclaiming it in some way, resulting in the absurd situation where the less I work the more I earn?
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Great - you have a ton of supporters you can market the kickstarter campaign to and reaching that figure can be done.
What happens if your supporters are not so generous and you do not meet your target? Have seen a number of kickstarter begs over the years that achieved little.
 
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Dog said:
But would I not need to pay VAT on that income. So I receive an assignment from the company for which I freelance, I do it and invoice them £3K. Now, I just pay tax on that sum, but if I was VAT registered I'd surely need to pay 20% VAT on that income too, VAT that I couldn't add to the invoice and therefore would lose?
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If non EU company X buys from you and you invoice them £3k, this is out side the scope of VAT and you wont have to gross it up or pay to HMRC. IF you sold to UK company X for £3k then you would have to pay £500 in VAT- you would also have to make this clear on the invoice ie. £2500 Services plus £500 VAT.

Dog said:
So that means I'd wait for the Kickstarter funds before registering for VAT and this would affect only current and future earnings?
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So only at the point you reasonably beleive you will hit the threshold of 85,000.

IF you are selling to outside the EU then you dont include those sales in the threshold calculation. example, your £20k of your income comes from US, £65k comes from UK - you dont have to register for VAT because only the VATABLE supplies reach £65k
 
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Dog said:
So that means I'd wait for the Kickstarter funds before registering for VAT and this would affect only current and future earnings?



But would I not need to pay VAT on that income. So I receive an assignment from the company for which I freelance, I do it and invoice them £3K. Now, I just pay tax on that sum, but if I was VAT registered I'd surely need to pay 20% VAT on that income too, VAT that I couldn't add to the invoice and therefore would lose?
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If you add 20% then you do not lose 20% if they do not pay.
16.67% is the maximum you can lose.

And if VAT is not payable then you do not charge it.
 
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Mr D said:
Great - you have a ton of supporters you can market the kickstarter campaign to and reaching that figure can be done.
What happens if your supporters are not so generous and you do not meet your target? Have seen a number of kickstarter begs over the years that achieved little.
Click to expand...

Kickstarter is all or nothing (more accurately all, more, or nothing). So if it doesn't reach the goal no money is collected from the backers.

YourCloudAccountant said:
If non EU company X buys from you and you invoice them £3k, this is out side the scope of VAT and you wont have to gross it up or pay to HMRC. IF you sold to UK company X for £3k then you would have to pay £500 in VAT- you would also have to make this clear on the invoice ie. £2500 Services plus £500 VAT.
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Right, that's what I was after. Thanks.

YourCloudAccountant said:
I
So only at the point you reasonably beleive you will hit the threshold of 85,000.
Click to expand...

It's not quite so simple in Kickstarter for a couple of reasons. First, the timescale is very short for funding - weeks, days, even hours make a big difference. Second, and more pertinently, even if you meet your funding goal there's no guarantee that will represent what you'll get deposited in your bank as some people will not have the funds in their bank when their card is charged, others might even have used expired cards or even fraudulent ones. So you can end up meeting your goal of £60K but only receiving £45K into your bank. Which I guess is part of the reason why project overfunding is seen as a good idea.

YourCloudAccountant said:
IF you are selling to outside the EU then you dont include those sales in the threshold calculation. example, your £20k of your income comes from US, £65k comes from UK - you dont have to register for VAT because only the VATABLE supplies reach £65k
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Good point, even better news. Thanks.
 
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Dog said:
It's not quite so simple in Kickstarter for a couple of reasons. First, the timescale is very short for funding - weeks, days, even hours make a big difference. Second, and more pertinently, even if you meet your funding goal there's no guarantee that will represent what you'll get deposited in your bank as some people will not have the funds in their bank when their card is charged, others might even have used expired cards or even fraudulent ones. So you can end up meeting your goal of £60K but only receiving £45K into your bank. Which I guess is part of the reason why project overfunding is seen as a good idea
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So really the answer is, as soon as you get the money in your account you have to register.
 
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Dog said:
Kickstarter is all or nothing (more accurately all, more, or nothing). So if it doesn't reach the goal no money is collected from the backers.



Right, that's what I was after. Thanks.



It's not quite so simple in Kickstarter for a couple of reasons. First, the timescale is very short for funding - weeks, days, even hours make a big difference. Second, and more pertinently, even if you meet your funding goal there's no guarantee that will represent what you'll get deposited in your bank as some people will not have the funds in their bank when their card is charged, others might even have used expired cards or even fraudulent ones. So you can end up meeting your goal of £60K but only receiving £45K into your bank. Which I guess is part of the reason why project overfunding is seen as a good idea.



Good point, even better news. Thanks.
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Yes so figure out what you will do when you do not meet target.
 
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Regarding your existing freelance income - what services are you supplying? If it’s some kind of professional consultancy service then your supplies to non UK clients are most likely outside the scope of UK VAT and therefore you are not required to charge or account for VAT on those sales. It doesn’t matter if the customer is outside or inside the EU in this case, although EU clients will be required to account for VAT under the reverse charge and you will need to mention this on your invoice.

I can’t help you with the Kickstarter side I’m afraid.
 
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YourCloudAccountant said:
I have just read you are supplying non-EU companies, you dont apply VAT to out of scope sales.

So only EU and UK sales require VAT.
Click to expand...

Why do you think EU sales would require accounting for VAT? Under the general rule at least (OP is not clear what they are actually supplying), a supply of services is taxed where the customer belongs and therefore it would be outside the scope of UK VAT too.
 
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I've looked into this in some depth, the legislation is borderline impenetrable. HMRC phone support helped a little but they ended up reading from the same documentation I had in front of me and admitted they didn't know how the specifics of my situation would be interpreted by HMRC when the time came.

TheCyclingProgrammer said:
Regarding your existing freelance income - what services are you supplying?
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Artwork, delivered digitally B2B.

The conclusion from talking to HMRC and doing more research is that whilst my current freelancing work is VAT exempt, the Kickstarter as described would not be, it would be mostly (mostly, note) 0% rated, which would still either require registering for VAT or obtaining an exemption. Registering is not in itself an issue but the documentation HMRC require, and the means of generating / sending that information, is prohibitive and way beyond the means of a sole trader like myself. The processes are all geared towards medium to large businesses and either do not translate to one-man operations, or impose an absurd administrative burden on them, e.g. the requirements to prove that a single item has been mailed (as opposed to freighted) outside the EU appears not only onerous but actually unfulfillable. I asked HMRC how this might be done, they didn't have a clue.

So currently I'm in the bizarre position that I alluded to in my first post, but for different reasons; that being either I don't do the Kickstarter at all, or I do it and limit rewards (pledges) at source, which is far from easy and even further from desirable.
 
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What gets me - or more accurately one of the things that gets me - is the seeming inability of the HMRC to collate their information and present it in any sort of logical format. It seems like they issue revision upon revision without updating any sort of core documentation, so that you need to search dozens of documents in order to discover what could have been presented in a single paragraph.

Case in point, I want to know when I must register for VAT so I go along to the HMRC page "When to register for VAT" and get a short list of conditions, the primary one being, "You must register for VAT if your VAT taxable turnover goes over £85,000." You would imagine that would be that, and I could base my decisions on the information I found there, but no, there are a whole host of other conditions hidden away in other pieces of legislation, some of them even negating one or more of the original conditions, such as, "For UK businesses making cross-border supplies where the place of supply is another EU member state, there is no registration threshold and VAT is charged at the rate due in the consumer’s country"; this located in a document that only somebody who expected to pay VAT based on the original information would think of reading.
 
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UK Contractor Accountant said:
perhaps he/she thought that they were non business customers in which case they would?

dont you just love VAT?
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Maybe, but freelancer implied B2B to me. I see OP has now clarified, would seem to fall under the rule for professional services to me so outside the scope of UK VAT when supplying to business customers outside the UK and EU clients should account for VAT under the reverse charge.
 
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Dog said:
The conclusion from talking to HMRC and doing more research is that whilst my current freelancing work is VAT exempt
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For the avoidance of confusion it's important not to get your terms muddled up. Your freelance services are not VAT *exempt*. They are standard rated services when supplied to a UK business customer. When supplied to a customer outside of the UK they are outside the scope of UK VAT (which is not the same as VAT exempt or zero rated).
 
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