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bigduckontax
bigduckontax, Accountant
Category: UK Tax
Satisfied Customers: 681
Experience:  FCCA FCMA CGMA ACIS
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Im going to set up a limited by share company which will act

Customer Question

I'm going to set up a limited by share company which will act a little bit like this website: It is going to be a marketplace where companies (Buyers) will look for specific expertise to hire on a project basis and freelancers can bid and being selected for the project by the companies according to their fee, experience and rank.

I will recieve in advance the amount of money requested for the project and at the end of the project I will pay the freelancers keeping a percentage on that. I will also sell premium subscription plans both to companies and freelancers. It is very likely that I will have custoers (both companies and freelancers) not just from the UK but from all around the world.

How to deal with the VAT? Do I have to charge English VAT also to foreign customers, just to the English ones or being a professional service can afford not to charge the VAT.

Would I need a VAT Registration with HMRC since the beginning?
Submitted: 8 months ago.
Category: UK Tax
Expert:  bigduckontax replied 8 months ago.
Hello, I'm Keith and happy to help you with your question.

To set up a VAT account is, in theory, simple, but if your company will be below the relevant level you will tend to meet resistance from the VATman! However, if you emphasise that you are in the export business you will find registration much easier.

Foreign customers (ie all those outside the UK including the Channel Islands and the Isle of Man) would all be zero rated supplies to use VAT speak! Thus you would issue invoices for such customers showing VAT at the zero rate. For all UK customers, not only professionals, you would have to invoice at the standard rate, currently 20%. On all expenditure by the company on outgoings upon which VAT has been charged (imputs), the company can reclaim the tax against the outputs. If foreign outputs are large you may well be in a reclaim situation on every return period. These you must do on line every quarter, but the process is fairly simple and painless. Basic VAT is pretty easy, but accurate records must be maintained and I suggest that zero rated and standard rated sales be separately recorded for ease on later analysis if necessary.
Customer: replied 8 months ago.

Ok… let me summarize with a scheme. Basically I will deal with money of my customers in 4 ways:

 

Buyers buy subscription plans (inbound cash flow):

  • If from the UK charging VAT
  • If outside the UK (even EU): not charging VAT

 

Buyers hire a freelancer through my service and pay me for a project (inbound cash flow):

  • If from the UK charging VAT
  • If outside the UK (even EU): not charging VAT

 

Freelancers buy subscription plans (inbound cash flow):

  • If from the UK charging VAT
  • If outside the UK (even EU): not charging VAT

 

Freelancers are paid when the project is finished deducted a fee which I will retain, ie my profit (outbound cash flow):

  • No VAT to charge (net even to UK based freelancers)
  • If receiving money from UK buyers they will receive X less VAT deduction less Service Fee
  • If receiving money from not UK buyers they will receive X less Service Fee

 

I have to fill quarterly a record and pay the VAT I’ve charged to the HMRC. My company has been set up past 17 October. When is my Accounting period ending? As long as I don’t start trading do I have to declare something to HRMC?

 

Thanks!

Expert:  bigduckontax replied 8 months ago.
Yes, that will work and produce the desired effect, although accounting purists will jib at the method! Just remember that if the fee is 10 quid to a freelancer then there is a 2 quid VAT on top of that a total bill of 14. Alternatively you an say 10 divided by 1.2 will give you the net fee, the difference to 10 being the VAT. That is what goes through your books as fees received and output tax. What goes into your books as fees paid is the 'X'. Of course, if the freelancer is also registered for VAT then they would invoice you and you could reclaim the tax as an input. It sounds complicated, but in fact is easy once you get working with it.

The quarterly account periods will be notified to you by HMRC on registration. You can backdate all your transactions before registration in your first quarterly on line return. If you don't start trading you do not have to register nor do you have to tell HMRC. Every quarter when you make your return HMRC will tell you how much you need to pay or how much they owe you as appropriate. You have to pay them on line, they will make repayments to your bank account if appropriate.

GBP 79,000 is the threshold for registration. If your company's turnover is below this level you do not need to register at all and can ignore the whole VAT caper. However, as I have said, in an exporting environment registration could well yield a benefit to the company. I know a couple of tiny organisations into exporting in a small way who get a few pounds back most quarters. Always remember services, not only tangible goods, count as sales.
Customer: replied 8 months ago.

Can calculate the VAT (multiplying or dividing by 1.2)... but didn't get how from a £10 fee you got £14!!!! With the VAT is £12! Where do the other £2 come from?

 

And then... if my turnover is less than £79000 (as it will probably be being a startup), when you say "If your company's turnover is below this level you do not need to register at all and can ignore the whole VAT caper" means that I am exempted from charging any kind of VAT at the beginning?

 

I also actually found discording documents which say that VAT should be also charged to EU customers... at least they don't have a valid VAT number which I should verify here: http://ec.europa.eu/taxation_customs/vies/ but in this case it becomes incredibly complicated!!!!

 

Anyway it seems it all depends on the place where the service is provided: http://www.hmrc.gov.uk/vat/managing/international/exports/services.htm

 

Actually the physical place of my servers is in the USA... Don't I have to charge VAT in this case or it's my office location? And what if I don't have a physical office but online employees who works from very different countries? Where can it be said as "the place where I provide the service"?

 

 

PS: none of similar service providers... not even this website... charge VAT!

Expert:  bigduckontax replied 8 months ago.
Where your turnover is below the GBP 79,000 level you can ignore VAT completely; you still have to pay it on goods and services you buy, you just can't claim it back. You don't have to register at all, but when you begin to reach that level then you do have to consider registration.

HMRC advice actually says:

Zero-rating goods sold within the EU

If you're sending goods to someone who is genuinely registered for VAT in the destination EU country, you can zero-rate the supply for VAT purposes, provided you meet all the conditions below.

To account for the VAT on zero-rated sales to another EU country, include the value of the goods and services in your VAT Return in Box 6 and Box 8 in the usual way. If any VAT is due in the destination country, then your customer pays it to the tax office in their country.

You can only zero-rate these supplies when all these conditions are met:

The goods are sent out of the UK to somewhere in another EU country
whoever you're sending them to is genuinely registered for VAT in another EU country

You get their VAT registration number - including the two letter country code - and show it on your sales invoice

You've got paperwork showing that the goods have gone out of the UK - 'evidence of removal'

You dispatch the goods and get evidence of removal within a set time - which is normally three months

In this case goods actually means tangible items, utterly confusing, I know!

The place your company works is the place where it is registered. The fact that it uses overseas servers is irrelevant. Of course, you could set up a company in the States, a quite different kettle of fish and beyond the scope of your original question.

In the UK we do have a problem with our 79,000 limit below which registration is not a requirement. That is not the case in some EU states; in Germany, for example, you must register all businesses no matter how low the turnover.

Customer: replied 8 months ago.

You've completely missed my point:


 


I don't care about claiming VAT back on some office equipments... my major concern is if staying below 79 I have to charge VAT and fill the quarterly report as well


 


Lots of examples with goods... but actually I offer a service.. and indeed not even me! When I get the money from the buyer I'm just getting that to transfer them to the freelancer later on!


 


And if the freelancer is in Asia who can say to me that the service has been provided in the UK? Maybe the subscription can be said about that.... but for a project a company is paying a freelance through me... not paying me!

Expert:  bigduckontax replied 8 months ago.

Below the GBP 79,000 you don't have to register or worry about VAT and quarterly returns at all. You don't even mention it on your invoices. If your freelancer was in Asia then as I have explained it is a zero rated supply so were you registered for VAT then the output tax on that transaction would be nil. That third party payments are being 'paid through me' you are actually for VAT purposes of being involved in a 'transferred management charge' situation. You have money going in (outputs) and out (inputs) and even if the amounts are the same under`the VAT regime they would have to be separately accounted for and, where appropriate, VAT charged or reclaimed. If you are not registered for VAT such matters can be ignored.

bigduckontax, Accountant
Category: UK Tax
Satisfied Customers: 681
Experience: FCCA FCMA CGMA ACIS
bigduckontax and other UK Tax Specialists are ready to help you
Expert:  bigduckontax replied 8 months ago.
Thank you for your support.

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