Here’s a nasty little trap that could catch out the unwary…. particularly those trying to stay just under the VAT threshold.
Some of the stuff you buy could be included in the total of stuff you sell.
Here’s how it works…
When you buy services from other EU Countries they are treated under special rules called the ‘Reverse Charge’. These rules are to help EU companies selling to other EU businesses from having to register for VAT in every country they sell to.
Under these rules the company receiving the service actually accounts for both Sales VAT and Purchase VAT. For most VAT registered businesses this doesn’t matter – the two cancel just each other out. But, for a non VAT registered business the extra turnover may make the difference between going over the VAT threshold or staying under.
Both LinkedIn and Google Adwords are companies that apply the Reverse Charge rules. So, if you spend £2,000 a year on Google Adwords and Linkedin then the £2,000 counts as part of your turnover for VAT purposes.
And, if you fail to take this into account you could go over the VAT threshold without knowing.
This could be an absolute disaster as HMRC will treat your business as being VAT registered from the date you exceed the threshold – whether or not you actually register. For businesses serving the public, like wedding photographers, it could mean a VAT bill of thousands of pounds that you can’t pass on to your customers.
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