September 18th, 2015

Staying just under the VAT threshold? What out for this trap.

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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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Freelancers Limited Companies VAT

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Director

John manages a wide portfolio of owner managed businesses and oversees the smooth operation of the firm’s payroll department.

After obtaining his degree in mathematics from the University of Liverpool, John joined Jonathan Ford & Co in 2004 and qualified as a chartered accountant four years later. John likes to keep abreast of developments in tax and accounting and is responsible for the mentoring of junior staff.

Outside of work, John enjoys powerlifting and is a Liverpool FC season ticket holder.

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