Freelancers’ Questions: Any VAT or tax tips to grow my marketing business?

Freelancer’s Question: I’ve been professionally freelancing for less than a year, but have never done a self-assessment tax return with HMRC. So I’ve got lots of questions, sorry!

I’m a Portuguese UK-based freelancer and I provide marketing services online. I’m not VAT registered, but I work with international clients on Fiverr and I have one US client who I invoice via PayPal. My aim is to set up a freelancer website with a store where customers can buy my services straightway. My services are not a straight digital download, however.

Firstly, do I need to charge my US client VAT? Secondly, if I decide to sell my services via my website to international clients, as I propose, do I need to tax my clients according to their countries? If so, do I need to register for VAT in each and every country I supply?

Third, is there any VAT requirement relating to my UK clients and when invoicing them, what information do I need to put on my invoice? Similarly, and fourthly, what information do I need to keep or retain to do my HMRC self-assessment?

Finally (and sorry to go on), please factor-in that although UK-based, I mainly work with US dollars, tending to only buy pounds when the currency is excellent value. Look forward to any answers and apologies, once again, for my many queries.

Expert’s Answer: Firstly, in answer to whether you need to charge your US client(s) VAT, the answer is ‘no.’ Be aware that you also do not need to charge Sales Tax which is not a federal tax but a state tax. Sales to the US from the UK are an export, and you do not charge UK VAT to US customers.

From something non-taxing of you, to something that will be quite taxing…

Regarding any potential requirement for you to register for VAT in each client-country, which you ask about second, an important deadline has just passed. In fact, until February 10th 2021, a UK business could opt to join the MOSS scheme (Mini One Stop Shop scheme), to simplify VAT for traders operating within the EU.

But that deadline has passed, which is a pity for you. The scheme allowed cross-border traders to account for the VAT on their EU sales on their UK VAT Return, and HMRC would distribute the VAT to the relevant countries. As a result of Brexit, the scheme is not now available to you as a UK trader.

How to get in on MOSS even if you are UK-based

Instead, you will now need to register for VAT in each country in Europe to sell your services. Another result of Brexit is that there is no longer a de minimis level of €10,000 of business in the EU. Strictly-speaking, if you have consumers buying your services in any EU country, you must now register in each country where your consumers are based.

Currently, it is not obvious how the authorities will police this requirement for small traders such as yourself. But one potential way around this complication you face, once your business is successful, might be for you to form a subsidiary company within the EU and join the MOSS scheme.

Paying the VAT-man in the UK

Third on your questions-list is your UK obligations regarding VAT. Well, you must register for VAT if your VAT taxable turnover goes over £85,000 (the ‘threshold’), or you know that it will. YourVAT taxable turnoveris the total of everything sold that is not VAT exempt, as HMRC outlines here.

Exports do not form part of the threshold. And be aware, you can also register for VAT voluntarily.

But more crucially for you perhaps, consider that if you sell a customer a product or a service, you need to give them an invoice (bill) by law, if both you and the customer are registered for VAT (a business-to-business transaction).

Invoice requirements – what your bill as a freelancer needs to contain

And remember, an ‘invoice’ is not the same as a ‘receipt’ which is an acknowledgement of payment.

The information that you need to put on all your invoices (i.e. not just the first initial one) is:

a unique invoice identification number
your company name, address and regulatory/contact information
the company name and address of the customer you’re invoicing
a clear description of what you’re charging for
the date which the goods or service were provided (supply date)
the date of the invoice
the amount(s) being charged
VAT amount if applicable
the total amount owed

Sole trader invoices

If you’re a sole trader, the invoice must also include the following:

your name and any ‘business name’ being used or traded under.

an address where any legal documents can be delivered to you if you are using a business name

Limited company invoices

If your freelance business is a limited company, you must include the full company name as it appears on the certificate of incorporation.

Also, if you decide to put names of your directors on your invoices, you must include the names of all directors.

Your fourth question concerns what information you ought to retain for completing self-assessment with HMRC.

Also if you work through a limited company…

Well, you must keep all your invoices, expenses and bank records forming your accounting. You need to provide information that HMRC may request on your VAT, income tax, and corporation tax, if you operate through a limited company.

In addition, you must keep your records for at least five years after the January 31st submission deadline of the relevant tax year. This is because the Revenue maycheck your recordsto make sure you’re paying the right amount of tax!

For example, if you sent your 2018 to 2019 tax return online by January 31st 2020, you must keep your records until the end of January 2025!

Dollars won’t wash with HMRC (so use their conversion rates if in doubt)

Lastly, you mention US dollars. It’s fine that you tend to work with USD, but don’t forget that you will have to account for VAT and tax in sterling in the UK. So you will have to translate your transactions and balances into pounds to account for them.

And very finally, as I mentioned earlier, you need to keep all your records for at least five years. If you are not sure what exchange rates to use when it comes to completing your UK tax return (i.e. self-assessing with HMRC), then you should use the official rates published by HMRC, here.

We hope we have now answered all your questions and let us wish you the best of luck in expanding your online marketing empire here in the UK!

The expert was Kevin Austin,chief executive of accounting firm and overseas tax-compliance advisory Access Financial.