Internet Marketing and VAT, do you need to Register? Lessons Shared from a Compliance Check

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This is a very UK specific post (though if you’re reading from elsewhere I’d suggest seeking some professional taxation advice). Also I’m not a qualified (or unqualified) accountant so bear that in mind too (however as you’ll read later don’t believe everything an accountant tells you).

When I receive a letter from HMRC I generally open it with a hint of dread (I’ve had one tax rebate in my life and enough fines and bills to cover that 1000 fold). With this letter the feeling of dread was very appropriate, it was from THE VAT MAN.

Dear Sir

VAT Registration Enquiry

Following a review of information held on Departmental records l understand that from SA returns quoting your Unique Taxpayer Reference for indicates that you exceeded the VAT registration limit during the 2007-2008 financial year and have continued to trade above the registration limit since then ‘ However, we are unable to trace a VAT registration.This could be for various reasons such as you are registered at a different address to the registered address or your services may be exempt from or beyond the scope of VAT.

If the company is VAT registered please inform me of the vrn or if they are not required to be registered please let me know the reason(s) why.

If the business should be registered please forward a monthly breakdown of your sales and cost of sales from April 2006 to 31st January 2013.

A belated notification penalty may apply so Forms CC/FS1a and CC/FSQ are attached for your information.

Please reply within 28 days of the date of this letter. However you choose to contact us about this check, you need to quote the case reference CFS-XXXXXX and any other references shown above.

Much love
Your friendly VAT man
xxx


I’d always believed I didn’t need to register for VAT. The majority of my income is from outside of the country (which isn’t liable for VAT), namely:

  • Adsense
  • Commission Junction
  • Amazon.com
  • eBay.com
  • Clickbank
  • LinkShare
  • ShareASale
  • Netshelter
  • Others in 2006 that I’ve now forgotten about

I do have some UK income however it was below the threshold that would require me to register for VAT. For the year ending April 2007 the threshold was £61,000 (you can see the current and past thresholds on the HMRC site).

Next step was a call to my accountant, after a few exchanges between accountant and I, VAT man and accountant and I etc… My accountant finally advised me I should of registered and will now be fined but I’d only owe VAT on my UK sales which aren’t considerable but over 7 years will of added up. He also advised me to arrange a meeting in person with the VAT man to make an agreement. Arrrrgggggg so what I didn’t need to hear!!!

I had researched a bit about VAT before and I really wasn’t 100% convinced, so went back to the HMRC website and read it ALL. There’s actually a lot of really good and simple information on there (though some of it is somewhat ambiguous). the following paragraph gave me hope:

You supply goods or services from the UK to other countries
If you supply goods and services both inside and outside the UK, then you may need to register for UK VAT if the value of your UK supplies alone exceeds the registration threshold.

You don’t need to include supplies you make in other countries when calculating your VAT taxable turnover for registration purposes – so leave out of your calculation any goods and services you supply where the place of supply is another country rather than the UK.

With this new bit of information it was time for me to call and discuss with the VAT man (something which I was really not looking forward to), my 28 days were ticking away. Called them up and explained and received the following answers:
“We generally don’t do house calls” (thanks Mr Accountant)
“Yeah it doesn’t sound like you need to register” (WTF Mr Accountant (but happy Al))!!!
“Can you put that to us in writing with the amounts please”.

Cool, so I’d heard it from the horses mouth that I didn’t need to register. However I now had to go through all of my accounts for 2007/08 and show exactly where my revenue was coming from. this resulted in the following letter:

Dear Mr XXX,

I am writing with regards to the VAT registration enquiry (#CFS-XXXXXX). I contacted your office on the number provided and spoke to one of your associates on 4 March 2013 and explained the situation. They advised me that I do not need to register but detail this information to you. In brief, the reason I have not registered for VAT is because the majority of my income is from overseas (USA and Ireland) and not subject to VAT.

For the tax year in question (2007-2008) the figures are as follows:

Sales: £147,000
Sales in the UK: £ 15,000
Sales in the US: £132,000

The majority of the US income is from advertising revenue (Google is the primary source). The UK income is from both advertising sales and some client work (approx. £12,000).

In later years more income has come from the US and also Ireland as Google changed their payment system. I stopped doing client work in the UK so my UK sales have continued to decline and are significantly lower than in 2007-2008.

I hope this meets your requirements, if you need any further information please do not hesitate to contact me.
Sincerely yours,

Letter sent off and fingers crossed that was it. Twenty Eight days later (great film), I’d still not heard anything from them, so it was back on the phone. A couple of calls later (their computer system was down) and they agreed I owed nothing and didn’t need to register (they also eventually sent this to me in the post which I won’t copy here as this post is long enough).

So lessons learnt:

  • The VAT man is your friend and will help you do the correct thing
  • Double check even professional advice
  • If you’re revenue is from outside of the UK you don’t need to include it in your VAT calculation
  • Google Adsense payments are now from Ireland and are not included for VAT (if they were in Northern Ireland they would be)
  • If your UK taxable supplies exceed £79,000 (this tax year 2013/14) you DO need to register
  • KEEP records

The next question to ask is just because by law you do not need to register for VAT would it be in your advantage to do so. I’ll answer that in a future post, be sure to subscribe or follow us on twitter or facebook if you think you’d benefit from it.

Disclaimer: This is from my personal experience, I would advise getting professional help either from a VAT specialist or a VAT office (they’re pretty friendly).

About Al Carlton

Al quit the 9 to 5 rat race in January of 2007, before then he was a software engineer and systems architect of financial system. Nowadays Al spends the days running his various businesses and experimenting with different ideas and opportunities.
Al can be found on twitter at AlCarlton.

Comments

  1. Hi Al,

    Fascinating post, I bet you had a few sleepless nights about the VAT mans first letter!

    But I’m just wondering, since most of your income comes from The U.S does that mean you have to pay taxes to the American government? And if so, is it all very complicated?

    Mel

  2. Hey Al

    thanks for sharing – very useful and the timing is right (was looking for information re legal requirements etc)

    off to dig some more through your site

    nice to meet you and maybe we’ll talk again soon

    cheers

    Al :)

  3. Al,
    Your experience with HMRC mimicks mine. When I first started my company, I got a call from them where they explained some schemes about accounting for and paying VAT. Over the years the HMRC people have been very helpful.

    I’d urge people not to believe all the bad press you hear about these people.

  4. Christian B says:

    Hi Al,

    If you think the UK VAT man is bad… You wrote: “I do have some UK income however it was below the threshold that would require me to register for VAT. For the year ending April 2007 the threshold was £61,000.” In Denmark the threshold, if I’m not mistaken, is something like £3-4,000. Yeah. Wish we were doing business in the UK!

  5. Hi al..
    If we are not registered firm, do we need to pay service tax in us?

  6. That’s a fascinating read. I’ve just moved into marketing online after almost 25 years of running an offline business in the UK, and being VAT registered during that time. I’ll add a couple of things from my own experience

    1) The VAT man will chase you much harder for payment that the friendly Income Tax guy. Expect a lot less leeway and flexibility from them. I paid my VAT monthly and always made sure it was on time

    2) Delay registering for VAT for as long as possible, it is a hassle. Sure, once you reach the threshold you have to comply with the law. However I know of people who registered before reaching the threshold, tempted by claiming back the VAT on business purchases. All of them regretted it – the extra work just wasn’t worth it. Plus if you’re running a one man/woman business from home you’re really not going to be incurring that many business expenses on which you can legitimately claim back the VAT.

  7. Hi Al,
    Thanks for the detailed post it answered one of my main questions. The second is deciding which route to take when it comes to paying tax. Should I set up as a sole trader and limited company. The plan is to mitigate shelling out tax, the last thing I want is to loose out a massive chunk from freelancing and online marketing to tax man.
    Regards
    Sam

  8. That’s a fascinating read. I’ve just moved into marketing online after almost 25 years of running an offline business in the UK, and being VAT registered during that time. I’ll add a couple of things from my own experience

    1) The VAT man will chase you much harder for payment that the friendly Income Tax guy. Expect a lot less leeway and flexibility from them. I paid my VAT monthly and always made sure it was on time

    2) Delay registering for VAT for as long as possible, it is a hassle. Sure, once you reach the threshold you have to comply with the law. However I know of people who registered before reaching the threshold, tempted by claiming back the VAT on business purchases. All of them regretted it – the extra work just wasn’t worth it. Plus if you’re running a one man/woman business from home you’re really not going to be incurring that many business expenses on which you can legitimately claim back the VAT.

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