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Where Taxpayers and Advisers Meet

Interaction between VAT and income tax

Samuel L. Jackson
Posts:1
Joined:Tue Jan 21, 2020 5:28 am
Interaction between VAT and income tax

Postby Samuel L. Jackson » Tue Jan 21, 2020 5:40 am

Hey there. Since this is anonymous, I will be completely frank with all the financial information. I’m a software developer with a full time job, and I’m taking on a job as a freelancer in my spare time. The question is, do I need to register for VAT?

I make 80,000£ in my main job, which puts me in the 40% tax bracket. The job is offering 3,500$ per month.

Here are the two situations I’m considering:

1. I don’t register for VAT, and I don’t charge it
So my final monthly earnings from this job is 0.6*3500 = 2100$

2. I do register for VAT, and I charge it
Since I’m performing a service for the client’s business, he will be able to claim VAT back, so no changes for him.

From my side, I still need to pay my income tax of 40%. 20% will come from the VAT, leaving me with 0.8*3500 = 2800$ i.e. more than the previous example


Obviously, the second scenario works better for me, but is my understanding even correct? If it’s not correct, can someone please explain what would be the correct calculation?

Thank you.

pawncob
Posts:5089
Joined:Wed Aug 06, 2008 4:06 pm
Location:West Sussex

Re: Interaction between VAT and income tax

Postby pawncob » Thu Jan 23, 2020 7:44 pm

Why would you register for VAT?
1. You're earning $ so not in the UK and not liable to VAT
2. With a turnover of £42k you don't have to register.
With a pinch of salt take what I say, but don't exceed your RDA

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Interaction between VAT and income tax

Postby robbob » Fri Jan 24, 2020 9:25 am

Ok unless you exceed the vat registration threshold there is no need to register for vat, but lets presume you do want to register and get a vat registration number.


pawncob
1. You're earning $ so not in the UK and not liable to VAT

Whether you bill $ or not has no impact on the vat treatment , so whilst the most likely situation is that uk vat may not apply (business to business services covered by the general rule where your customer is based outside the uk being the most likely scenario and there would be no vat billed) - there is no certainty that this is the case. Note this is on the basis that you are vat registered.

Note you can have your cake here and eat it in that if you register for vat and provide services outside the uk that would be vatable in the uk you can then reclaim input vat , the benefit of that will depend on the total of your vatable expenses.

1. I don’t register for VAT, and I don’t charge it
So my final monthly earnings from this job is 0.6*3500 = 2100$
2. I do register for VAT, and I charge it
Since I’m performing a service for the client’s business, he will be able to claim VAT back, so no changes for him.
From my side, I still need to pay my income tax of 40%. 20% will come from the VAT, leaving me with 0.8*3500 = 2800$ i.e. more than the previous example
These calculations make no sense to me - perhaps i am not understanding the situation

On lfl basis i would expect it to work as follows

not vat registered - or vat registered and no vat charged
bill $3500 - income $3500 pay tax on $3500 - i am ignoring expenses here

vat registered and bill subject to vat
bill $3500+ 20% vat $700
the $700 vat you bill on top is simply passed across to the vat office so you have the same $3500 earnings as in the first example

With this route its the same cost to your customer whether you bill vat or not - with your example you must be charging different price to your customer - i am presuming any vat billed to customer is not a cost to them as they will claim it back.


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