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How does VAT relate to UK online sole traders?

A few serious questions

     
1:01 pm on Mar 22, 2006 (gmt 0)

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I have been reading through a couple of UK small business accounting and tax guides recently and I've also gone through the HM Revenue and Customs website, but all I have managed to find is a general overview of how VAT works and I am looking for some more specific answers as they relate to the independent web-publishing industry.

1) Does VAT apply to UK sole traders in the same way that it applies to UK limited companies - or does it apply in a simpler way to sole traders? Or are sole traders partially or fully exempt? I understand that there are certain simplified arrangements such as cash accounting and a flat-rate scheme. Would any of you who run your own small operation recommend any of these?

2) Does VAT apply to UK affiliate marketing in the same way that it applies to UK offline sales - or does it apply in a simpler way to affiliate marketing? Or is affiliate marketing partially or fully exempt? Is commission from an affiliate sale liable for standard rate VAT, reduced rate VAT, zero rate VAT or VAT-exempt?

3) If VAT applies to online affiliate marketing sole traders at a standard rate in the same way as it applies to everyone else, I understand that I have to register for VAT at the end of any month when the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - 60,000.

But what constitutes a taxable supply where independent web-publishers are concerned? Is providing space on my website for CPM, CPC and CPA creatives and links a taxable supply? Is the publication of sponsor links a taxable supply? (Yes, I pay income tax on all income streams right now, no questions asked, but I want to check this).

None of the books nor the HMRC website seem to talk about web-publishing, even incidentally.

Also, if I design a website for someone else, is that a taxable supply?

4) If all of the above are taxable supplies and contribute to my turnover - which then indicates whether I am obliged to register for VAT or not - how does VAT relate to things like Google AdSense earnings, CJ earnings etc.?

Clearly I'm not going to send Google AdSense an invoice for the extra VAT they have to pay me on top of what they pay me each month. But then, the UK government will expect me to pay VAT out of what I receive from Google AdSense, won't it? I have the same question with regard to CJ and other affiliate networks and to Fastclick and other banner networks.

5) Let's say I have a US-based corporate sponsor on my website with a handful of links pointing to its site. Let's say I am currently charging that corporate sponsor $1000 per year. If I am VAT registered, won't I now have to pay VAT on that income? If so, is my only choice to a) only keep $825 of that amount and give $175 to the government, or b) start charging $1212.12, in order that I still receive the $1000 that I used to receive (before taxes) before I was VAT-registered.

Thanks in advance for all your help and clarification!

Also if anyone knows any guide or book which talks specifically about how UK taxes (including VAT) relate to independent publishing / affiliate marketing on the web, I would be very grateful to hear about it.

Thanks again.

11:10 am on Mar 23, 2006 (gmt 0)

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Hi ronin,

It's a complicated area and I'm not an accountant, so I'm not going to be able to answer all your questions, but here's a few thoughts, based on our experience, which may be helpful:

The key phrase for talking to HMRC, and searching their website, is 'electronically supplied services'. Their phone number is 0845 010 9000.

Does VAT apply to UK sole traders in the same way that it applies to UK limited companies - or does it apply in a simpler way to sole traders? Or are sole traders partially or fully exempt?

Does apply to sole traders.

Does VAT apply to UK affiliate marketing in the same way that it applies to UK offline sales - or does it apply in a simpler way to affiliate marketing? Or is affiliate marketing partially or fully exempt? Is commission from an affiliate sale liable for standard rate VAT, reduced rate VAT, zero rate VAT or VAT-exempt?

Let's think about this... affiliate marketing could be considered as selling ad space, or as a kind of sales commission. I would have thought that both of these would be liable for VAT at the standard rate.

BUT: you DON'T have to charge VAT to customers outside the EU. Search something like 'place of supply' and 'electronic services' for further info.

Is providing space on my website for CPM, CPC and CPA creatives and links a taxable supply? Is the publication of sponsor links a taxable supply?

Yes, I would have thought so. I'm sure the HMRC will tell you if you ask them, but I'd be surprised if any form of advertising is exempt. Google for 'VAT exempt' and you'll be able to get a list of things where VAT isn't charged: it's mostly books, children's apparel, staple foods, things like that.

if I design a website for someone else, is that a taxable supply?

Yes.

But then, the UK government will expect me to pay VAT out of what I receive from Google AdSense, won't it? I have the same question with regard to CJ and other affiliate networks and to Fastclick and other banner networks.

I don't know. It's a good question. If you can make the case that the customer is in the USA, then you might not be liable for VAT. Time to talk to an accountant, I think.

Let's say I have a US-based corporate sponsor on my website with a handful of links pointing to its site. Let's say I am currently charging that corporate sponsor $1000 per year. If I am VAT registered, won't I now have to pay VAT on that income?

Possibly not. If the customer were based in the UK then you would have to charge VAT (and they wouldn't mind paying it extra because they'd be able to reclaim it), but if the service is supplied in the States (again getting into 'place of supply' issues here) then no VAT.

Also if anyone knows any guide or book which talks specifically about how UK taxes (including VAT) relate to independent publishing / affiliate marketing on the web, I would be very grateful to hear about it.

So would I! It's a confusing area, and the rules have changed within the past few years.

BTW non-EU businesses selling into the EU above the VAT threshold are also liable to pay VAT - e.g. even if they're based in the States. The idea is to promote a level playing field. (This came about because under the old rules AOL was able to sell ISP services to UK consumers VAT-free while its UK-based competitors had to charge VAT - Freeserve et al made a stink and the rules were changed).

Happy to send you my accountant's number, he's dealing with these issues for us, stickymail me if you want it.

HTH, a.

3:00 pm on Mar 23, 2006 (gmt 0)

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Does VAT apply to UK sole traders in the same way that it applies to UK limited companies - or does it apply in a simpler way to sole traders? Or are sole traders partially or fully exempt?

That you are even asking this question reveals that you seriously need some professional advice.

Get a proper accountant.

But just for now, VAT is as applicable to a sole trader as it is a partnership, a limited company and a PLC.

Matt