If you want to provide freelance services to clients based in the EU, or are a business that imports or exports products with the EU, there are some tax issues you need to be aware of, such as, how do you account for VAT?
The Freelance Informer put some questions to Mike Glover, Co-Founder of Taxually, a provider of international VAT and compliance services.
Here’s what we learned.
Mike, how would a UK contractor or freelancer – set up as a UK limited company director – residing in the UK and looking to solely provide their services remotely to non-UK clients (due to IR35/off-payroll constraints) set up their tax and VAT obligations in multiple countries (i.e. for US clients, EU clients, Asia clients)?
Does the UK VAT threshold remain the same for them or is it calculated on a country-by-country basis? Do they have to submit VAT and tax returns in the client countries they are serving?
Each country has its own set of tax rules which have to be considered based on each particular fact pattern. Trading with a country from distance yields a different result from maintaining a stock of goods in a particular territory and/or having a permanent establishment, branch or subsidiary there. The entry point for needing a VAT presence in another country is usually lower than that for needing a corporate income tax presence.
If a UK based business trades in another country but is not required to set up a VAT presence in that country, the export sales still count to the UK VAT threshold.
What has probably been this biggest pain point for VAT registered UK businesses exporting goods or services outside of the UK over the past 12 months? And importing?
Up until the end of the Brexit transition period, businesses continued to trade as before. However, from that point onwards, the UK left the EU single market and Customs Union, meaning additional paperwork, checks on goods at the EU border and a general putting up of hidden barriers to trade (e.g. more stringent origin of goods rules). These points combined have added friction, and therefore cost, to cross-border trading.
The tax tail should never wag the commercial dog. Any business that decides to move a part of its business to within the EU must do so on purely commercial grounds.
How can they overcome these pain points?
Whilst businesses should get slicker in dealing with the new trading regime, costs of trading (administration, checks, transport delays) will inevitably be higher. If customers decide to source their supplies from within the EU due to the delays and extra costs, many UK businesses may consider how they can set up a base within the EU.
What are some of the post-Brexit tax triggers for a business to seriously consider setting up a business presence in the EU?
The tax tail should never wag the commercial dog. Any business that decides to move a part of its business to within the EU must do so on purely commercial grounds. However, taxation and the costs of tax compliance must be considered in the total commercial picture and in deciding between one or more potential countries. Taxation should be regarded as a cost of doing business.
Which EU countries are probably the easiest to set up a business presence when it comes to tax rates and compliance?
It is certainly the case that some countries are easier to set up in than others. There are many factors to be considered, though, ranging from language and cultural fit to cost of properties, staff availability and cost, ease of transportation, and legal and tax issues.
Within tax considerations, it is important to see the full picture. A country may have low corporate tax rates but a high personal income tax burden. There may be additional transaction-based taxes or levies payable to local taxing authorities.
Countries with lower corporate tax rates in Europe include Hungary, Bulgaria, Cyprus, Ireland, Latvia, Poland and the Czech Republic but, as indicated, this is only one small piece of the jigsaw.
If a company deals with a lot of transactions in the EU how can they keep track of their VAT and tax obligations for each purchase and return?
Tax compliance is complex and requires good record keeping. VAT is at the forefront as it is reported throughout the year and it is important for businesses to have up to date cumulative information on its sales. Using state of the art VAT compliance technology (such as Taxually) can really help to reduce the burden on businesses.
Is HMRC looking to reduce any VAT obligations in any sectors or services to boost purchases (i.e. for thatch materials, education, food and hospitality)?
The impacts on numerous industry sectors caused by COVID-19 have led to temporary VAT reductions and reliefs. For example, the reduced hospitality and tourism VAT rate has been extended further (5% to 30 September 2021, then 12.5% to 30 April 2022).