When I set up as a sole trader, relocating from Germany to the UK, I decided to register voluntarily for VAT. Today I will discuss why I did this (was I crazy?!) and what it has meant for my business during my first year of full-time trading. [Disclaimer – no tax advice is offered here and I am not in a position to give it – here I explain my reasoning and the knock-on effects on my business].
Why register for VAT?
In the UK, the threshold of VAT-taxable turnover for VAT registration is really high (around £85,000) compared with other European countries. In Spain the threshold is nil, whereas in Germany it is € 22, 000. Obviously, a full-time sole trader would hope to earn more than €22, 000 after a year or two, and definitely more than nil. This means that understanding and dealing with VAT is the norm in many EU countries, while it is not so common in the UK. For many companies across Europe, having a VAT number is a sign of professionalism as my business advisor in Germany highlighted when we discussed VAT. This alone is not reason enough to register though!
The main reason I registered is because several key clients in Slovenia, Croatia and Germany told me they could not do business with me if I did not have a VAT number – and unlike in those three countries, it is impossible to get the number in the UK without registering for VAT itself. Periodically, debates occur on UK translation forums about whether VAT registration is a requirement for UK–EU transactions – the answer is unclear and seems to be confused around questions of UK–EU sovereignty and whether individual EU states actually apply EU tax directives to the letter [the smaller, newer EU-states appear to]. This will all change again after the Brexit transition period anyway.
What does it mean for me?
Most translators, especially in their first few years of trading, do a lot of Business-to-Business (B2B) work – e.g. for translation agencies. Early on, there is much to be gained from the feedback, guidance and learning of industry standards that occurs through working with agencies and publishers. VAT registration does not affect work for these kinds of customer, except for a little bit more paperwork each year. This is because businesses can claim VAT back. However – and here’s the sting – it does mean that the price of work completed for individual customers (B2C) has to take into account the extra 20% in tax that must be paid.
This means that I either have to cover the VAT myself or charge private customers more. Most of the time, I have opted for the middle ground, perhaps charging 10% more than I would were I not registered for VAT. However, private work completed for individual customers often pays slightly better as there is no “middle-person” (an agency, publisher, packager factoring in their costs). This does mean that some clients may be put off by the slightly higher prices, but then, competing solely on price is not viable for everyone in the long-term, as Louise Harnby describes well here. [Personally, I think a tax that charges all individuals a blanket percentage and companies nothing is not a fair way of doing things, but that is another issue entirely].
There is a clear loser in registering for VAT, however, and that is in sourcing work through peer-to-peer platforms. These are sites (e.g. Upwork, Peerwith), where you pitch services directly to end-customers, who find you and hire your services through the platform. The platform then takes a cut (e.g. 20%). Where you are contracting directly with the end-customer, you lose out on both the VAT and the platform fees, which may be 10–20%.
When working with academic researchers, VAT registration means it is much better for me if I am paid officially, via a university out of project funds, rather than privately, out of their own pocket – this is usually also better for the researcher. This has encouraged me to seek out more “professional” projects (e.g. book copyediting and developmental editing) and turn me away from, for example, editing masters and PhD dissertations. I believe this is also good for my business as I can advertise the published books I have worked on.
To conclude, in my first few years of full-time trading, I expect to do more work with VAT-registered companies. The lost income when contracting with private customers is compensated for by the generally better rates I receive, and I learn how VAT works. I have avoided peer-to-peer platform gigs and VAT registration has skewed me towards working with larger institutions and organisations.
I will likely review this decision in the future – particularly if I plan on working with indie authors – but for now, it makes sense!