Ways that employing freelancers affects your VAT
The rising trend for freelancing is completely transforming the face of the business market, and it affects your VAT reclaim as well.
In the UK, 4.8 million workers described themselves as freelancers in 2017, the most recent year for which data is available, a rise of 31% from the 3.3 million freelancers registered in 2001. The number of working-age adults using gig economy platforms has increased from 1 in 20 in 2016 to 1 in 10 in 2019, while in the US, 57 million Americans freelanced in 2019. The global freelancing trend is only increasing.
Freelancing is highly popular, but it can make things far more complicated when it comes to calculating VAT. In May, the issue made headlines when the HMRC opened an investigation into Uber, accusing it of owing around £1 billion in unpaid VAT. Uber claimed that it doesn’t have to pay any VAT because all of its drivers are self-employed contractors, not employees.
The fight is still going on, but you’re more concerned with how employing freelancers affects your business’ VAT returns. Here are some major issues to bear in mind when you set out to process your VAT reclaim.
Are your contractors VAT registered?
According to most tax authorities, you can reclaim VAT that you pay on your freelancer’s invoices and expenses, but only if they are registered to pay VAT. Freelancers who have not met their country’s annual turnover threshold don’t need to register for VAT (or they do register but receive graduated relief benefits). That means that they can’t charge VAT on their invoices or pass on VAT from their expenses, and you can’t include them on your VAT return.
Your contractor’s VAT status could also change from year to year. For example, if your accountant, who’s been working with you as a contractor for years, reaches the age of 70 and decides to cut back on their workload, they could slip below the VAT threshold and deregister for VAT.
Are you employing freelancers through an online platform?
If you use the services of freelancers through an online platform, like Upwork, Freelancer, or Flime, bear in mind that the platform uses a reverse VAT process. Essentially, this means that the platform serves as a subcontractor for the freelancers that use it. You’ll end up paying VAT for the work done by that freelancer, but you pay it to the platform instead of to the freelancer him/herself.
What about gifts and entertaining for freelancers?
VAT reclaim on gifts and entertaining for employees is extremely complicated. What’s more, the rules are liable to change from one country to the next, so if your business has branches in different countries, you’ll need to check what you can claim through each one.
In the UK, contractors are not considered ‘employees’ when it comes to reclaiming VAT on gifts and entertaining. That means that if you invite them to your Christmas party, you won’t be able to reclaim VAT on the entire shebang. It also means that your Christmas gifts to freelancers can’t be included on your VAT return.
In a similar vein, you wouldn’t be able to reclaim VAT on anything that you buy for your contractors to do their job. For example, you pay for an annual subscription to a project management app so that you can keep everything organised between your in-office employees, remote employees, and contractors. When you complete your VAT return, you can include the cost of subscriptions for your in-office and remote employees, but not for your contractors.
It’s easy to make mistakes on your VAT reclaim for freelancers and contractors, but you can prevent them when you use the right tools. For all the details about filing successful VAT returns in the EU and other countries around the world, download our eBook.
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