If you’ve just started a digital business, or have been growing your startup over time and are beginning to reach an earnings threshold where you will need to register for VAT, this can be a somewhat daunting process. Small businesses, and in particular those that are growing at a steady rate, are more susceptible to VAT compliance problems as they usually have less resources at their disposal to be able to remain compliant in the first place. Let’s have a look at VAT, when you are required to register for VAT as a digital business, what to do in foreign jurisdictions, as well as when it may be viable to de-register if need be.
VAT (value-added tax) refers to a tax on what people consume, be it goods or services. It is considered an indirect tax, because VAT registered companies earning above a certain threshold essentially gather the tax on behalf of the government in the country. Individual governments have different VAT rates, so if your digital business is operating in multiple regions around the world, it is worth researching individual rates as outlined by specific jurisdictions, as these may vary considerably by region.
Companies are required to register for VAT once their annual earnings threshold, in a given tax or financial year, reaches a specific amount. In the UK, that amount is £85,000 (throughout 2020 at least), whereas other countries like South Africa require VAT registration for companies earning over R1 million over the span of twelve months. Failure to do so could incur hefty fines, so make sure you are keeping a close eye on your earnings, weighing them up to budgets and expectations of total turnover across the span of any given year.
For digital businesses, there is a great chance that you will be doing business in a range of different countries, especially so if you offer an online service. Businesses who provide goods and services in a foreign jurisdiction are required to comply with VAT laws in that particular jurisdiction, over and above commitments to where the business itself is registered. Don’t let this scare you, especially if you’re getting close to income thresholds this financial year. If your business requires a VAT registration anywhere in the world, companies like VAT Global offer a complete service, providing you with helpful tips and peace of mind around compliance practices.
Keep in mind, that if your digital business no longer makes taxable supplies in a given country, there may be grounds for the de-registration of VAT. This can have an effect on how large tenders view the professionalism of your business (companies that are not registered for VAT are known to be earning less than the threshold) and in turn it may become harder for you to sign larger tenders. This will be important depending on the nature of your business, as well as taking into consideration its longer term goals. If you are in doubt about whether you should be registered for VAT, or have any questions about the registration process, the first step is to reach out to an expert about it.
While this article aims to provide an overview of the technicalities around VAT, it should not be considered a legal authority on the matter. You are encouraged to talk to a specialist if you need more information, or if you have specific questions about the processes mentioned.