Royalties - what happens when you reach the VAT threshold?

[MitchT]

Hypothetical question ...

If you sell your music you'll need to be a limited company or a sole trader to process the income, but what happens when your income reaches the VAT threshold? I guess you'd have to register for VAT, but what actually happens money wise?

If you have a record deal paying you a percentage then that percentage is not going to increase to reflect the cost of the VAT that you now need to pay. If you sell your music directly, such as on Bandcamp, you're not going to put your prices up by 20% because you now have to pay VAT, as your consumers are generally individuals who can't claim it back, not VAT-registered entities that can, so how does it work?

[BigRedX]

IIRC it should only affect you if you sell your music directly to public yourself without going through a 3rd party such as a record label or an on-line reseller such as Bandcamp.

Then it will hopefully be mostly offset by being able to claim back the VAT you've paid on getting the music made in the first place.

Besides with a distance selling threshold of £70,000 you need to be selling a lot of records/CDs/downloads to qualify. If you are doing that well you'll already have an accountant who will have sorted it all out for you.

[shufflebeat]

If you are doing that well you'll already have an accountant who will have sorted it all out for you.

This ^^ should be very high on the priority list.

[Hugh Robjohns]

If you sell your music you'll need to be a limited company or a sole trader to process the income, but what happens when your income reaches the VAT threshold? I guess you'd have to register for VAT, but what actually happens money wise?

If you are in the UK and your taxable turnover exceeds £83k you are legally obliged to register for VAT. (You can choose to register with a lower taxable turnover if you wish.)

If you are based in the EU and are selling into the UK, you fall under the 'distance selling' rules and have to register if the taxable turnover is more than £70k

Once registered, everything you sell has to include the appropriate VAT charge and each quarter you have to pass on that VAT revenue to the HMRC (either on a cash-accounting basis or flat rate scheme, depending on how the business is set up).

At this stage you have three choices: (1) put up your prices by 20% to maintain your income level but piss off your non-VAT-registered customers, or (2) lower your prices by 20% to keep the customers happy but accept the lower income, or (3) find some compromise position in between!

If you have a record deal paying you a percentage....

If you have a record deal then you are not selling direct to the public. Instead, you effectively invoice the distributor and what happens depends on whether the distributor is VAT registered.

If you are VAT registered you invoice the distributor with VAT. If you are VAT registered because your income level is so high, the chances are that the distributor will have to be VAT registered too! So if the distributor is VAT registered they claim back the VAT on your invoice, and charge the public customers the VAT on the product.

If you are not VAT registered but the distributor is, they charge VAT on goods and pass that on to HMRC. You invoice the distributor for your percentage without VAT and they pay you.

...that percentage is not going to increase to reflect the cost of the VAT that you now need to pay.

Yes it would, because you now charge the distributor VAT on top of the sales percentage. They claim that VAT back, so it's no burden to them, and you pass it on to the HMRC.

Business-to-business invoicing with VAT is just circular money that doesn't really exist. You collect it on your invoices and save it in the bank for a few months before passing it on to the HMRC. Your clients pay you the VAT and then claim it back on their next VAT returns. It's bonkers pointless paperwork... but that's the way it is!

If you sell your music directly, such as on Bandcamp, you're not going to put your prices up by 20% because you now have to pay VAT, as your consumers are generally individuals who can't claim it back, not VAT-registered entities that can, so how does it work?

See above. You have to charge VAT if you are VAT registered and pay it on to the HMRC. How you choose to price your goods and services is up to you...

But if you are in the position of having to register because your taxable income exceeds the threshold, you probably aren't going to be very bothered, and your customers won't mind paying more for the CDs of someone so successful! Leave it to the accountant to sort out!
H

[MitchT]

Thanks for the replies - makes for interesting reading. Of course, if I have the, admittedly, unlikely problem of encountering this situation I'll engage an accountant. I was just curious how it might work out.

[jpalmer]

Don't forget of course, if you're based *anywhere* and are selling digital downloadable product to customers in the EU you should currently be charging those customers relevant VAT (at every individual EU rate) and then passing it on to each country's VAT office quarterly.

Third party platforms (such as Bandcamp) should be handling the VAT for you but if you sell via your own website, you're responsible for all the logistics and paperwork.

No minimum threshold at present (so even if you sell a 99p download this must be accounted for) but a minimum level of €10K has just been proposed (fingers crossed this will be approved and instigated within a year or 2 but with Brexit who knows).

http://euvataction.org/2016/12/01/pierr ... or-eu-vat/