What you need to know
Registration for VAT can be compulsory or voluntary.
Once registered, you can then claim back the VAT which you are charged on things like telephones, instruments, etc, that are used in your business, but it means that you will also have to charge VAT on your fee for every gig, arrangement, etc, and handle all of the considerable bookwork involved.
It is wise to first consult an accountant, who will examine and explain the benefits and pitfalls of VAT Registration and the accounting system to be employed. Beware of the implications of Scale Charges for motoring costs if you reclaim VAT on petrol.
VAT Flat Rate Scheme
This scheme is for businesses, individuals etc with an annual vatable turnover of less than £150,000 and allows for a simplification of the calculations required so that VAT liability can be determined as a percentage of turnover. It can be beneficial for many small businesses.
Voluntary As a musician, provided that you are making supplies of services by way of business in the UK, then that is sufficient to register for VAT in the UK on a voluntary basis, even if your income is only a few thousand pounds.
Compulsory If VATable income exceeds the current VAT registration threshold of £79,000 (with effect from 1 April 2013) in any 12-month period or less, VAT registration is compulsory.
It should be noted that failure to notify HMRC of a compulsory requirement to register for VAT may result in a late registration penalty.
However, if your income is subject to major fluctuations and only exceeds the threshold for a short period, it is possible to arrange not to have to register for VAT. To do this, you must notify HMRC of the breach of threshold and obtain its agreement.
VAT liability of supplies
Once VAT registration is achieved, VAT will become chargeable at 20% on all vatable business supplies made in the UK. There are, however, some specific rules for supplies made outside of the UK.
Services — live performances
With effect from 1 January 2011, fees for live performances will be treated as supplied where the customer belongs, when that customer is a business, rather than treated as supplied where the performance takes place. More detailed guidance is available in the article, Change In Place Of Supply Rules For VAT, which can be downloaded from HW Fisher and Company
Services — recorded performances:
Where a musician’s performance is recorded and a fee and/or royalties are received for the supply of this service, the supply is deemed to take place where it is received or, in other words, where the customer belongs.
Accordingly, if fees or royalties are received from outside of the UK, these will not attract UK VAT. However, there is an additional rule for fees or royalties received from elsewhere in the EU (European Union). In order for UK VAT not to apply on EU royalties, the person paying the fee or royalty must be in business themselves and the proof of that status is their VAT number in their EU country of belonging.
Accordingly, for fees or royalties received from inside the EU, an EU VAT number should be obtained by the musician.
Services — EC Sales Lists
The scope of EC Sales Lists were extended with effect from 1 January 2010. Previously, they only had to be completed to record all goods sold to EU business customers on a calendar quarterly basis. All services supplied to EU business customers, such as royalties, must also be included on an EC Sales List.
Goods, for example CDs, exported outside of the EU are zero-rated for VAT purposes, provided that valid export evidence is retained.
For goods sold to persons in other EU countries, the following rules apply:
1. Goods sold to private individuals in other EU countries are subject to UK VAT at 20%
2. Goods sold to businesses in other EU countries are not subject to UK VAT, provided the business has a VAT number in its EU country and that the number is obtained by the musician for inclusion on the sales invoice.
VAT is recoverable on business expenditure, subject to various rules.
Some of the common applicable areas are detailed below:
In order to be able to recover VAT on purchases and expenses via your VAT Returns, the purchase should relate directly to your business activity and a full VAT receipt will need to be retained as evidence.
A credit card slip is not sufficient evidence for VAT recovery. Items that may not be considered a business expense by HMRC include purchases of clothing, household goods and leisure services. Some items may be used for both business and non-business purposes (e.g. the cost of home telephone calls) and therefore an apportionment to account for business and non-business use should be made and only a proportion of the VAT recovered.
In order to be able to recover VAT incurred on fuel, a VAT scale charge should be applied. The scale charge is based on the CO2 emissions of the car and this is added to the VAT payable to HMRC, which enables you to recover VAT on all fuel purchases in respect of your car, whether used for business purposes or private motoring.
If the amount of VAT you incurred on fuel is minimal, it is advisable to recover no VAT on fuel and then, by concession, you do not have to pay any scale charge.
The VAT incurred on the purchase of a car is not recoverable at all. However, if a car is leased, the VAT incurred on the leasing charge is 50% recoverable. VAT on servicing and repairs is recoverable in full, even if the car is also used privately.
VAT incurred on the purchase of a van for business purposes, i.e. moving musical equipment between different venues, is recoverable in full as a business expense, even if there is an element of private use.
VAT is recoverable on hotel and restaurant bills for subsistence. The VAT incurred on such expenditure is only recoverable in relation to the business and not third party individuals.
For these costs to be viewed as subsistence, the meals and hotel accommodation usually need to have been incurred when you are away from your normal place of work on a business trip/tour.
Most forms of transport, e.g. air, train, bus, coach, are zero-rated for VAT purposes so no VAT is incurred on these expenses. However, some taxis or chauffeur-driven cars charge VAT at 20% for this service. The VAT is recoverable, provided that the journey was made for business purposes and a valid VAT invoice is held.
VAT incurred on business entertaining is not recoverable. Although following a recent VAT case, HMRC now accept that some VAT incurred on essential entertaining of overseas clients can be recovered.
Only VAT incurred on business expenditure in the UK is recoverable via a UK VAT Return.
From 6 April 2008, the benefits from being domiciled outside the UK, while resident here, reduced considerably for most people. Only people with very substantial overseas income or gains, or those with overseas income of less than £2,000 per annum now benefit. HW Fisher & Company can offer advice as necessary.
Foreign Tax Credits
If you work abroad, you may be taxed on that income in both the UK and the country where it is earned. Therefore, you will effectively be taxed twice on the same income.
However, when you prepare your UK tax return, you can usually claim relief for some or all of the foreign tax suffered, depending on the rate at which you were taxed. The treatment of the foreign tax is usually subject to the Double Tax Treaty the UK has in place with the country you were taxed in.
Generally, the tax treaties are such that your combined tax bill should be no more than the amount you would have to pay in the country where the higher tax is charged.
If there is no treaty in place, then unilateral relief is available, where the rule is that you can claim relief on the lower of the foreign tax suffered or the UK tax due on that income. In order to claim the Double Tax credit, you must get a certificate of tax deducted. Claiming the correct foreign tax credit can be complicated, so we advise that you obtain professional advice.
Incorporating your trade into a company can be useful at saving tax, through the use of lower corporation tax rates and dividends. However, this generally depends on how much you earn, and professional advice should be sought. Again, the costs incurred can eliminate many of the benefits.
HMRC has recently been attacking some incorporations, especially arrangements where there is goodwill involved or the shareholders are husband and wife.
If you are a member of a group, you may be taxed as being a member of a partnership. Husband and wife partnerships could also help to save tax, through making use of a spouse’s personal allowance and their basic rate band.
HMRC has recently been attacking husband and wife partnership agreements if it feels that the profit share is not representative of the level of work done. Therefore, professional advice should be sought before entering into this type of arrangement.
If your income is low, it may be possible to claim Tax Credits to supplement it. For further details on what you can claim, visitThe HMRC website
Save tax by investing your money
If you have earnings from self- employment (or employment, if you do not contribute to a company scheme) you can use that income to make provision for your retirement. Within certain limits, you will get full tax relief on your payments, which compares very favourably with other financial products where you get no tax relief. However, you will have to wait until you are at least 55 to get at the money — that is the catch in it!
Nevertheless, this is an effective and tax efficient way of saving tax, particularly if you are paying tax at the higher rates.
Even without earnings, it is possible to contribute to a pension. If you wish to make a pension contribution, you should seek advice from an accountant, tax adviser or Independent Financial Adviser (IFA).
Other tax efficient investments
There are other tax efficient investments, such as Individual Savings Accounts (ISAs) and Insurance Bonds. For more information on these, contact an IFA.
Personal Financial Advice Scheme
If you are experiencing difficulties with HMRC, NI Contributions, VAT, your ‘band’ finances, or just need some financial advice, you can get help from the MU’s preferred financial partners, HW Fisher & Company.
Please note that it is essential you are up to date with your MU Subscriptions to enjoy this (or any other) benefit of Union membership.