While every effort is made to ensure the information in this article is accurate, Visual Artists Ireland and the author can accept no responsibility for loss or distress to any person acting or refraining from acting as a result of the material contained herein.
Introduction to VAT
It should be noted from the outset that this text is a simple guide to VAT general rules and administration. Where large sums are involved it is in the interest of the artist to seek specialist advice especially in respect of larger commissions and particularly if that commission is in another EU country.
VAT can be very complicated and where large amounts are involved the artist should definitely get specialist advice.
VAT is a sales tax levied throughout Europe.
The form and method of compliance is left to each individual EC country but EC law takes precedence if there are any inconsistencies with national law.
VAT was introduced in the UK on 1 April 1973.
VAT: Registration and Deregistration
You can register for VAT by completing and posting a Form VAT1 to HM Revenue & Customs. Alternatively, the Form VAT1 can now be completed and submitted online. This form (hard copy and online version) is available on the HM Revenue & Customs website in pdf format.
Registration for VAT is compulsory in certain situations, but is also available on a voluntary basis subject to specific criteria. The rules for both are summarised below.
You are required to register for VAT if you are self employed or work on a freelance basis and receive turnover from taxable supplies in excess of the VAT registration threshold.
Taxable supplies would include transactions such as the sale of your artwork.
However, you may be in receipt of income from sources such as the facilitating of art classes. This income is exempt from VAT and is therefore not a taxable supply. See section below on VAT rates for further details.
The current VAT threshold is £75,000, so you are therefore required to register for VAT if:
- the turnover from your taxable supplies (for example, sales of artwork) in the past 12 months or less has exceeded £75,000 or
- the turnover from your taxable supplies in the next 30 days alone is expected to exceed £75,000.
If the value of your taxable supplies is below the £75,000 threshold, you may still want to register for VAT on a voluntary basis.
Voluntary VAT registration may be attractive as you can reclaim the VAT that you have incurred on your business costs.
However, registration means that you will also have to charge VAT on your sales.
Registration may be favourable if your customers / buyers are VAT registered and entitled to reclaim the VAT that you have charged to them on a sale.
Registration may not be favourable where your customers are not entitled to reclaim the VAT that you have charged to them on the sale. Your product / artwork become more expensive to the customer, which may affect sales.
If you are VAT registered and sell a piece of artwork for £100, you will be required to charge VAT on the sale to your customer. The rate of VAT is likely to be 20%, so the VAT inclusive price that you will charge your customer is £120.00.
If your customer is VAT registered, and the purchase was for a business purpose, they will be able to reclaim the £20.00 VAT that you charged to them from HM Revenue & Customs. The net cost of the artwork to this type of customer is therefore £100.
However, if your customer is not VAT registered (or the customer is VAT registered but the purchase is not for a business purpose), they will have no way of reclaiming the VAT charged to them by you. The net cost to this customer is therefore £120.00.
Cancellation of Registration
You will be no longer required to be registered for VAT if your turnover excluding VAT over the next twelve months will be £68,000 or less. You can, however, remain registered if you wish so long as you continue to trade.
If you deregister, HM Revenue & Customs can look at the VAT that you have reclaimed on goods and services sold to you and if this has not resulted in a sale of a work they can ask for this money back. However, this should not be an issue provided the VAT in question does not amount to more than £1,000.
You can apply to have your registration cancelled by completing a Form VAT7 (available on the HM Revenue & Customs website).
*Charging VAT on Sales
Once you are VAT registered it is necessary to charge VAT on your sales.
For example, if you are VAT registered and sell a piece of artwork for £100, you will be required to charge VAT on the sale to your customer. The rate of VAT in most cases is likely to be 20%, so the VAT inclusive price that you will charge your customer is £120.00.
There may be some instances were the VAT rate is not 20%. See section entitled VAT rates for more information.
*Claiming VAT on Expenses
The VAT that you charge on your sales (output tax) must be paid over to HM Revenue & Customs.
From the VAT that you charge on your sales you may deduct the VAT that you have paid on any goods and services (art materials / equipment etc) that are used for the purposes of your taxable business (input tax).
No deduction may be made for the VAT on purchases used for any other purpose e.g. for personal use. The purchases must be in the course of business.
A situation may arise where a portion of your purchases may be for the purposes of your taxable business and the remaining portion for your private use – for example electricity, telephone charges and heating expenses if your business / studio is carried on from your private residence.
It can also arise that inputs may be used for both taxable and non-taxable activities.
In such cases, only the amount of VAT that is appropriate to the taxable business is deductible. In practice this normally works by apportioning a percentage of the bills to your business.
Consider the situation where a VAT registered artist purchases materials costing £100 plus VAT of £20.00. If the artist is to use half of the materials on producing artwork that is to be sold, and the other half on producing artwork that is to be kept or used for some other purpose, only £10.00 of the VAT paid on the purchase of the materials may be reclaimed from HM Revenue & Customs (being £20.00/2).
* Non-deductible Expenses
Broadly, you may not deduct VAT on any of the following, even when the goods and services in question are required or used for the purposes of your taxable business:
- business entertainment, for example restaurant or hotel bills
- the acquisition of motor cars (unless used in specified businesses such as taxi firms etc. There is some scope for reclaiming back a portion of VAT on vehicle leasing charges)
- fuel where scale charges are not accounted for under agreement with HM Revenue & Customs
As a general rule, if registered persons are not entitled to a credit on the purchase of goods for use in their business, they are not liable to charge VAT on the sale of such goods.
* Business fuel bills
If your business vehicle fuel bills include fuel for private use, an adjustment must be made in respect of the non-business proportion.
For privately owned cars, this adjustment is made by way of the fuel scale charge. More information concerning the fuel scale charge, and motor expenses in general, can be found on HM Revenue & Customs website.
* Self Supplies
A “Self Supply” occurs when you – a taxable person – use goods or materials for a personal i.e. non-business use.
If VAT has been reclaimed on the original purchase of the goods then it must be repaid to HM Revenue & Customs.
If you produce a work but decide that instead of selling it that you will hold onto it for yourself or even make a gift of it to someone then you have to pay back to HM Revenue & Customs any VAT that you have reclaimed on materials and other costs associated with making that work.
If you are a VAT registered artist you must supply tax invoices in respect of taxable supplies, keep a VAT account showing your calculations of the VAT liability for each tax period, and make returns to HM Revenue & Customs showing the VAT payable or repayable.
Requirements of a VAT invoice
A taxable person who supplies taxable goods or services to another taxable person is obliged to issue a VAT invoice showing the following particulars:
- The invoice number
- The date of issue of the invoice
- Your name, address, and VAT registration number
- Your customers name and address
- A description of the goods and services supplied, and for each type of goods, the quantity, rate of VAT and VAT exclusive amount payable
- The total amount payable excluding VAT
- The rate of cash discount offered
- Total VAT chargeable
Where you sell your works to any other EU country special rules apply. These rules say that you must, in addition to the above, show the VAT registration number of the customer in the other EU Member State.
Filing a VAT Return
At regular intervals (usually quarterly) registered persons must submit a return to HM Revenue & Customs, showing the input tax and output tax for the period covered by the return. Any excess of output tax over input tax is payable to HM Revenue & Customs, whilst any excess of input tax over output tax in repayable by HM Revenue & Customs.
In a VAT quarter, if you have charged your customers VAT of £100 (output tax), and incurred VAT on your own purchases of £75 (input tax), you will be due to pay the difference (£25) over to HM Revenue & Customs.
Alternatively, if you have charged your customers VAT of £75 (output tax), and incurred VAT on your own purchases of £100 (input tax), you will receive a VAT refund from HM Revenue & Customs of the difference (£25).
The return is made on a Form VAT100 and must be submitted within one month of the end of the tax period (usually a quarter) to which it relates. VAT returns can also now be submitted via the internet. See HM Revenue & Customs website for details.
Interest, penalties and surcharge
HM Revenue & Customs can impose a wide variety of penalties for non-compliance with the VAT regulations.
In extreme cases of non-compliance, HM Revenue & Customs have the right to take criminal proceedings which could lead to a fine or imprisonment, or both.
The most common forms of penalty imposed by HM Revenue & Customs are interest on the late payment of VAT, and a surcharge penalty for the late submission of VAT returns.
HM Revenue & Customs have extensive powers to make sure that you have paid the correct amount of VAT, including the right of entry, without a warrant, to premises used in conjunction with the carrying on of a business.
A VAT-registered artist must keep full and true records of all business transactions that affect or may affect his or her liability to VAT. The records must be kept up to date and must be sufficiently detailed to enable you to accurately calculate any liability or repayment and also to enable HM Revenue & Customs to check the calculations, if necessary.
You must retain all books, records and documents relevant to the business for six years from the date of the latest transaction to which they refer
Persons who carry on business, even though they may not be VAT registered, must for VAT purposes keep all invoices issued to them in connection with the business and copies of customs entries in respect of goods imported.
All VAT registered artists who have supplied goods to another EU member state (for example, selling an artwork to someone in France), or acquired goods from another EU member state (for example, purchasing materials from a person in Germany) must complete the relevant EU sections of their VAT return.
Additionally, all VAT registered businesses that make supplies to other VAT registered businesses in the EU must provide details of the transactions on the EC Sales List. The EC Sales List is to be submitted to HM Revenue & Customs each quarter.
If the value of the EU sales exceeds a legally set threshold, currently £250,000, businesses must also provide more detailed information to HM Revenue & Customs in Supplementary Declarations.
The Margin Scheme
Special VAT schemes operate in relation to the sale by dealers/commercial galleries of second-hand movable goods, works of art, collector’s items and antiques.
The principal feature of the scheme is that dealers, galleries and auctioneers effectively only pay VAT to HM Revenue & Customs on their profit margin.
The Margin Scheme for calculating VAT is an optional scheme, so galleries/auctioneers etc can chose to use it or not.
Before agreeing to sell your work through a gallery it is very important that you have a formal agreement in place with the gallery as to how the VAT will be calculated.
You need to know in advance exactly what the gallery is going to do and ensure that you are happy to trade on those terms.
VAT Rates – Exempt, 0%, 20%
VAT is chargeable at 20%, unless detailed as either exempt or zero rated below:
Exempt from VAT
-Providing Art Classes-
Where an activity is exempt, VAT cannot be reclaimed on the purchases relating to that activity. Example: If an artist purchases art materials to use in creating an artwork the VAT can be reclaimed, but if they use the materials for an art class the VAT cannot be reclaimed.
0% VAT – Intra-community Supplies
Where you sell your works to any other EU country special rules apply. You can zero-rate the supply of goods to a customer in another EU Member State if:
– the customer is registered for VAT in that other EU Member State
– the customer’s VAT registration number (including country prefix) is obtained and retained in the supplier’s records
– this number, together with the supplier ’s VAT registration number, is quoted on the sales invoice
– the goods are dispatched or transported to that other EU Member State.
If these four conditions are not met the supplier should charge VAT. If the supplier is not able to satisfy HM Revenue & Customs that particular consignments of goods have been sold and delivered to a VAT-registered person in another Member State, the supplier becomes liable for the payment of VAT on the transaction. If the conditions for zero-rating are subsequently established the customer is entitled to recover the VAT paid from the supplier. The supplier can then make an adjustment in his/her VAT return for the period.
Unlike exempt supplies VAT can be reclaimed on expenses relating to 0% supplies.
By Flannigan Edmonds Bannon
Flannigan Edmonds Bannon is a Chartered Accountancy practice based in Belfast which offers a wide range of services, including:
* Management Accounting Services (bookkeeping, VAT returns, payroll services, and the preparation of management accounts).
* Compliance Services (annual accounts preparation, tax computations and returns, audit of company accounts, company secretarial function).
* Advisory Services (business development, taxation planning, corporate finance).
If you believe that you could benefit from any of the services above you can contact: