Contractors’ Questions: How to avoid landing my new overseas client with a VAT bill?

Contractor’s Question: I’m British but am living in France, although my question seems relevant to all contractors working remotely for overseas clients.

I provide a range of IT-related services direct-to-customer, mostly online, including via email, software, and video calls.

Pleasingly, I’ve just secured a potential new client who is based in Lebanon. They are not a business but will be an end-user of my services nonetheless. It’s a small job for now, but it came to my attention that where they are located requires any business to charge VAT from the first sale, even though I’m not VAT-registered.

Apparently, the provider needs to be registered for VAT or have an agent who can report and pay the tax, otherwise the responsibility lies with the tax resident of the state in question. But there’s little information online about how a personal end-user (non-business) would file and pay those taxes. Any guidance would be appreciated, and a workaround even more appreciated!

Expert’s Answer:  You are correct that in Lebanon, there is no VAT threshold for providers of services outside Lebanon (a ‘non-established business’ with no permanent establishment in Lebanon).

A non-established business should register for VAT and appoint a tax representative in Lebanon. Of course, for a supplier like you, this makes no sense whatsoever as the costs and complexity are likely to outweigh any benefit to you.

Your desired workaround

Instead, if you do not register for VAT and appoint a representative, then the liability for the collection of the VAT will fall to your client if he/she is paying you from Lebanon. If these sums are small, the first thing you should consider is if your customer could pay for your services from outside Lebanon, which would entirely circumvent the problem for both of you – the ‘workaround’ you’re seeking.

If this is not possible, then your customer must account for the VAT at 11% to the VAT authorities. It perhaps goes without saying, but it might be tough for a non-Arabic speaker, such as yourself presumably, to direct a non-Arabic speaker on matters of taxation. I therefore suggest that you advise your client to email the Directorate of VAT in Beirut at the this email address for instructions on how to pay the VAT. Despite the potential language barrier, you should encourage your client to do this, as there are penalties and interest for late or incorrect submissions.

Limited won't limit your tax bill

Penultimately, let’s consider your structure. I do not know how you will bill your client in Lebanon. or elsewhere, but you can operate as a self-employed person or you could incorporate.

Since you are French resident, I am not sure that a UK limited company will be the better option for you as you will have to report your transactions to the French ‘fisc’ as you will be liable in France for your tax on your worldwide income. If you've left the UK permanently, then UK tax should be of no concern to you. A UK company will make you, among other things, liable to UK corporation tax as well as French corporation tax (a hefty 33%).

However, the Double Tax Agreement between the UK and France will mean that you suffer the effective rate in France, which is higher but not have to pay the tax twice. Personally, I would avoid the limited company route unless you need limited liability.

French issues

In your case, I would choose to operate as a self-employed person in France paying your social charges (‘charges sociales’), and your income tax by way of self-assessment. If your turnover is less than €72,500 (£65,400), then you qualify to operate as a ‘micro-enterprise’ which is a special tax regime (and not a structure), that allows you to pay lower social charges -- but your expenses are not tax-deductible. You decide to elect to be treated in this way, but you cannot change your mind part-way through a tax year.

Finally, do watch the VAT threshold. In France. If your outputs exceed €33,200 in a year, you must register for VAT. The current standard rate of VAT in France is 20%. Good luck!

The expert was Kevin Austin, managing director of overseas contracting advisory Access Financial.