Most escorts will not earn enough to be troubled by VAT, but it is important to be aware of how it works because getting accidently caught in the VAT net can prove very, very expensive. In most cases with a bit of foresight and awareness of the pitfalls it is straightforward to avoid.
VAT is a tax on goods and services supplied by a business, and it applies to escorting once you get to the point where you need to register. The way it works is that you add 20% tax onto the charge you make to your clients, and you are in effect collecting the VAT on behalf of the government. So instead of charging a punter £100 you charge him £120. Most clients will of course squeal at having to pay £20 extra, and you will inevitably end up leaving your rates unchanged and absorbing the extra cost yourself – from every £120 you get from punters you will have to pay £20 to HMRC.
You will also have been charged VAT on some of your expenses and you can claim that back from the VATman. Then at the end of every 3 months you pay over the difference to HM Revenue & Customs.
Do I need to register?
Businesses that receive less than £77,000 per year from their customers don’t have to register. But you need to be careful. At the end of each month add up your total business receipts for the last 12 months and if it comes to more than £77,000 you need to register within 30 days. Before 1 April 2012 the limit was £73,000.
So, for example, at the end of March 2012 you add up your business income for the 12 months from 1 April 2011 to 31 March 2012, and lets say it comes to £65,000 – no need to register. But you then have an exceptionally busy month in April this year, so at the end of the month you add up your income for the 12 months from 1 May 2011 to 30 April 2012, and it comes to £78,000 – you need to register within 30 days i.e. by 31 May 2012.
Even if you do breach the threshold you don’t have to register if you can convince HMRC that your future turnover will be below the de-registration limit which is currently £75,000.
You need to watch out for the VAT registration pitfalls.
First of all you have to add up your income before taking off any business expenses. So if you go on tour and receive £5,000 from your clients but the tour costs £2,000 so you make a profit of £3,000, it is still the £5,000 that you add in to your total.
You also need to watch out for other business you run because VAT covers all the businesses you own. Let’s say your escorting business receives £40,000 a year from clients but you also own a chimney sweep business which receives £40,000 a year from its customers. You need to register because the combined total of £80,000 is more than the registration threshold of £77,000. Please note it is only businesses in the same ownership that have to be added together: if you are employed as a chimney sweep then you don’t add the income to your escorting business, or if the chimney sweep business is a partnership with your mother (or anyone else for that matter) it doesn’t get added to your escorting business.
And of course there is a penalty for late registration.
Why you should avoid VAT
Here’s why you should avoid VAT registration if you possibly can.
To keep the figures easy lets suppose you normally charge £100 for a 1 hour appointment. If you are registered for VAT you have to add on 20% VAT which you collect on behalf of the government. That means either putting your prices up to £120.00 which means your client pays more, or you leave the price the same but absorb the VAT yourself which means you still get £100 but out of that you now have to pay £16.67 to the VATman. Over the course of a year that is a lot of money – if you’re only just above the registration limit you could lose about £12,000 a year from registering.
Of course if you are registered you will be able to reclaim the VAT you get charged on things like advertising that you buy for your business, but you will still be considerably out of pocket unless your outgoings exceed your income and your business is losing money.
The other important to reason for steering clear of the VATman is to avoid the hassle of another bureaucratic system with all the extra forms and potential for grief.
[If you’re wondering why the VAT on a £100 fee is £16.67 and not £20.00 the explanation is that VAT is charged at 20% on your share – in this example your share after taking off the VAT is 100.00 – 16.67 = 83.33, and the taxman’s share is 83.33 x 20% = 16.67. In taxman speak your share is called the net price and the charge paid by the client is called the gross price.
VAT = net x 20%
VAT = gross x 1/6
20% is the tax rate, and 1/6 is called the VAT fraction]
Avoiding the VAT trap
One of the problems with VAT is that you have to register if your income from clients (and you can’t deduct any business expenses when you do this sum) is more than £77,000 in 12 months (£73,000 before 1 April 2012). And if you own 2 businesses you have to add the takings from both businesses together. So what can be done to avoid having to register?
- If you have 2 self-employed businesses which taken together push you over the limit then consider putting one of them into different ownership. For example if you are an escort but you also own an arc-welding business you could convert the welding business into either a partnership or a limited company. For legal reasons you shouldn’t try to turn your escorting into a partnership or a company.
- If your escorting business also includes income that is not strictly escorting (like photo sales, T shirts, modelling) you could split those into another business in separate ownership. So your sales of photographs could be a partnership with you and your partner. If you do that you don’t need to split the profits equally, you could take 95% of the profits and leave your partner with just 5%. But because the escorting and photographic business are now in separate ownership they are not added together for VAT purposes.
- If you are getting close to the VAT limit try to get your clients to book and pay for your travel tickets rather than buying them yourself and then charging the client extra.
- And probably the best idea. If you have done £75,000 after 11 months and you are likely to go over £77,000 in the next month then consider stopping work for a few weeks and taking a holiday. It could work out a lot cheaper than having to register for VAT.
If you have to register
If you cannot arrange your bussiness so as to avoid registration then the basic mechanics are straightforward. You have to charge 20% VAT on all the VATable goods and services you supply, and you collect this ‘output tax’ from your clients on behalf of the government. On the other side you are entitled to claim back the VAT you have been charged on your business expenses – ‘input tax’. At the end of every 3 months you add up all your output tax, deduct all your input tax, and pay the difference to the taxman.
Every quarter the VATman will send you an email reminding you to submit your return on line and pay any VAT you owe. You have a month after the end of each quarter to get this done, and you can also pay by direct debit if you wish.
There are penalties for late returns and late payment.
VAT is a very complex tax with lots of pitfalls for the unwary. If you have to register for VAT I would strongly urge you to sign up with an accountant.
Flat rate VAT scheme
If you have to register but your business expenses are fairly modest you might well be better off by electing to use the VAT flat rate scheme. This allows you to ignore the actual output and input tax and simply pay a flat rate percentage of your turnover. HMRC publish a list of flat rates for different types of business, although strangely these don’t include prostitution. My view is that this means you can use the rate for “any other activity not listed elsewhere” which is 12%. If I’m right then this is what it means for an escort receiving £90,000 per year.
Under the normal method you she would calculate her output tax like this
£90,000 = £75,000 + VAT of £15,000 (75,000 x 20%)
Therefore output tax = £15,000
From which she could deduct her input tax – the VAT on her expenses.
Under the flat rate scheme it’s all much simpler.
VAT payable – £90,000 x 12% flat rate = £10,800
So she’s better off unless the VAT on her expenses comes to more than £4,200, which equates to just over £25,000 of VATable expenses.
There are conditions which have to be satisfied before you can use the flat rate scheme, but I see no reason why escorts should not meet them. There are also special rules which enable you to claim back the VAT on expensive capital items – dungeon equipment etc.