Being a grown-up has its perks and pain points, and one of the biggest pain points is that now you have to do your taxes, and as soon as you start to work, you come across the most common of taxes, VAT, or Value-Added-Tax. And it gets too complicated when you are a freelancer.
Clients you work with are generally incorporated companies that have all kinds of tax responsibility. And to put it simply, they pay the tax for the difference between whatever they got and whatever they paid that in that period. Meaning the difference between their income and their expense is subject to taxation.
Where does your freelancer work come into the equation? Well, if they don't get a valid VAT invoice from you, they cannot show you as an expense: And if you are not an expense, they won't be able to deduct you from their tax payment. So you become an additional burden.
The solution? Issuing a VAT invoice as a freelancer.
What is a VAT Invoice?
A Value-Added Tax (VAT) invoice is a document issued by an "accountable person" laying out the details of service and all relevant data as commanded by VAT law in the world.
The underlined thing here is being an "accountable person", meaning that you have to be registered as a sole trader (an individual who is self-employed with a valid tax identification) or incorporation.
The terms differ from country to country, to region to region, but VAT laws look alike. For example, here's one VAT invoice related law from Ireland.
Why Is It Important For Freelancers to Issue One?
Putting aside the fact that wherever you reside, taxation is something to be aware of and governments usually frown upon when their citizens try to avoid them, issuing a VAT invoice helps your VAT registered customers to reclaim the VAT charged to them. Companies usually tend to minimize their costs (as dictated by your Econ101 professor) while trying to maximize their profit, right? Being the greatest help to your clients as a professional freelancer is not enough sometimes, but being able to both help them out with your skills and in terms of their taxes is not something a lot of freelancers can do; so that makes you a bit more important when it comes to your clients. Plus, it makes you look a lot more professional, more than you may imagine.
We have found that freelancers and digital nomads who started to use Rimuut had their retention rates went up more than 60% for long-term projects, stating that the fact that ability to issue valid VAT invoices help them with how their clients perceive them: They are not just individuals in the eyes of the clients, but a business equal both in terms of business and in commerce.
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Using invoices will assist to get paid on time. A valid invoice provides legitimate evidence that your services and goods were delivered to your client. It also helps to verify your claim to payment. An effective invoicing method presents adequate legal protection when faced with a tax audit. Invoices enable companies to verify reported income.
So yeah, issuing invoice is a big advantage, big deal, and big legal protection.
OK, Valid VAT Invoice Is Important. How Do You Issue A Valid VAT Invoice Then?
Issuing a VAT invoice depends on the route you choose: do you want to become incorporated, or do you want to stay a free digital nomad?
If you like, you can incorporate yourself as a sole trader or a business, it comes with several costs that we have listed in our previous article. And if you want to stay as an unregistered, free-as-a-bird digital nomad, you can use Rimuut's invoicing solution, which transforms individuals into virtual companies (with its Company-as-a-Service) model that can issue legal VAT invoices.
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If you want to become incorporated, or you are registered business your invoice should include
invoice number: a unique and incremental number of the previous invoice
The seller's name / commercial name and address
The seller's VAT ID number
The customer's name or trading name and address
a description of the goods or services
For each line item or service, you must also include:
unit price or rate, excluding VAT
quantity of goods or the extent of the services
rate of VAT that applies to the items being sold
total amount payable, excluding VAT
rate of any cash discount
the total amount of VAT charged
If you want to use Rimuut, all you have to do is
Add your client's name, email, VAT ID and address
Add in the service description
The amount to be charged
And that's all! Your clients will be able to deduct it from their VAT charges, and your retention rate will be higher with lower costs than setting up a conventional business. Make sure to e-mail us the results of how turning into a virtual company affected your freelance career, we want to learn more!