Taxation on sales of software online?

BrokenArrows

I am currently in the process of developing some software.

I plan on selling this online on a website that i setup and the software will be for business use so it is likely the customers will claim it as a business expense.

Because this will be online customers will be from lots of different countries, both inside and outside of the EU, is there anything specifically i need to be aware of?

seamus

Initially before you start, you cannot charge VAT on your sales unless you are registered for VAT. You cannot register for VAT unless your sales exceed €37,500 of services or €75,000 of goods.

In your case, if you're providing the software via download, you're selling a service. If you provide the software on a disc or other physical media, then you're selling a product.

If you are registered for VAT, then as a rough rule: acquire a full address for every customer. If they're in the EU, charge 23% VAT. If they're outside the EU, charge no VAT.

That's a rough rule because if you sell a lot of products into other EU countries, then you need to start charging VAT at those countries' rates.

However, I'm suspecting that you're just starting out in which case you don't need to worry about charging VAT until you start making large figures in your sales. You will however have to register for income tax, and I would strongly advise setting up a Limited company if you're selling software for business use.

smeharg

You can ignore more or less everything Seamus has said - I don't think any of it is correct.

Firstly you need to decide whether to operated as a sole-trader or limited company. There are many factors to consider and the fact that you are selling software to businesses is probably not one them. As you've already started development it is probably something you should have considered and decided upon before now.

You must register for VAT if your sales in any 12 month period are likely to exceed the thresholds - €37,500 for services; €75,000 for goods. You can elect to register if your sales are below the thresholds. If you are registered you can reclaim VAT on business purchases, so again it is something you should consider and decide on before any activity commences.

If you are VAT registered and selling to customers in Ireland you must charge Irish VAT at 23%. Sales to businesses in other EU countries would be at 0% provided you have recieved and verified the customer's VAT number. Sales to non-EU customers would also be at 0%.

You might need to make yourself aware of any requirements of non-EU countries you'll be selling into. Some may have distance selling rules that you don't want to fall foul of.

seamus

smeharg wrote: »

You can ignore more or less everything Seamus has said - I don't think any of it is correct.

Except for the parts you repeated?

Firstly you need to decide whether to operated as a sole-trader or limited company. There are many factors to consider and the fact that you are selling software to businesses is probably not one them. As you've already started development it is probably something you should have considered and decided upon before now.

It doesn't really matter that he's started development, it really only matters before he starts actually selling the software.

The reason I recommend a limited company is because if he is selling software to businesses, then he may be potentially liable for any losses those businesses incur due to errors or bugs within his software. Obviously this is less of an issue for, say, a graphics package, but a financial package for example could cause huge problems if incorrect.

A limited company would limit the OP's personal exposure should there be a massive screw up, and while it does involve a bit of extra expense in preparing documentation on a yearly basis, it can often be the best option in the long run.
Yes, of course you can insure yourself against this, but I wouldn't be wholly reliant on that to protect one's personal interests.

smeharg

seamus wrote: »

...
You cannot register for VAT unless your sales exceed €37,500 of services or €75,000 of goods.

Incorrect - you can register for VAT if your sales are below the relevant threshold

seamus wrote: »

...
If you are registered for VAT, then as a rough rule: acquire a full address for every customer. If they're in the EU, charge 23% VAT. If they're outside the EU, charge no VAT.

Business to business sales within the EU are zero rated provided the customer's VAT number is received and verified, and the goods/services are supplied outside Ireland.

seamus wrote: »

...
That's a rough rule because if you sell a lot of products into other EU countries, then you need to start charging VAT at those countries' rates.

I think you are referring to the distance selling rules which apply to non-business sales only.

seamus wrote: »

...
However, I'm suspecting that you're just starting out in which case you don't need to worry about charging VAT until you start making large figures in your sales.

There are circumstances in which it would be advantageous to register for VAT before making any sales - you cannot generalise.

seamus wrote: »

...
and I would strongly advise setting up a Limited company if you're selling software for business use.

There are many things to consider when deciding whether to operate as a sole-trader or limited company. It's impossible to "strongly advise" a course of action without knowing OP's particular circumstances.

smeharg

seamus wrote: »

Except for the parts you repeated?

I think the only thing I repeated was the VAT threshholds?

seamus wrote: »

...It doesn't really matter that he's started development, it really only matters before he starts actually selling the software.

Not true. Any costs incurred in his own name during development may not be available for relief against sales in a limited company. Certain grants and tax incentives are available only to limited companies.

seamus wrote: »

...The reason I recommend a limited company is because if he is selling software to businesses, then he may be potentially liable for any losses those businesses incur due to errors or bugs within his software. Obviously this is less of an issue for, say, a graphics package, but a financial package for example could cause huge problems if incorrect.

A limited company would limit the OP's personal exposure should there be a massive screw up, and while it does involve a bit of extra expense in preparing documentation on a yearly basis, it can often be the best option in the long run.
Yes, of course you can insure yourself against this, but I wouldn't be wholly reliant on that to protect one's personal interests.

Fair point and it would've been more helpful to set out those reasons in your original post. However, there are other ways to indemnify against claims which, as you imply, may be sufficient depending on the circumstances.

kennyb3

seamus wrote: »

Initially before you start, you cannot charge VAT on your sales unless you are registered for VAT. You cannot register for VAT unless your sales exceed €37,500 of services or €75,000 of goods.

In your case, if you're providing the software via download, you're selling a service. If you provide the software on a disc or other physical media, then you're selling a product.

If you are registered for VAT, then as a rough rule: acquire a full address for every customer. If they're in the EU, charge 23% VAT. If they're outside the EU, charge no VAT.

That's a rough rule because if you sell a lot of products into other EU countries, then you need to start charging VAT at those countries' rates.

However, I'm suspecting that you're just starting out in which case you don't need to worry about charging VAT until you start making large figures in your sales. You will however have to register for income tax, and I would strongly advise setting up a Limited company if you're selling software for business use.

This is one of the most blatant examples of people who don't have a clue giving out tax advice.

'You cannot register for VAT unless your sales exceed €37,500 of services or €75,000 of goods'.

The mind boggles!

Shane732

Seamus please refrain from giving inaccurate advice.

professore

I never understood why people advise you not to register for VAT, unless your "business" is a hobby for your spare time.

If it's something you are planning to make a living out of, then surely you will go over the 37500 threshold. Also if you price your goods and calculate your profits ex VAT, and then exceed the threshold, wave bye bye to your profits.

Lastly, the less red tape you have to deal with when your business is in full swing the better. The last thing you want to be doing is chasing around registering for VAT when customers are roaring and shouting at you !

Solair

You can register for VAT if you want to, regardless of the thresholds.

However, it's not required until your sales are going to reach that threshold in any given tax year.

If you're not legally obliged to register for VAT, and you are not buying a lot of business inputs, I would not really advise it. It can be a major headache and requires quite a lot of detailed accounting and online form filling and very formal invoicing.

For a software developer, the only inputs are your own time and probably the odd new computer from time to time and consumables like paper, printer carts, your broadband etc.

All of those types of genuine business costs can have their vat claimed back, which can be a big advantage if they're a significant expense. The downside is that your products then have VAT added to their price when sold.

So, just think carefully before registering for VAT and make sure that it's an advantage to you.

In my experience it's more of an advantage if you're a small business with heavy input costs e.g. manufacturing, food, retail etc. Service companies tend to have relatively little other than minor overheads.

You need to ensure that you keep accurate records of all sales as you will have to pay income tax on these.
Also, make sure you register with revenue as self-employed and do the appropriate tax returns at the end of the year.

If you need business start-up advice contact your local city or county enterprise board. They can often provide a lot of basic information for free.

Also, shop around for an accountant. They are absolutely invaluable when running a business!

Taxation issues need to be done correctly from the start. You can end up either grossly over-paying by not being aware of what you're able to claim back or, you can end up not paying properly and get in trouble with Revenue.

It's best to get professional advise, and if you shop around it needn't be crazily expensive either.

Any decent accountant will be able to set you up with the basic 'books' (on a spreadsheet) so that you can keep the appropriate accounts for whatever type of business structure you choose.

Once you've got the framework in place, it's all relatively easy and it's just a matter of plugging in the correct figures and getting your accountant to check over everything once a year to do the tax filings.