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iOS indie game developers: are you paying too much VAT?
This is a guest post from UK-based Unity programmer and indie game developer Byron Atkinson-Jones (@xiotex).
I am not an accountant. I’m just a developer who took an interest in the legal side of running a business. What follows is my interpretation of the rules and does not count as advice: should you decide to follow this up, you should talk to a professional accountant and/or lawyer before proceeding. If you find differently, share your view on the topic!
(Editorial note: Byron is based in the UK. Devs in other territories could learn something from his experience, but specifics of tax law will vary. If you have a story to share about running a games business where you are, get in touch.)
Now onto the story:
How well do you know your business?
Business accounting seems to be something that scares the hell out of most of the devs I know. Compared to being creative and making games, it can seem dry. In fact, at least two developers I’ve spoken to about this have both said to me that they don’t want to know about it: that’s what accountants are for. However, no matter how dry and boring the subject may be, just ignoring it can not only get you into legal trouble but could also cost you money.
Accountants are not necessarily up to speed on everything to do with your area of business. For the most part, small business accounts are just small business accounts, but if you are an iOS developer there are a couple of specialised areas that your accountant has probably never come across. For example, my accountant keeps me on my toes in respect to payroll, VAT quarterlies and end of year reports, but when it came to how Apple processes the payments from App sales and how they should be accounted for, they admitted that they didn’t know what to do. This is not a criticism of my accountants; the tax world is vast and I suspect finding an accountant that did know all about it would probably cost me a lot more than my current accountant does.
How should a game dev handle VAT?
Because tax can be confusing, especially VAT, I’m finding a lot of the developers are being persuaded to go down the flat-rate VAT scheme which promises to be a lot simpler to deal with than the full blown VAT system. The accountants are right that the flat-rate scheme does result in less paperwork and it does this by removing the responsibility of working out what should have VAT applied to it and at what rate. The downside is that this rate assumes that VAT should be applied to all your income regardless if that income should have had VAT applied to it or not. To sweeten the deal however, they reduce the VAT rate you have to pay allowing you to keep the difference. So if you charge a client VAT at 20% you would only have to pay HMRC as if you had charged them at a rate of 14% and pocket the rest. The actual rate you pay HMRC at varies based on your type of business but you get the idea.
Under the flat-rate scheme, VAT (albeit at the reduced rate) is applied to all your income regardless to if that income wouldn’t ordinarily have VAT applied to it. There are exceptions to this rule. One of them is if the revenue comes from a country outside of the UK VAT remit, for example, the USA. So if you get a lot of revenue from the USA you don’t need to pay VAT on it under the flat-rate scheme, so it can be removed from your income calculations for HMRC. This means that while the flat-rate scheme looks beneficial from the point of view of less paperwork, you still need to keep track of where your income comes from.
All income (unless exempt) has VAT applied to it under the flat-rate scheme, including revenue from products or services that are zero-rated. In other words, products or services that don’t have VAT liability. However, what happens if all your revenue comes from products or services that are zero-rated? Under the flat-rate scheme this doesn’t matter. You still have to pay VAT on it. In fact under HMRC’s own guidance, if the main bulk of your revenue comes from products or services that are zero-rated or exempt then the flat-rate scheme may not be the best for you because you may actually be paying too much VAT.
So how does Apple feature in all this?
VAT on iTunes revenue
The way Apple takes payment for App sales or IAP revenue is very complicated and has to do with how they represent income to the various governments wherever Apple does business. Apple already processes VAT on App and IAP sales, and we receive revenue from Apple after that VAT has been processed. Therefore,the revenue we receive from Apple is not liable for any further VAT payment from us. On top of this, the income we receive from Apple is actually paid from Apple Luxembourg, which is outside of the UK VAT remit and is exempt anyway.
If like me you have difficulty wading through all the reports that come back from Apple about your sales, it feels like every now and then money just appears in your account from Apple. Depending on your level of involvement with your accountant, you may just be recording those payments as income and then leaving it at that. This means that your accountant may not be aware of all the facts and is assuming that you will be telling them the pertinent information such as where that payment came from. Conversely, you may be under the impression that the accountant will actively seek that information out – after all you just want to make games, the business stuff can be left up to them. At least one developer I know wasn’t aware of the VAT status of royalty payments from Apple and had been paying VAT on a sole income derived from App store sales.
So, if you are a small developer that has been persuaded to go onto the flat-rate scheme by your accountant and you derive the main bulk of your revenue from Apple App store sales, make sure your accountant is aware of the above. At the very least, talk all of this through with your accountant so that they have all the facts. As I mentioned at the beginning, I’m not an accountant. Everything here is my understanding of the situation, but I could be wrong. It’s important to check it out for yourself.