A few days ago, I made a decision that will have a lasting impact on – at least – the next five years of my business. It's a decision that might not seem logical at first – something most online guides, business gurus, and "coaches" tell you to do the opposite way.
I decided to no longer claim the VAT exemption for my business.
I know. Not a sexy, juicy topic. But honestly, most things in entrepreneurship aren't. They are logical conclusions you come to. And giving up the VAT exempt status for Magic Pages was exactly that.
Let's quickly explore what VAT and VAT exemption actually is. Keep in mind that I have my business registered in Austria – so this probably won't be the same for you, unless you live here.
VAT is the dreaded Value Added Tax. Or for you Americans: sales tax 😉
In your daily life you pay it on most things. Getting some croissants from the bakery? 10% goes to the state. Buying a new TV? That's 20% for roads, hospitals, and schools.
The tricky thing: it's usually an indirect tax. If you go to said bakery, you won't need to report your purchase of croissants to the authorities. The bakery hands you a receipt (well, at least they should) with the net and gross amounts on it, and records the purchase in their books. In Austria, they then calculate how much VAT they charged their customers per quarter, send that to the authorities, and wire them that amount.
And if you're a multi-million Euro company, that will just be a task for one of your bookkeepers. But as a small business, figuring out how to declare VAT and pay for it can be a huge burden.
Therefore, in most countries, small businesses can be VAT exempt. In Austria the rule is simple: is your revenue under 35,000€ per calendar year? Great – you can claim VAT exemption and not deal with all of that. No more bookkeeping hassle. And you don't have to charge your customers VAT – CHEAPER PRICES FTW!
But it's not that simple, of course. Being VAT exempt goes both ways. I don't charge my clients VAT. But I can also not claim VAT back on the purchases I make as a business.
Example: I bought a tablet around a month ago, to be more flexible in how I work. I didn't want to carry my laptop everywhere – but still want code and answer support tickets on the go.
I did not buy this tablet to resell it, but to use it in my business. It's a tool that helps me create the value that is then resold: Ghost CMS website hosting.
So, I can claim back the VAT I paid on it.
Unless…I already claimed that the entire business is VAT exempt, based on the fact that I make less than 35,000€ per year. Remember: it goes both ways 🤷
That was always fine for me. VAT exemption means less hassle. An easier way to run my business. But, the other day it hit me: I am leaving money on the table.
None of my customers pay me VAT directly. All purchases are handled by Paddle, my merchant of record. Paddle handles the VAT declaration and payment in each country – and just sends me one payout per month, which only includes the net amounts.
So, nothing changes for my customers. The VAT exemption for my business did not affect them at all – but I could claim back 20% on all my business expenses, like servers, domains, and other purchases for Magic Pages 🙃
From a financial perspective, that really is a no-brainer. No downside for customers (who are already paying VAT through Paddle). 20% reduction in server cost for me.
So…why did I think this VAT exemption was smart?
Oh yeah – bureaucracy. Filing the VAT reports every quarter. Keeping business simple.
Well, I looked into this. Most accounting software out there actually does that for you. Just not the one I used 😂
So, I ditched that software and wrote to my local Finanzamt – the tax office.
A day later, I officially had a VAT ID. And I am now part of the cool kids club that can claim 20% VAT back on their business expenses. Effort on my end: clicking 3 buttons per quarter.
To put it in the words of the great poet Borat Sagdiyev: "Great success!"
My tip when you start a new business: don't listen to everything you read on the internet. Some things might make sense for 80% of new entrepreneurs – but chances are, you're in the 20% it doesn't apply to. Think things through, take a spreadsheet, and do some calculations.
Bureaucracy is always scary – but clicking a few buttons for some nice cash is a good tradeoff, I think.