The taxation model in the United Kingdom can be a maze, especially for people getting familiar with the system. Sometimes, you get away without paying a dime, while in other cases, you might have to let off some of your profits, depending on how much you make, how you traded, or if you’re running your investments as a business. The dynamics are pretty tricky, but easy enough when laid out in bits, which is what we’ll be doing in this piece. You’ll get to know how VAT works for forex traders and how much you might be liable to pay if that isn’t possible. Let’s get into it!
Understanding VAT And How It Works In The UK
VAT (value added tax) is a fee added to products and services sold by VAT-registered businesses, and it exists in every country, including the UK. The UK has different tax rates based on the services and goods being provided. There’s the standard 20% that you’d find on most goods and services, the 5% reduced fees on products like home energy, and residential property conversions. Lastly, there is a 0% charge for most foods and children’s clothes. Just like all of these products, one would expect the financial service sector to have an equal charge. The reality is, however, a bit different, as most financial services are exempt from this fee in the UK. Under Schedule 9, Group 5 of the VAT Act 1994, many financial services are VAT-exempt. This exemption covers a wide range of services like retail trading, proprietary trading firms, and broker-executed trades.
However, some conditions warrant foreign exchange investors to pay other taxes on their transactions. This includes cases of finance educational courses, trading software services, or managing your trade activities as a registered business. If you’re running an institutional trading firm or business and are VAT-registered, you’re liable to the 20% business charge. On the other hand, if you’re an individual trader and your activities qualify as investment activity, you may be subject to Capital Gains Tax (CGT). It’s different if your investment is viewed as a side hustle, and you earn 1,000 pounds or less annually. Anything higher than this is subject to a tax.
It might be interesting to discover that a forex business can completely evade any other form of VAT on forex through spread betting. If you don’t already know, spread betting is a form of derivative that allows investors to profit from assets without necessarily owning them. This form of investment operates on leverage and allows traders to use it to the fullest when placing a trade. All they need is to satisfy the margin requirement of the capital required to execute the trade, not the full amount of the trade. Any profits from spread betting are generally exempt from the capital gains tax. The primary reason for this is that spread betting is considered gambling in some jurisdictions, rather than a financial instrument.
VAT for Forex Businesses
Not all forex businesses are required to register for VAT. Companies must register if the taxable turnover exceeds 90,000 pounds yearly, or if they sell services like courses, signals, and trading tools. Any financial business crossing this revenue threshold must register, regardless of whether they are VAT-exempt. So, typically, forex trading and analysis platforms like TradingView and others that investors use are subject to VAT, and some of the fees paid when trading on these platforms are diverted to these dues. If the forex business is tied directly to trading, it can be VAT-exempt. However, if the platform or broker offers non-core services like premium analytics tools, platform subscriptions, and paid educational content, these services may be VATable. This law also applies to brokerage firms, and every service you get from your broker outside of spread betting may be VATable.
Lastly, if your business is a VAT-registered enterprise outside of the UK, but offers services to UK users, no VAT is taxed. The payment will most likely be directed to your country’s respective agency in charge of this.
READ MORE : How to register for VAT?
Navigating Services That Are Not Exempt
With the information provided in this article, it should already be clear that your forex trading activities are exempt from VAT, but other related services might not be. Offerings like paid courses, analysis tools, charting software, and more are typical examples of this category. If you genuinely want to, a good way to evade this is to stick to spread betting services, as these are not regarded as financial assets. Lastly, draw a clear line between trading and related offerings that may attract additional tax fees. Don’t assume your business is VAT-free because it’s a financial market investment.
