Stop paying VAT on digital sales when earnings are under £81k
You can't currently avoid it. The reason the legislation was introduced was to prevent the big-name developers from setting up shop in a low-VAT country and selling apps to citizens of EU countries that would normally be paying a much higher VAT.  You need to register for VAT and file quarterly nil-returns so that you get that money back. It's a hassle, but probably worth it just to recoup those funds.  From an article in Kotaku from late 2014: You see, in the UK we have a rather sensible exemption on VAT for   businesses that earn under £81,000 a year. This allows people to run   small businesses - like making and selling games in your spare time,   for instance - without the administrative nightmare of registering as   a business and paying VAT on sales. Unfortunately, none of the other   EU member states had an exemption like this, so when the new   legislation was being put together, there was no exemption factored   in. That means that if someone makes even £1 from selling something   digital to another person in another EU country, they now have to be   VAT registered in the UK AND they have to pay tax on that sale at   whatever rate the buyer’s country of residence has set. That could be   25% in Sweden, 21% in the Netherlands, and so on. [...] There’s one piece of good news: even though anyone who sells digital   stuff now has to be VAT-registered in the UK, they don’t actually have   to pay VAT on sales to people in the UK if they earn less than £81,000   from it. (This concession was achieved earlier this month after   extensive lobbying.) But they’ll still have to submit what’s called a   “nil-return”, which is essentially a tax return with nothing on it,   every quarter in order to use the VAT MOSS service. That’s a lot of   paperwork. Obviously Brexit may have a significant impact on all this, so the rules might change.  This is the official Google Link to how they've implemented this and for which countries it affects: https://support.google.com/googleplay/android-developer/answer/138000?hl=en  Due to VAT laws in the European Union (EU), Google is responsible for   determining, charging, and remitting VAT for all Google Play Store   digital content purchases by EU customers. Google will send VAT for EU   customers' digital content purchases to the appropriate authority. You don't need to calculate and send VAT separately for EU customers.   Even if you're not located in the EU, this change in VAT laws will   still apply.
The HMRC website would explain it better to you. There is a lot of factors and conditions involved, so refer to the HMRC website for clarification. If your question had more details, it could have been easy to pinpoint the exact answer. Do I declare the value of shares as income Why would you do that ? You haven't generated income from that yet(sold it to make a profit/loss), so how can that be declared as income. Not sure where the confusion is coming from - software/digital/intangible goods are just like any other product, with regard to VAT. Turns out it's being made complicated by HMRC... Anyone would think they enjoy making everyone who collects tax for free on their behalf a crook! You charge customers everywhere in the EU VAT and pay it to HMRC, the only exception being customers outside the UK who can provide you with a VAT number. For these customers you are free to not charge VAT, as it's assumed they would be reclaiming it in their home country anyway. The above is true until 2015, when the rules become more relaxed - you will not need a VAT number from customers outside the UK in order to exempt yourself from collecting VAT. Turns out you need to be part of the MOSS scheme (more here) which was set up to prevent you having to register for VAT in every country you sell your software. Unless you only sell through app stores, and then it's easier because each sale is treated as you selling your software to the store for it to be sold on. You can reclaim all VAT on your eligible purchases in the UK, just as any other UK VAT registered business would (usual rules apply). And of course you don't collect VAT from anyone outside the EU, so you can either reduce the price of your software or pocket the additional 20%. "You cannot ""claim back"" VAT. What happens is that if you sell goods with VAT and charge customers VAT, you would have to send that VAT straight to HMRC, but if your business itself paid VAT, then you already paid VAT, so you have to send less.  As an example, if you send an invoice for £10,000 plus £2,000 VAT, and you paid yourself £500 VAT on business related expenses, then you need to send £2,000 - £500 = £1,500 to HMRC.  But if you don't send invoices including VAT, then you owe HMRC £0. Any VAT you paid on business related expenses is lost; HMRC won't pay you money.  BTW. Only VAT on business related expenses can be deducted. So if you want to be ""smart"", register for VAT and get the VAT on your weekly shopping bill refunded, forget it." With the W8-Ben filed, tax will be withheld at a lower rate. (I would expect 10%). Tax treaty treatment will mean that this witholding will reduce your UK tax even if this payment is not taxable there. This is only effective if you actually pay tax. This is how it works for lotteries and dividends as well. Not doing this would defeat the entire purpose of a VAT. The reason for a VAT rather than a simple sales tax is that it's harder to evade. Having a simple sales tax with the type of rates that VAT taxes typically are is unworkable because evasion is too easy. Imagine I'm a retailer. I buy products from a wholesaler and sell them to consumers. With a sales tax, if I don't charge the customer sales tax, the customer is happy and I don't care (assuming I don't get caught). And if I keep the sales tax but don't report the sale, I make a lot of money. Now, imagine a VAT. If I don't charge the customer the VAT, I lose money since I paid the VAT on the wholesale products. And if I don't report the sale, how do I claim my VAT refund? I would assume that under a certain threshold, HMRC doesn't even want to hear from you, because extracting taxes from you costs them more money than you are going to pay. On the other hand, I cannot find anything written about that subject.  I'd suggest to call them at 0300 200 3300 and ask them. Have the annual cost of the server ready, and tell them that you will stop asking for donations if say 6 months of cost is covered. There may be an official threshold that I was unable to find.  Obviously if you receive £1000 in donations and spend £100 for the server, they will want tax payment. If its £110 in donations and £100 for the server, they will likely not care. If they tell you to register as self-employed, it's not difficult, just a bit of a pain. In that case you'd have to pay tax on your income (donations) minus cost (cost for the server and any other cost). This is taxed as ordinary income. See the IRC Sec 988(a)(1). The exclusion you're talking about (the $200) is in the IRC Sec 988(e)(2), but you'll have to read the Treasury Regulations on this section to see if and how it can apply to you. Since you do this regularly and for profit (i.e.: not a personal transaction), I'd argue that it doesn't apply. Yes, you can.  That the books were purchased from abroad is irrelevant: you incurred an expense in the course of earning your income. If the books are expensive (>$300 per set iirc) you will need to deprecate them over a reasonable life time rather than claiming the entire amount up front. It doesn't matter whether what you got was a VAT Invoice; as long as you have some reasonable documentation of the expense you're ok. The big problem I see with this article is it does not state what the profits would be minus the licensing fees. It only states revenue, which is obviously a bad indicator of taxes owed.   Also, licensing fees are applicable in some markets. For example in markets like China that mandate a company do business under a subsidiary, licensing is a legitimate expense, considering the subsidiary might not be wholly owned by the parent company (per the country's laws).   That said, this is the UK we're talking about, so it is clearly not in that situation. I was just pointing out in some markets it is a legitimate expense. Maybe the UK could make licensing fees a non-deductible expense after a certain percentage of subsidiary income. Its a complex problem, I would be interested to see if any other jurisdictions have tackled it. As Victor says, you pay tax on net profit. If this is a significant source of income for you, you should file quarterly estimated tax payments or you're going to get hit with a penalty at the end of the year. The Government self-assessment website states you can ask HMRC to reduce your payments on account if your business profits or other income goes down, and you know your tax bill is going to be lower than last year. There are two ways to do this: I love the flat rate VAT scheme. It's where you pay a percentage based on your industry. An example might be Computer repair services, where you'll pay 10.5% of your total revenue to the HMRC. But you'll be invoicing for VAT at 20% still. Would definitely recommend registering for it since you're expecting to cross the threshold anyway. And like DumbCoder said, you also get a first year discount of 1%, so in the example above, you'd end up paying 9.5% VAT on your turnover. I personally found it a pain to invoice without VAT (my clients expected it), so registering made sense regardless of the fact I was over threshold. The tricky bit is keeping under the £150k turnover so you stay eligible for the flat rate. It does get more complex otherwise. Is the VAT scam still on the go? I was under the impression that amazon have to pay vat according to the country the items are shipped to, not shipped from? It will be a complete fuck up on the part of our politicians if this loophole has not been closed yet. The scenarios you describe are obviously easy to catch. It is reasonably defined in tax law, but more needs to be done to exert the spirit of the rules. The problem is that when international businesses are cross charging  there is limited information the tax offices have to argue the toss - for example a UK tax office cannot audit the accounts of its US parent in order to decide whether a cross charge representing license fees and marketing costs is fair - but these types of transaction are one of the primary mechanism for avoiding taxes. These are therefrom inferred by the UK companies accounts but not 'in the open' in the sense that they can be easily challenged with accurate information. And that is why it happens, people know about it, but it is still not easy to stop. 1) Every credit card company charges vendors a fee. That's sufficient to make an acceptable profit per charge even if some of that money goes into marketing expenses -- and the cash-back offer is a marketing expense. 2) Many if not most consumers pay interest; probably everyone does so occasionally when we get distracted and miss a payment. 3) The offer encourages you to put more payments on the card -- and in particular on their card -- than you might otherwise. See #1; that increases net income.