Conducting a business as an individual while constantly on the move is an idea which is still new enough that, as far as I know, not many Countries’ governments take such possibility into consideration. So, as digital nomads, we quickly get used to the idea of being in the nether zone. We are forced to eat grey areas for breakfast, lunch and dinner.
I mean, are we really supposed to pay the taxes to the exact Country where we were located when we executed our work (this is the basic principle)? To use an extreme example, which Country’s ministry of treasure should I make happy if I am doing some graphic design on my laptop on a plane from London to Singapore?
So the idea is that we just keep giving our money to the Country where we registered our activity, hoping that Kerberos doesn’t suddenly wake up and bite our head off while we’re sunbathing or surfing in Asia. And, just for sheer convenience, for most of us this is very simply the Country where we were born and bred.
But, is there a better option? As long as we don’t cheat and keep spending most of our days in our homeland while dodging its taxes just because we can, I think it’s perfectly legitimate to base our operations somewhere else where paying taxes is less of a bloodbath.
When I first left Italy for Germany, I was not planning to stop paying taxes in the former Country. I kept doing it as if I was on an impossibly long holiday weekend in Berlin, because, after just a bit of research, I found out what sort of a bureaucratic monster would await me in Germany. The paperwork would be conspicuous and the tax rates sounded even steeper than what I was already paying, to the point that I just procrastinated hoping to have an epiphany. So I lived in Germany for a bit more than one year without ever announcing my presence to the authorities.
I then left and lived on the move for one year, between Thailand, Italy and Egypt, at the end of which I almost suddenly thought I should go and live in London, UK. The way I took such a decision was so weird and improvised that to this day I wonder how small of a butterfly effect I would’ve needed to decide for Amsterdam or New York instead. Maybe it was just a matter of eating one more falafel the night before.
Once in the UK, I immediately started looking for jobs as an employee, so I couldn’t do what I did in Germany. I had to register. Without a national insurance number (NINo), getting paid is rather complicated, and, without proof that someone wants to pay you, even simply opening a bank account is not a trivial thing. But I immediately realised how massively simpler everything was over there. Being fluent in the language of course helped, but even for those with an english as basic as my german, accomplishing these sort of things in the UK is a breeze (at least it was in 2014). You make a phone call, they give you an appointment, you go there, have a short interview about your working intentions and a few days later you get your NINo in the mail. And, with it, universal free health care. For europeans, bureaucracy ends there!
I only worked as an employee, in an e-commerce company, for three weeks (90 minutes of daily commute and having to ask permission for holidays…you’ve got to be joking), and immediately went back to living as a freelancer. With the NINo safely in my hand I could simply go online on gov.uk and register to pay taxes as self employed.
And that was the day that I cried tears of joy and love for Queen Elizabeth II. I honestly thought I was having a wonderful dream and that the rates I would have to pay, according to the online information I was reading, were impossible. I was ready to be awakened by the wailing of an ambulance passing by my street only to discover the actual numbers. But it was all real. I suddenly realised I was officially and entirely legally living in a tax haven, something I had never planned for.
The difference between Italy and UK in this respect are brutal. Here they are in all their glory.
- Income tax. In Italy you almost immediately hit the 27% threshold, and from 28 thousand euros that goes up to a massive 38%. In the UK it sits at 20% until 46350£ (except that it’s even better than that, wait for it and stay with me).
- Obligatory pension contributions. 28 fucking percent in Italy (and, if I heard correctly, rising to 32%), zero in the UK. I know it’s not the wisest strategy in the world not putting money aside for the pension, but being able to do it on your own terms and not from day one (when it’s very likely that you’re nearly broke) is a huge relief. In the UK though there’s the health insurance to worry about, which doesn’t really exist in Italy. It’s 9% of the money you make above the threshold of 8400 odd GBP (class 4 insurance), plus a flat 153£ (class 2 insurance) that everyone has to pay. AAAAND…it turns out, you’re entitled to a pension! I’ve recently discovered that this Class 4 and 2 insurances are a very lean equivalent of the italian INPS. Except that the minimum UK pension is even higher than the italian counterpart.
- VAT. 22% in Italy, 20% in the UK. Except that all invoices directed to clients outside of the UK (and my clients are mostly still in Italy) are VAT-free. Now I know what you’re going to say: “But your client is paying VAT to you on top of the invoice amount!”. Yes, but you people living in the civilised world have no idea about the all italian malpractice of companies paying contractors with delays of 60-90-120-180-240-360 days!! Usually, the bigger the company, the bigger the delay. This might not register in your brain because it sounds completely absurd, but I may be damned if it’s not true. In Italy freelancers are used to not being able to enjoy the fruits of their work for months, and so too many times VAT must be paid in advance with money coming from completely unrelated work. Getting rid of it is another blessing. Of course it’s ideal to get some clients in the UK (they have a totally different ethic, you get paid in two weeks tops) so that some invoices contain VAT. This way we can buy a MacBook or whatever and claim the VAT expenses.
AAAAND…No, actually you can deduct VAT on expenses even if your VAT balance is zero! In less than a week after you’ve submitted your VAT declaration you’ll see the money appearing on your bank account. Absolutely mind bending.
- Regional taxes. Zero in the UK, something not very conspicuous in Italy.
- Taxes advisor. In Italy, despite my business extreme simplicity (40-50 invoices per year and very little expenses), I needed help to survive the bureaucracy, and had to pay someone 400 euros every year. From what I’ve heard from my peers, that’s nothing, as business owners easily pay twice as much. In the UK, if you’ve got an equally simple business and you’re not a complete donkey, you can do everything by yourself.
I guess this sounds already quite nice, but be prepared for two beautiful cherries on top. The first one is a massive no-tax area of, as of 2018, 11850£. It’s called personal allowance, and it completely vanquishes your income tax up to that point. Imagine the consequences of this on your first year in the UK. Maybe, just like me, you register as a business six months before the end of the tax year, and in those six months you make 15k £ after expenses. In the UK, the income tax will be 20% of 15000 minus the personal allowance. A puny 630£. I can’t recall what I paid the first year I was registered as a business in Italy, but I clear as day remember I wanted to cry and go back to my mom’s womb. The pension contribution is not only big, but there’s a minimum non negligible amount to pay even if you decide to go on hibernation and end up earning zero euros.
Not only that, but you’re also supposed to pay in advance some taxes for the next year. I honestly am not updated enough on Italian fiscal matters to know if this is still the case, but this scheme clearly made opening a business at the time an epic tragedy. In the UK on the other hand, your first year feels like the whole nation is patting you on the back and whispering: “don’t you worry sir, we are rich enough without your money. You’ll give us something next year, if you can”.
The obligations as a UK tax payer are stripped to the bone, and can all be fulfilled online. Last time I checked there were three.
- The yearly self-assessment declaration to be made and paid before the 31st of January, almost 10 full months after the end of the tax year. Yes because, for some reason dating back to the middle ages, the tax year in the UK begins on the 6th of April.
- Four (once every three months) VAT declarations in which you specify how much you’ve earned in total in the previous 3 months, how much of it was coming from outside the UK, and how much you’re claiming as expenses. The form immediately tells you how much VAT you have to pay.
- Four (once every three months, but skewed in respect to the VAT dates) declarations of all the invoices you emitted towards clients outside the UK and inside the European Communion. It’s called EC sales list submission, and there’s nothing to pay with it. It’s simply an obligation to communicate the exact amounts of each invoice and the VAT# of each client.
And that’s it. One more astonishing thing about the UK system is that, whenever you are filling the field relative to expenses in a form, they don’t ask you to prove anything. You could literally put any number there and see the connected amount of taxes owed go down right in front of your eyes (cheating is still illegal and immoral, so don’t cheat!), without anyone demanding a copy of the receipts. Coming from Italy, I find absolutely incredible the level of trust that citizens get to receive from the government. It’s adorable!
In my quest for financial lightheartedness in the UK three things became absolutely indispensable.
- The HMRC page with the conversion rates from British Pound to Euro. You might be wondering if, from the UK, you can send an invoice to an european client in euros. The answer is yes, but, when you calculate the taxes owed, that number has to be converted in GBP, using the exact rate that was in force at the moment of the invoice emission. Every 3 months for VAT, and once every year for the self-assessment, there’s some numbers crunching to do. Simple stuff.
- A way to move euros from my italian bank account to the UK without paying hefty commissions on the currency exchange. A few times I was forced to receive an ordinary wire transfer in euros on my British account, and it was unsustainable, as I was paying over 5% to transform euros in pounds. When I discovered Transferwise that went down to a perfectly acceptable 0.5%. Transferwise is a company based in Estonia which, for every euro that you need to convert in pounds, finds a pound that someone else needs to convert in euros. This way no actual conversion actually happens and no bank is authorised to eat on our profits. The company is totally legitimate and, for conversions from euro to pound and viceversa, the process is really swift and painless. The way you send them money is via an ordinary SEPA money transfer (or credit card if you’re in a hurry and are ok with paying more commissions), and once they receive your euros and convert it, they send it to your account in GBP. There they appear immediately, courtesy of the majestic british bank system.
- A registered address where my post (both personal and work related) can be delivered when I am not in the UK without fear of it getting lost. There’s several companies offering this service in London, and I use HoxtonMix. For the price of 18£/month they receive and keep all my post, and warn me with an email every time something arrives. They can also scan it and email the content for just 1£, which is extremely useful during those periods of nomadism.
It’s now two years that I don’t live in a stable way in London, and I have to say that this situation has been for me ideal. As I have showed you, there’s very little to pay and almost zero complexity involved in it. If the elephant in the room going by the name of Brexit doesn’t screw things too much, I won’t change a thing.
I am not of course advocating the use of my strategy for whoever thinks is paying too much taxes in his own Country and feels like it’s time to dodge’em. This only makes complete sense if you’re European and if the idea of becoming a UK resident is already in the back of your head, and all you need is a little push before Theresa May shuts the border in your face.
December 2018 UPDATE: I always knew that it is actually possible to run a business in the UK without registering for VAT, if your turnover is below 85k £ per year. But, working with Italian clients, I was wrongly advised about the necessity to be VAT registered in order to work with customers outside of the UK. I didn’t care too much, because I almost never had to pay VAT anyway. But, having recently started a business on Amazon, things have changed dramatically: keeping the VAT position open would mean having to pay all the VAT on the goods that I sell, and that would eat a huge chunk of my profits. So I dug into the matter a bit more and discovered that it is actually possible for me to still work with clients outside of the UK without a VAT registration. So I deregistered for VAT, and made my life 100 times simpler than it already was.