I posted a version of this on our FREE OnlyFans but I thought it would be useful to share on our blog seeing as there is a kerfuffle surrounding VAT right now, and a lot of conflicting information. There seems to be so much confusion on the interwebs over the recent VAT change on OnlyFans, so hopefully this will clear some things up for everyone. Please be aware that I am not an accountant and this is just my basic understanding of everything (after speaking with my accountant).
💖WHAT IS VAT?💖
VAT stands for Value Added Tax and it is a legal requirement in the UK, where OnlyFans is based. All UK businesses that sell physical or digital goods and services have to pay 20% VAT on their GROSS income once they hit a threshold of £85,000. The government does not mess around with this and it is NOT something you can wiggle out of.
Previously, it looks like OnlyFans were taking VAT out of their 20% commission and creators were paying VAT on their own income once they hit the £85K threshold, but now the HMRC guidelines have changed making OnlyFans liable for the full amount. Because OnlyFans as a business has hit the threshold, VAT is due on ALL of their eligible products or services, regardless of whether an individual creator is VAT registered or not - it is the PRODUCT that is liable now, not the person. The extra 20% (charged to fans) is then paid to HMRC.
The UK isn't the only country to pay VAT, a lot of EU countries have it also and VAT varies from country to country (see the above infographic - it was the most recent one I could find).
In the US, VAT is known as SALES TAX (see above) and varies from state to state, and city to city. It is often added at checkout rather than being incorporated into the price. It is usually lower (roughly between 5-10%) and again, is not optional.
💖WHAT IS INCOME TAX? IS IT THE SAME AS VAT?💖
NO. I used to get these two mixed up for years, but VAT is DIFFERENT to income tax and we all have to pay income tax once we hit a threshold (in the UK) of £12,500. Once you hit that amount you have to declare your income to HMRC and register as a self-employed sole trader, to start paying income tax and national insurance. You can then use an app like Quickbooks to stay on top of your tax and finances. The threshold is different in other countries, so check your local government website for more specific info.
In the UK the tax year runs April 6th to April 5th of the following year and you need to file a return for each year that you are self-employed. Your VAT year is not the same as your tax year. Your VAT year starts when you first declare your business to HMRC, so if that was the 12th of January it will run 12th January to 11th January the following year.
UK CREATORS: Once you start hitting around £1000 ($1250) a month in GROSS sales/subscriptions (GROSS means before a platform takes their commission, NET means after) it is worth putting AT LEAST 20% of the NET amount away in a savings account for your tax. Once you start earning £7000 ($8750) a month in GROSS sales/subscriptions you need to start putting AT LEAST 40% of it away for your tax and potentially your VAT (it's still unclear on whether creators who hit the threshold still have to register - I am just waiting on a response from my accountant). If you can, open a business Monzo account to track everything and keep everything separate (I am not affiliated with them I just think they are good).
However, it is not all bad as once you are registered as self-employed, you can start claiming expenses on your yearly tax return, which can reduce your tax bill. For example, if you earn £50,000 in tax and claim £10,000 in expenses, you only pay tax on the remaining £40,000 - avoiding a higher tax bracket. However, if you DO go up a tax bracket, YOU DO NOT PAY THE HIGHER PERCENTAGE ON THE FULL AMOUNT, just the amount you are over. This is important to remember.
UK TAX BRACKETS:
£0 - £12,500 - This is your Personal Allowance. YOU PAY 0% TAX (on this section only).
£12,501 - £50,000 - This is the Basic Rate. YOU PAY 20% TAX (on this section only).
£50,001 - £150,000 - This is the Higher Rate. YOU PAY 40% TAX (on this section only).
£150,001+ - This is the Additional Rate. YOU PAY 45% TAX (on this section only).
For example, say you earned £30,000 in a year: you claim £5000 in allowable expenses, leaving you with £25,000 that you have to pay tax on. Only £12,500 of that amount is taxable (once you subtract your personal allowance), so your TAX BILL that year (not including National Insurance) would be £2500.
Where it gets more complicated is if you cross multiple tax bands. So, if you earned £175,000 in a year and claimed £15,000 expenses, that leaves you with £160,000 that you have to pay tax on. Broken down that is £12,500 personal allowance (NO TAX), £37,499 basic rate (20% TAX or £7500), £99,999 higher rate (40% TAX or £40,000), and £9,999 additional rate (45% TAX or £4500). Your total tax bill that year would be £52,000.
💖WHAT IS NATIONAL INSURANCE?💖
In the UK we pay National Insurance to qualify for certain benefits and a state pension. If you are self-employed, you may be liable for Class 2 and Class 4 National Insurance.
Class 2 National Insurance is £3.05 a week if your profits are more than £6,475 a year.
Class 4 National Insurance is 9% on profits between £9,501 and £50,000 and 2% on profits over £50,000.
💖WHAT CAN I CLAIM AS EXPENSES?💖
Now here is where it gets quite complicated, as you can claim back 100% of allowable expenses from your tax and you can also claim back the 20% VAT on purchases IF you are registered for VAT and have a VAT receipt from another VAT-registered company.
Allowable TAX expenses include: lingerie, photography or computer equipment, stationery, printing costs, payment processor fees, editing software, internet connection, travel, petrol, hotels you stay in for work, 50% of your phone bill and a percentage of your heating costs (if you work from home). Check HERE for a full list.
Expenses that are NOT allowed: clothing that is not exclusively for work (i.e., not kept completely separately), botox, nails, hair, makeup (if you use it for non-work purposes).
Either way it is best to keep all of your receipts and track your expenses. Apps like Quickbooks will usually tell you if an expense is allowable or not, but your best bet is always to get an accountant to be sure.
💖WHY DO I NEED AN ACCOUNTANT?💖
Once you start earning money from any subscription site, the best thing you can possibly do is find an adult-friendly accountant. They will help you to avoid massive unexpected tax bills and help you to find areas in which you can save money, such as claiming travel and expenses. They can also help you with VAT and might advise you to set up a Limited Company.
In the UK, on average, an accountant costs around £500 to file your tax returns for you, but they will usually save you more than that so it is definitely worth it.
Just know that you aren't being stupid for not understanding what is going on - there is a lot of bad information doing the rounds as VAT is very complicated and even accountants struggle with it! Just be aware that if you start earning good money, you WILL have to pay tax on it at some point so don't bury your head in the sand!
Also this change is going to hit all content platforms at some point so be wary of platforms that advertise they are "VAT or sales tax free" as they are burying their heads in the sand also!