Should You be a GST Registered Consultant?

If you are starting out as a consultant, you may or may not have to be GST registered. If it is not required, it may or may not be to your advantage to register voluntarily. This article explains why.

How does GST work?

Goods and Services Tax (GST) is collected by GST registered consultants (and other businesses), from their clients, and passed onto IRD. GST registered consultants also claim back, from IRD, the GST content of their expenses. When a consultant’s GST collected on fees exceeds GST paid on expenses, the excess is paid to IRD. If GST paid exceeds GST collected, the shortfall is refunded by IRD.

Who can be GST registered

A business, or consultant, can generally be GST registered providing they sell taxable supplies. Taxable supplies are the sale of goods or services. If you are a consultant, you almost certainly are providing taxable supplies to your clients.

GST charged on consulting fees

GST registered consultants add GST to their fees charged to clients. With a couple of exceptions mentioned below, GST is charged at the standard rate of 15%. So, if a GST registered consultant charges $100 for their service, they generally add $15 GST and charge their client $115 including GST.

Zero-rated supplies

Certain taxable supplies are zero-rated, meaning GST is charged at 0% instead of 15%. Zero-rated supplies include:

exported goods or services
sales of a whole business as a going concern
sales of land from one GST registered person to another.

A GST registered consultant generally charges GST at 0% on services provided to overseas clients (exported), unless the services relate to property in New Zealand.

Exempt supplies

Certain types of supplies are exempt from GST. If you are in the business of providing these, you cannot be registered for or charge GST. Exempt supplies include:

salary or wages
residential rent
interest (whether paying it or receiving it)
most other financial services
sales of fine metals.

Should a new consultant register for GST?

If a consultant’s fees exceed $60,000 per year, they must register for GST. Even if their fees are likely to exceed $60,000 over the following 12 months, they must register.

If a consultant’s fees are less than $60,000, the consultant has the option of becoming GST registered or not. Voluntary registration may be worthwhile depending on the consultant’s circumstances.

Advantages of GST registration for consultants

The major advantage to a GST registered consultant is claiming back GST on business expenses. A non-GST registered consultant must wear the cost of GST of all GST inclusive expenses including:

Vehicle running costs
Computer equipment
Books and training costs
Office rental (offices are commercial rents so not exempt from GST like residential rents)
Big items like motor vehicles or even office buildings

Note however that once an asset such as a vehicle has been purchased by a GST registered consultant and the GST claimed, GST must be charged on a subsequent sale of the asset.

Disadvantages of GST registration for consultants

There are two potentially significant disadvantages to being GST registered: GST registered consultants must charge their clients GST and they have GST compliance requirements.

Charging GST to clients

Charging GST to clients may or may not be a problem depending on the type of client the consultant has.

For a consultant selling business to business (B2B) services, GST registration may not be a problem. The B2B consultant’s clients will generally be GST registered businesses themselves and can therefore claim back the GST. Paying a non-GST registered consultant $100 with no GST to claim back equates to paying $115 to a GST registered consultant and claiming back the $15 GST.

For a consultant selling business to consumer (B2C) services, GST registration is a problem. The non-business clients will generally be unable to claim back the GST content, so it does not matter to them whether the consultant is GST registered or not. If the maximum they will pay for a service is $100, the consultant will have to suck it up and return the GST content out of the $100. The GST registered consultant is wearing the GST cost.

For a GST registered B2C consultant, the costs of paying GST out of their sales will exceed the benefit of claiming GST on expenses unless their expenses exceed their sales and they are losing money. For B2C consultants, I suggest not registering for GST until you have to.

GST compliance requirements

The other disadvantage to GST registration is the compliance obligations. A GST registered consultant must prepare and file GST returns, make payments to IRD, prepare tax invoices for sales and collect tax invoices for purchases. These records must be kept for seven years. Of course, accountants or bookkeepers can do most of this for you and modern accounting software makes it a whole lot easier.

If a GST registered consultant breaches any of their obligations, they are exposed to IRD’s penalties regime which can be very costly.

Summary

If you provide taxable supplies exceeding $60,000 per year, you must register for GST. If your supplies are below $60,000 per year, you have a choice.

For B2B consultants, I would generally recommend registering voluntarily as the GST charges should not hurt your sales and you can claim GST on expenses. I would only suggest staying non-registered if the GST on your expenses are not worth the GST compliance hassles.

For B2C consultants providing services to non-GST registered people and organisations, I recommend remaining non-registered until you must register. It may be tempting to register if you intend claiming GST on a large business asset such as a vehicle, but ultimately, if you are successful, your sales will exceed your costs and the loss of 15% of those sales will exceed the 15% reclaimed on costs.