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I'm running a relatively small one-man business in the software sector. I just started and am trying to create a larger portfolio. For that, I offer some friends free services.

I found a few reasons to send these clients €0,- invoices, mostly similar to the reasons to send 100% discount invoices to charity funds that I gave here:

  • Clarity about what has to be done and when
  • No transfers (as I would have with a 0% discount bill and returning the money as a gift)

And also:

  • With an invoice I have more distinguishable clients which makes that I have more chance on getting a better certificate from the state (doesn't matter how it exactly works, this is an advantage)

Suppose that these clients won't have a problem with the €0,- invoices, could there be any reason for me to not send them?

I ask this, because I've never seen people sending invoices like this, and I can only see advantages.

  • 1
    Which country are you in? and your customers? – smci Jun 5 '13 at 7:57
  • @smci both in the Netherlands, but looking at the answer I don't think it's very localized. – user19 Jun 5 '13 at 8:35
  • Can't understand 'more distinguishable clients => more chance on getting a better certificate from the state'. Tax certificate? or something else? How is it 'better'? What specific aim do you have in mind? – smci Jun 5 '13 at 8:39
  • @smci I didn't explain it in detail because it is of no relevance to the question, but with more different clients you get a better certificate, which makes it easier to attract clients. These certificates are things like 'profit from own company', 'employee', 'profit from other activities', ... – user19 Jun 5 '13 at 9:47
  • Camil it is entirely of relevance to the question because unless there was a serious tangible benefit to this, I wouldn't do it and risk incurring tax liability. You can reference your contributions (e.g. 'implemented X on site Y') without giving an itemized hourly billing. – smci Jun 5 '13 at 15:21
12

It depends on the tax system that applies to you, but there can be consequences, and they can be very severe.

Generally economic activity is defined as oriented on profit, so giving anything for free could qualify as self-promotion or donation.

In Poland, for example, only some costs of the company spend on promotion can be considered as tax costs. So in worst case you could end with tax office refusing to acknowledge, for example, 50% of your expenses as tax costs. You would end up with fine and penalty percentages.

With donation, the danger is even greater. There was a case of baker who was giving the unsold bread to charity for free. He was told to pay the VAT from the bread that was given for free (from the price it was normally being sold - but the tax officer is free to estimate the basis price as he/she wants). With penalty percentages the sum was so big, that he has become insolvent. However, the obligation to pay VAT was only in case of wares, not services, and the law has changed recently, but in other countries the regulations may be even stricter.

There is also a potential consequence if you receive something for free. It could be interpreted as income and you would have to pay income tax from the value estimated by tax officer.

Assuming, analyse your local law, consult a tax specialist and be sure you exactly want what you are doing before issuing €0 invoices.

  • 3
    From what I know of tax law in some jurisdictions I concur. I would add that the rules in some places are not at all straight-forward so a tax specialist may be able to tell you how to do this safely. – Chris Travers Jun 1 '13 at 15:24
  • 1
    didn't know there is a law stating something like this, so giving anything for free gives you higher risk? geez. – AdorableVB Jan 18 '14 at 9:18
3

I upvoted Łukasz L.'s answer, which addresses the body of your question well (taxes/invoicing concerns). I'd like to answer the other part of your question, "Why should I not provide free services to friends when freelancing?".

I am a freelance UX designer. I have done two free projects for friends, as I described in my answer to Should I work for free for non-profit organizations?. Designers are frequently asked for free work, possibly more than many other professionals are. Some advice about free work from this article by Speider Schneider and its comments:

  • Do free work for friends only if you are getting something back in return.
  • Have a quota for how many hours of free work you are willing to do per month or quarter. Don't go over that quota.
  • On free projects, only do one revision. Don't accommodate change requests or new revisions (I would add: without charging your rate for it). Do your best on that revision. If it's for your portfolio, it represents the best of your professional ability.
  • Do the project on your terms - no requirements and no deadlines.
  • Don't do jobs on spec.

I'd add this advice:

  • Clearly define the project's scope.

  • Don't make it a team project unless your friends are staff members with a key role working for the client. (In my second project's case, the developer has served for years as the client's webmaster and we know he is dependable.)

  • Have a very detailed task breakdown. (I've been a software engineer and know that this is a huge risk in software projects, but it can be mitigated with a good task breakdown.)

  • Have sufficient outside income stream(s) while you work on the free project, whether that means having other paying client(s) or having an outside job.

  • Understand how much of a return on investment there is for you in doing the free project. Consider diminishing marginal utility. I did full site redesigns for my friends, and I'm not sure today if designing any more than the homepage for free was a good decision.

  • During the time period when you are working on the project, keep spending time with these friends doing things that aren't related to work. I'm still friends with the people I did free work for, in part because of this.

2

The tax issues are very real, and very true. What if your friend itemizes the service you provided for themselves to get a tax break, etc? Then you are now "on the radar"

I do not suggest working "under the radar" but i will say that for friends and family, working "officially" is usually more headache than it's worth.

Several years ago, I provided resumes for clients and had a nice little client base. I started by providing free to friends and family, once the decision was made to actually be a business, i stopped providing free services to them.

Instead i offered a steep discount for immediate family and friends. Friends of friends, or people who only had a passing friendship received 20-30% off.

There was a distinct difference in the client relationship. Before, they would press for things on their resumes or phrasing that was very unprofessional or even detrimental to their CV.... after, even close family stopped being so argumentive and respected my opinion more.

Bottom line? Free = hobby and they know better than you... Paid = professional

0

You can invoice at rate of €xx for job then do a second line that gives a 100% discount. Thus net invoice is for €0.00. However this is best if you are not VAT registed. If VAT registered and thus VAT is also zero, you need to explain why it is discounted. Probably best not to offer for 'free' but for a very low price, and thus keep things straight for tax reasons. You remember are the one who sets the price.

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