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Are you one of those people who doesn’t feel totally confident about Value Added Tax?
I have been qualified as an accountant for over 30 years now. My work experience includes working at Finance Director level in large multinational manufacturing plants. I also help owner managed SME’s to manage their finances. No matter what type of business, questions about value added tax (VAT) keep coming up.
In this article, I am going to give a brief overview of VAT in the Republic of Ireland. The key things that I think you need to know if you are running a business.
What is VAT?
Value Added Tax is a tax on sales. When a business sells an item, it usually has to charge VAT on that sale.
So if you sell a widget for € 60, you will have to charge VAT at 23% (€13.80) on that sale. The invoice then will be for € 60 plus € 13.8 – a total of € 73.8
The government is using you as its agent to charge and collect VAT and to pay what you have collected to the government. When you get the 73.8 only 60 is yours, the other 13.8 is held on behalf of the government.
If you bought the widget from an Irish supplier for € 40, they likely charged you VAT of 23%. The invoice to you will be for € 49.2 being €40 plus VAT of € 9.2 (23% again).
How to calculate VAT
Here is how to calculate how much VAT you have to pay the government. You deduct the VAT you pay to your suppliers from the one you collect from your customers. In this case, you charged € 13.8 and paid € 9.2, therefore you owe the Taxman € 4.6.
Effectively, the government gets the VAT on the difference between your selling cost and your buying costs ie € 20. This is the Value Added and it’s why the tax is called Value Added Tax. The amount you are paying is 23% of the Value Added – 23% of 20 is € 4.60.
It’s not always as simple as this but that is the broad principle.
Consumers cannot register for VAT so they bear the full cost of any VAT on items that they purchase. Generally speaking, they cannot reclaim the VAT that they incur. There are some exemptions from this for medical-related items.
Do you have to register for VAT?
If you are in business in Ireland and your turnover exceeds certain limits then you will have to register for VAT.
VAT registration is obligatory when the VAT thresholds are exceeded or are likely to be exceeded in any 12 month period. There is an exemption for sales to consumers in the other EU States.
The principal thresholds are as follows:
- €37,500 in the case of persons supplying services only.
- €37,500 for persons supplying goods liable at the reduced or standard rates which they have manufactured or produced from zero-rated materials.
- €35,000 for persons making mail-order or distance sales into the State.
- €41,000 for persons making acquisitions from other European Union Member States.
- €75,000 for persons supplying goods.
- €75,000 for persons supplying both goods and services where 90% or more of the turnover is derived from supplies of goods.
- A foreign business, with no base in Ireland, supplying taxable goods or services in the State is obliged to register an account for VAT irrespective of the level of turnover.
If you are below the thresholds you may elect to register for Value Added Tax. It’s beneficial to register if you mainly supply goods or services to VAT registered businesses. In that case, VAT will not be a cost. This is because they can recover it, and will be able to reclaim VAT on your business expenses.
If your customers are mainly not VAT registered (i.e. consumers or a VAT exempt business) then the VAT is not recoverable for them so it becomes a cost. In that case, you will be better not to register for VAT until you reach the threshold.
What are the VAT rates?
There are currently 5 different VAT Rates. These can change from time to time, so you need to be aware of any changes. Any changes are usually announced in the Government’s annual budget.
The five rates are
- standard rate – 23% – this is the standard rate of VAT and all goods and services that do not fall into the reduced rate categories are charged at this rate.
They include alcohol, audio-visual equipment, car parts and accessories, CDs, computers, consultancy services, cosmetics, detergents, diesel, fridges, furniture and furnishings, hardware, jewelry, lawnmowers, machinery, medicines (non-oral), office equipment, pet food, petrol, paper, tobacco, toys, tools, washing machines, bottled water.
This rate applies to most items except medical and educational
- reduced rate – 13.5% – this rate is for items including fuel (coal, heating oil, gas), electricity, veterinary fees, building, and building services, agricultural contracting services, short-term car hire, cleaning and maintenance services.
- special reduced rate – 9% – is for tourism-related activities including restaurants, hotels, cinemas, hairdressing, and newspapers.
This rate was introduced temporarily following the Global Recession and is expected to be eliminated at some point in the future
- livestock rate – 4.8% – is a reduced rate of VAT specifically for agriculture. It applies to livestock (excluding chickens), greyhounds, and the hire of horses.
- zero rate – includes all exports, tea, coffee, milk, bread, books, children’s clothes and shoes, oral medicine for humans and animals, vegetable seeds and fruit trees, fertilisers, large animal feed, disability aids such as wheelchairs, crutches, and hearing aids.
- Exempt – You do not have to pay any VAT on financial, medical, or educational services. You may also not pay VAT for live theatrical and musical performances (except those where food or drink is served during all or part of the performance).
Revenue has a good search facility for VAT rates on their website – here. You simply enter the name of the product or service and the correct VAT rate will be presented to you.
Difference between Exempt and Zero Rate Value Added Tax
If a business person supplies taxable goods or services, including zero-rated ones, they can claim the Value Added Tax back from the government on their taxable business purchases. However, if someone only supplies exempt goods or services, they cannot reclaim VAT.
Can I claim the VAT back on my expenses?
If you are VAT registered, then you can claim back VAT incurred on most of your business expenses. If you are VAT exempt, you cannot reclaim VAT.
You cannot claim VAT on the following, even when the goods and services in question are acquired or used for the purposes of a taxable business:
- expenditure incurred on personal services. This applies to yourself, your agents, or employees. This is an exemption if such expenditure is incurred in relation to a supply of services you are accountable for tax.
- the expenditure incurred on accommodation other than qualifying accommodation (typically conferences) in connection with attendance at a qualifying conference as defined in the legislation
- expenditure incurred by you on food or drink, or accommodation or other entertainment services, where such expenditure forms all or part of the cost of providing an advertising service in respect of which tax is due and payable by you
- entertainment expenses incurred by you personally, your agents or employees
- the purchase, hiring, intra-Community acquisition or importation of passenger motor vehicles other than certain qualifying motor vehicles (details from Revenue Website) and other than motor vehicles held as stock-in-trade, or for the purposes of the sale of those motor vehicles by a financial institution in the context of a hire-purchase agreement, or for the purpose of a business of the hiring of motor vehicles, or for use in a driving school business.
- the purchase, intra-Community acquisition or importation of petrol otherwise than as stock-in-trade
- contract work involving the handing over of goods when such goods are themselves not deductible
You can only claim back VAT where the supplier supplies a proper VAT invoice. This includes their VAT number and details of the VAT rates and amount. The full requirements for invoicing are provided on the Revenue Website
VAT on Petrol and Diesel
- VAT registered traders are not entitled to recover VAT incurred on the purchase of petrol.
- Value Added Tax is fully recoverable on diesel by VAT registered traders if the vehicle is used 100% for business. The 100% condition is important.
What reports do I have to file?
You have to periodically file a VAT return, called a VAT 3, showing how much VAT was charged or collected in the VAT period and you have to pay that money to the government. Most small businesses file the VAT return every 4 months – Jan-Apr, May-Aug, Sep-Oct. Bigger business file every two months. Some businesses file every 6 months.
When you register for VAT, the revenue decides whether you should be filing on a two/four/six-month basis and let you know.
There is another annual form that has to be filed. This is the Return of Trading Details and it summarises, by each of the different VAT rates, the sales and purchases of the business.
VAT 3 just shows the VAT amounts. The RTD shows the sales and purchase amount and the related VAT rates. It is used to reconcile sales and purchases in the annual accounts with the VAT returns made during the year.
In recent years, Revenue has been enforcing the filing of RTDs more strictly. If you are due a tax refund, they will withhold payment of the refund if an RTD has not been filed.
Cash v Invoice Basis
When reporting for VAT, small businesses have two options available to them:
- invoice basis for accounting
- cash (or money received) basis of accounting.
Under the invoice basis for accounting, a trader accounts for VAT when they issue the invoice to the customer. This is irrelevant to whether they receive payment from the customer at this time or not.
The cash basis is also known as the basis or money of the receipt received on the basis of accounting. Under this option, a trader accounts for VAT when payment is actually received from the customer.
This option gives the small businesses some relief for a situation where they could incur cash flow problems if they had to pay over VAT before they have collected it themselves.
What I have international sales or purchases?
When you are exporting outside of the EU, then the zero rates for exports apply.
If you are selling into the EU, then you charge VAT if your customer is not VAT registered in their own country. If they are VAT Registered, you can charge zero VAT only if they give you their VAT number and you can verify that VAT number using an online EU portal for VAT verification. You must keep a record of the Verification step – the system will supply you with a reference number.
When you are submitting your VAT 3, you have to report purchases from within the EU by using what is called the reverse charge method. This shows a notional VAT on sales of the amount that would have been on the purchase if VAT had been charged. You will also show a deduction of the same VAT amount as if VAT had been charged. The net position is nil – the notional vat on sale is offset by the notional VAT on purchases. The transaction is being recorded for statistical purposes only.
If you have distance or internet/mail-order sales, then you need to pay particular attention to the VAT situation.
This article aims to give you an overview. Without knowing your specific circumstances, it cannot be comprehensive.
I would advise you to discuss your business – the type of products or services provided, the type and location of customers, your level of turnover, etc – with your accountant to ensure that you are applying VAT properly. This should be done first when the business is starting but you should also review it regularly as your business may change or the VAT rules may change. Here is an article that can help you find which type of accountant is right for you.
The Revenue website has a lot of information about VAT. The Local Enterprise Offices also will be able to provide information. It’s usually better to have a thorough discussion with your accountant at the start.
I hope this article was of benefit to you. If you have further questions, feel free to contact me at Jim (at) accountsplus (dot) ie.