By Andrew Lambe, 19th July 2010 (Updated 20th October 2017)
Value Added Tax (VAT) is a minefield for many people when starting a new business and it’s something we are asked about by our clients on a regular basis. Most ask us how they can avoid it! The purpose of this article is to give a brief overview of VAT and to explain why it actually may be a good idea for businesses to voluntarily register for VAT. However, it should be noted that a company cannot register for VAT unless it has a physical trade in Ireland, i.e. the company has a base in Ireland and/or is making sales to Irish customers.
What is VAT?
VAT is what’s called an “indirect” tax, in that it’s not levied directly by Revenue. It’s up to businesses to charge, collect and pass the tax on to Revenue. This is quite clever since it means we’re all really unpaid tax collectors for the government!
Generally, it’s the final consumer of the product or service who suffers the VAT, and can’t claim a VAT refund from Revenue. Businesses that are VAT registered can usually claim a VAT credit for VAT they have suffered from other VAT registered businesses (or individuals who are sole traders).
When the VAT return (Form VAT3) is processed by Revenue, the result is simple; if the VAT on your purchases is greater than the VAT on your sales you are due a refund. Otherwise, you need to pay Revenue the difference.
Why should I voluntarily register for VAT?
There are a few reasons in my opinion but the first simple answer is so that you can claim a credit for the VAT suffered on your purchases. Bear in mind however that the purchases must be “wholly and exclusively incurred in the furtherance of trade” – meaning the item purchased must be a valid business expense.
Every business owner knows cash is king right now, so being able to get a refund from Revenue is a potential boost to any operation.
Secondly, in my opinion, it adds a level of professionalism to show your clients and suppliers that you are VAT registered. If you offer professional services of any kind I would personally suggest you register for VAT, even if you are under the thresholds.
One final point I should make is that VAT is a high-risk tax. Revenue penalties for VAT fraud or evasion are extremely punitive. For example, from December ’08 the fixed penalty for failing to register for VAT is €4,000. You must also keep proper books and accounts, otherwise, additional penalties may apply.
What are the VAT thresholds?
Currently, in Ireland, you are required to register for VAT if you provide, or believe you will generate turnover from the provision of services to the value of €37,500 in any continuous period of twelve months. This increases to €75,000 for the sale of products.
In addition, registration is compulsory in the following cases:
• Distance sales from outside Ireland into Ireland to the value of €35,000;
• Acquisitions from other EU countries to the value of €41,000;
• Foreign trader even where turnover is nil.
Which basis do I register for?
If at least 90% of your turnover is from providing goods or services to unregistered persons or your annual turnover is not likely to exceed €1,000,000 then you may choose to register for the “cash receipts” basis of accounting for VAT. This would be the preferred basis for start-up businesses in our experience because it means you are only liable for VAT on sales when you actually receive the payment.
The alternative is the “invoice accounting” basis. This could be a drain on cash flow for a start-up since you would be liable to pay the VAT when the invoice is issued, yet the client may not pay you for several months.
What VAT rate should I charge?
Briefly, there are four main tax rates in Ireland.
• Exempt – examples include certain financial, medical and educational providers. They don’t charge VAT on their sales and are not entitled to claim VAT on their purchases.
• Zero – the main example is providers of food and drink. They actually charge a 0% VAT rate and are entitled to claim VAT on their purchases.
• 9% – This lower rate applies to restaurants, hotels, take-away food, newspapers, cinemas, amusement parks, hairdressing services (excluding beauty treatments)
• 13.5% – two examples are building services and photography. They charge a reduced VAT rate and can claim VAT on their purchases.
• 23% (Increased from 21% on 1st January 2012) – simply put, this rate is applied generally to all goods and services that don’t fit into any of the above categories.
There’s no straightforward answer to which rate you should charge I’m afraid as it really depends on what products or services you are selling. Most of us will fall into the 23% category though it is possible to have a mix of rates, depending on what and how you supply the goods or services.
What about VAT returns?
In a nutshell, if you’re VAT registered you generally need to submit your Form VAT3 return by the 19th day of the month following the end of the VAT period, which are typically two calendar months each. So, for the VAT period 1 – the beginning of January to the end of February – your return must be received by Revenue by the 19th of March if posting it, or by the 23rd of March if filed online using the Revenue Online Service (ROS).
You may be allowed to file a monthly VAT return if you are in a permanent refund position, which of course could be very helpful for cash-flow. Conversely, you may also file an annual return if you have a low VAT liability. Traders who opt to pay by Direct Debit may also avail of this facility.
How do I register for VAT?
VAT registration is done using the following forms:
• Form TR1 is used to register an individual, partnership, trust or unincorporated body
• Form TR2 is used for registration if trading as a company.
We would always recommend you seek expert advice when registering for VAT as mistakes may be costly.
A good tax adviser will be able to analyse and understand how your business works and should advise you the time to register, the basis and rates to charge most appropriate to your business.
For more information please do not hesitate to contact us