Value Added Tax (VAT) is a tax on consumer spending and is applied to most goods and services. While consumers purchase goods and services without giving VAT a second thought, the buying and selling of goods by a business is very much impacted by VAT. We have put together a simple guide to some of the key points surrounding VAT which every business owner should be aware of.
1. Rates of VAT
In Ireland there are 5 main rates of VAT which will apply to goods and services. These rates are as follows:
- Standard Rate of 23% (most goods and services)
- Reduced Rate of 13.5% (fuels, electricity and building services)
- Second Reduced Rate of 9% (tourism, restaurants and hairdressing)
- Special Rate of 4.8% (livestock, greyhounds and hire of horses)
- Zero Rate of 0% (certain food and children’s clothing)
In addition to the above, certain activities relating to educational, crèche facilities, medical or financial services, along with admission to and promotion of live theatrical and musical performances are exempt from VAT. Understandably those who are exempt from charging VAT are also precluded from reclaiming VAT on goods or services which they purchase relating to those exempted activities.
2. VAT Registration Thresholds
If you are an established business you will most likely be registered for VAT. For those starting out in business, you will only be required to register for VAT once you have exceeded certain thresholds. While you are not obliged to register for VAT until you exceed such thresholds, you may wish to elect to register for VAT. The following are the relevant VAT registration thresholds:
- €37,500 for the supply of services
- €75,000 for the supply of goods
If you are supplying both goods and services and 90% or more of the turnover relates to goods then you will apply the threshold of €75,000.
Once your registration has been processed by the Revenue Commissioners you will be provided with a VAT registration number.
3. Returning VAT to the Revenue Commissioners
Once you are VAT registered you will be required to apply VAT on the sales invoices you raise or the cash you receive, depending on the basis which you are registered for. This VAT will then need to be paid over to the Revenue Commissioners through a VAT 3 return, which is generally submitted on a bi-monthly basis. Also included in the VAT 3 return will be the details of the VAT on your purchases in that period. These amounts are then deducted from your VAT on sales, giving rise to either a VAT liability or a VAT refund. For example:
|Details||VAT Liability Due||VAT Refund Due|
|VAT on Sales||5,000||5,000|
|VAT on Purchases||3,000||6,000|
|VAT Liability/(Refund) Due||2,000||(1,000)|
VAT returns are due for submission on the 19th of the following month, with an extended deadline of 23rd, if the return is both submitted and paid through the Revenue Online System (ROS). For example a January/February VAT 3 would be due for submission on or before 19th March or 23rd March if completed on ROS.
Our recent blog, How Managing Your VAT Can Assist With Cashflow, provides details on how to return VAT on either a Cash Receipts Basis or an Invoices Basis, along with details of paying your VAT by direct debit.
In addition to VAT 3 returns, you will also be required to submit a Return of Trading Details (RTD) on an annual basis. An RTD will outline your sales and purchases for the year, which will be required to be broken down by the relevant VAT rate, along with providing details of Intra-EU and overseas trade activity.
4. Valid VAT Invoices
A reclaim for VAT on purchases can only be made on a valid VAT invoice so it is important that you check each invoice you receive to confirm they are valid before making a reclaim of VAT. If an invoice is not valid, you should return it to the supplier requesting that they issue you with a replacement invoice. Also, as a VAT registered business or individual it is vital that you are also issuing valid VAT invoices. For an invoice to be valid it should contain the following details:
- Date of issue and invoice number
- Full name, address and VAT registration number of the business or individual issuing the invoice
- Full name and address of the person receiving the goods or services
- The date, quantity and nature of the goods or services supplied
- The unit price, discounts price, reductions and consideration exclusive of VAT
- The rate and amount of VAT charged
5. Keeping VAT Records
The keeping of proper books and records is not just for VAT purposes, it is also a legal requirement. A good bookkeeping system should allow you to determine at any time who you own money to and more importantly, who owes you money! From the perspective of the Revenue Commissioners your VAT records must be kept up to date and must allow you to accurately determine and verify your VAT liabilities or refunds due. Books and records must also be retained, in their original form, for a period of 6 years.
VAT Compliance for the Business Owner
At Roberts Nathan our financial outsourcing department provides valuable support to many of our clients through the management of their financial function, which includes VAT compliance. Our dedicated team of professionals understand the importance of VAT to your business and by assisting our clients in this regard we can remove the burden associated with the compliance of “paperwork”. Our policy is to help our clients to continue to do what they are good at, their business!