VAT or Value Added Tax is an indirect and complex tax which is based on consumer and business spending. It is a significant source of revenue for the government, in fact, VAT accounted for €13.2million, around 26% of the total tax intake in 2017.
Generally speaking, a VAT registered business charges VAT on it’s products and services. It can also claim back the VAT it spent on business related expenses.
Different products and services have different rates so it’s not a one size fits all approach. You should talk with your accountant about VAT, for example, there is a different VAT rate on toasted sandwiches than there is for a regular, non-toasted sandwich.
We work with our clients on VAT and here are the most popular questions that we get connected with VAT.
1. What are the VAT rates?
Briefly, there are five main tax rates in Ireland.
There are some businesses that are exempt from charging or claiming back on VAT.
There are some businesses who charge 0% VAT rate and can still claim back on their purchases.
This lower rate applies to an extensive list of businesses. It’s worth noting that a lower rate of 9% was put in place as a temporary measure in 2011 to assist restaurant, hotels, take away food and entertainment venues such as cinemas during the recession. It ended on 31 December 2018. Any business taking advantage of the 9% should now apply the 13.5% rate.
This is the standard rate that most businesses charge, unless you fit into the previously mentioned tax rates.
Revenue.ie has a great search facility, a VAT Rates Database on their website so you select the correct VAT Rate for your product or service.
2. What is the VAT Threshold?
If your business’ turnover exceeds the VAT threshold in that year, then you must register for VAT. So some businesses may never have to register for VAT. The VAT threshold in Ireland is currently at €37,500 a year for a service based business or €75,000 a year for a product based business.
Some businesses are a combination of both product and service supply. If that is the situation, then you should use the €37,500 turnover figure rather than the €75,000 number. Always go on the side of caution when it comes to the Revenue.
3. Should I register anyway?
There are pros and cons for registering even if your turnover is less than €37,500/€75,000.
Lets look at the pros first.
Reasons why you should register for VAT even if you’re below the VAT threshold
1. You can claim back what you spent
Registering for VAT means that you can claim back the VAT that you’ve paid on products and services for your business.
Getting a refund of monies that you’ve paid out is a good thing, after all, cash is king.
2. You are ready for growth
As soon as you go over the threshold, you have to register. Registering before hand means its one less thing to worry about.
Reasons why you shouldn’t register for VAT even if you’re below the VAT threshold
1. Higher prices
Because you’re adding VAT, your prices will be higher than if you weren’t. While other businesses may not mind this, if you’re selling to consumers or businesses not VAT registered, they may have some pushback on it.
2. Extra paperwork
As a VAT registered business, you become the tax collector for the Government. There is extra paperwork that needs to be completed. If you submit late or incorrectly, then you are subject to fines and penalties.
So it’s a business decision that you have to make. Take advice from your accountant aswell.
4. Which basis do I register for?
There are two ways to calculate your VAT.
1. Cash receipts basis
This is where you pay the VAT when you get paid on your invoices. You get paid, the Revenue gets paid.
You can use this basis if your expected annual turnover will be less than €2 million a year. You can also use this method if at least 90% of your products or services is bought by customers who are not registered for VAT.
2. Invoice accounting
This is where you are accountable for VAT on every invoice you issue. This is regardless of whether you get paid on that invoice in the VAT period. It is a drain on cash flow especially if you’re taking anything from 60 plus days to get paid.
It’s entirely up to you which method you use but the latter option certainly helps with cashflow.
Talk to TaxPlus Accountants and we can advise you on your individual situation. If you’re not registered, we can advise you a time to register, the basis upon which you should register and which rates apply to you.
If you are registered, make sure you are paying the right VAT rate for your products and services.
TaxPlus Accountants are accountants who serve the North East of Ireland. We bring simplicity to your accounts with proven results. We provide a complete range of accounting and book-keeping services to businesses operating a manufacturing, retail or service business.
Call us on 041 9844525 or email firstname.lastname@example.org