VAT is a tax on consumer spending, administered entirely by traders who collect VAT from their customers and who hand it over (less the tax they pay to their suppliers) to the Collector General.
- Once a company’s turnover exceeds, or is expected, in a particular year to exceed, a threshold of €75,000 in respect of the supply of taxable goods or €37,500 in respect of the supply of taxable services then they must register. If the company’s turnover is below the threshold, they may register voluntarily. In general, if most of the company’s sales are to other businesses, then it is advantageous to register. Most goods and services attract VAT, though a few, such as financial, medical, and educational activities, are exempt from VAT.
- If the goods/services a company supplies are subject to VAT they can reclaim all VAT on purchases relating to the business. If the goods/services supplied are VAT exempt the company may not reclaim any VAT on purchases.
- If a company supplies a mix of products/services (exempt and not exempt) they are entitled to reclaim a portion of the VAT on purchases – ratio of sales of exempt products/services to non-exempt.
What are the current VAT rates?
If the company provides exempt supplies, then they will be unable to recover the VAT paid to suppliers; if they provide zero-rated supplies then you can recover the input tax.
How to calculate what to pay?
A company will buy supplies at a price, plus VAT. They will also sell goods or services at a price, plus VAT. You deduct the VAT paid on purchases from the VAT collected on sales and pay the difference to the Collector General (or receive a refund if the VAT paid on purchases exceeds the VAT collected on sales).
If a company is registered for VAT, the Collector General will send a VAT3 Form usually every two months, to be completed and returned with the payment due (or if a refund is due, the Collector General will forward a payment to the company’s bank account) before the 19th day following the end of the bi-monthly taxable period. Returns can also be made electronically, via the Revenue on line service (ROS)
In the past, VAT became payable as soon as a sales invoice was sent (even though money may not have been received yet) and became deductible as soon as a purchase invoice is received (even though money may not have been paid yet). A company can still account in this way, however, they can also now account for VAT under the 'cash receipts basis' which has the advantage that they do not need to account for the output VAT until they have been paid.
A company may opt to use the cash receipts basis if:
Ø 90% of turnover consists of supplies of goods and services to unregistered persons or
Ø annual gross turnover is not likely to exceed €1,000,000.
How often must the return be submitted?
Returns are made bi-monthly, but traders with low VAT liabilities may be permitted to make an annual VAT return.
Certain smaller taxpayers may make their VAT returns for accounting periods (by Collector General Concession) and VAT registered businesses in a permanent repayment position may apply to Revenue to file monthly returns.
What records must be kept to complete a VAT return?
- Sales invoices which clearly show
- Name, address and VAT registration number
- Name and address of the person to whom goods/services were supplied
- Date of issue of the invoice
- Date on which the goods/services were supplied
- Description of the goods / services supplied
- Quantity of goods supplied
- Price excluding VAT
- Rate and amount of VAT applied for each supply of goods or services.
- Purchase invoices (i.e., bills) must show suppliers' VAT registration numbers. It will help to record all purchase invoices in a Purchases Book.
- Credit notes - if these are issued to customers, they reduce the amount of VAT on purchases; if suppliers issue them, they reduce the amount of VAT on sales
- Cash Book and Cheque Payments Book.
Hints and tips
- Whilst the principles of VAT are simple, there are some complexities. The VAT guide is a very helpful reference book and the Revenue Commissioners publish an extensive list of factsheets. See www.revenue.ie for further details
- A company should invite the VAT office to send a representative when they first register for VAT to review personal and business circumstances and ensure that systems are in place which will serve the company’s needs.
- Keep VAT records for a period of 6 years, unless the Inspector of Taxes advises otherwise.