VAT – Back to Basics

Are you a new business? Are you an existing business? Have your circumstances changed? If so, do you need to be registered for VAT? Any business selling products or services must register for VAT (unless its supplies are VAT-exempt) if the turnover exceeds certain thresholds as follows:

– €37,500 per annum on the supply of services

– €75,000 per annum on the supply of goods.

If turnover levels are expected to be below these limits, a business can elect to register for VAT even though it is not required to do so. This may be advisable if a significant amount of VAT has been incurred on commencing a business such as pre-trading expenditure.

VAT can be accounted for on an “Invoice Basis” or a “Cash Receipts Basis”. The advantage of cash receipts basis is that VAT can be paid on the basis of when cash is received rather than when the invoice is issued. This can have a huge beneficial effect on cashflow.  To be eligible to account for VAT on cash receipts basis, annual turnover (excluding VAT) must be less than €1 million or 90% of turnover is from Vatable supplies to non-VAT-registered people.

The rate of VAT chargeable on your supplies will depend on the nature of the product or service. The supply of certain goods and services is exempt from VAT, while other supplies are subject to VAT at rates of 0%, 13.5% or 21% and for farmers 4.8% and 5.2%. If the supplies are VAT-exempt, you will not be entitled to recover any input VAT on your costs. Generally, VAT can be reclaimed on expenditure incurred wholly and exclusively for the purpose of the business. As with every rule, there are exceptions – no business can recover input VAT on expenditure on any of the following, even when the goods and services are used for the purposes of the business:

  •  personal services
  •  accommodation other than qualifying accommodation in connection with attendance at a qualifying conference
  •  food or drink
  •  entertainment expenses
  •  the purchase, intra-Community acquisition or importation of petrol (other than as stock)
  •  contract work involving the handing over of goods when such goods are themselves not deductible.

Valid VAT

Invoices VAT law contains specific requirements in terms of the information that must be included on invoices, including the date of issue, a sequential number, the full name, address and VAT registration number of the supplier, and the full name and address of the customer.

Applying the correct VAT rate to your supplies is essential, and it can be a complex process if you are supplying a variety of products or services.

If you are not charging the correct rate of VAT or if you are claiming VAT inputs incorrectly, you may be subject to significant interest and penalties should the matter be uncovered during a Revenue audit.

Cancellation of VAT registration

A person who has elected to register for VAT (even though not required to do so by law) may cancel their registration. However, it is a condition of such cancellation that they pay to Revenue any excess of VAT refunded to them over the tax paid for the taxable periods during which the election had effect or three years prior to the date of application for cancellation, whichever is the lesser. In certain circumstances a cancellation of registration will give rise to recovery by Revenue of net VAT repaid to the person during the period of election.

A person whose turnover has fallen below the appropriate turnover threshold may deregister for VAT. So long as the business did not originally elect for registration there will be no clawback of any VAT refunded previously.

Where a farmer who would not otherwise be an accountable person has elected to register for VAT and wishes to cancel that election then the review period is also the period for which the election had effect or three years, whichever is the lesser.

VAT can be quite a complex area with almost as many exceptions as there are rules. If you are involved in any business transactions that are different to your normal day to day transactions, in particular in relation to any property transactions, you should seek professional advice in advance.