When you are starting your own business, whether as a sole trader, partnership or a company, you need to determine if you are obliged to register for VAT and what VAT rate should be applied to your sales. Once registered VAT charged on sales needs to be paid to the Revenue Commissioners (after deducting VAT on purchases and expenses) on a timely basis.
Who needs to register?
The main reason for registering for VAT is that the business engages in the supply of taxable goods or services within Ireland.
A business whose turnover, in any twelve month period, does not exceed or is not likely to exceed €37,500 (in the case of supply of services) or €75,000 (in the case of supply of goods) is not obliged to register for VAT.
A business that does not, nor is likely to, exceed the relevant limit may still elect to register for VAT and will be obliged to charge and account for VAT on sales and can claim back VAT on purchases.
A word of warning. When you first commence in business you may not need to register for VAT due to turnover being under the threshold. However, once turnover exceeds the threshold, you will need to register and subsequently your sales prices will increase by the VAT amount. This is not normally a problem if you are selling business to business as your customer can claim back the VAT. However, it may cause problems if you are selling to the general public or to businesses not registered for VAT. These customers cannot claim back the VAT and may not be willing to pay higher prices.
Other reasons for VAT registration are:
- The business makes intra Community acquisitions of goods.
- The business receives fourth schedule services (for business purposes) from abroad. Fourth schedule services include consultancy services provided by accountants, lawyers, consultants and engineers. All persons, other than private individuals, who receive fourth schedule services from abroad (for business purposes), must self account for the Irish VAT and must therefore be registered for VAT regardless of the above.
- The business is involved in property transactions within the State and needs to register for VAT as a result of same.
Certain business activities are exempt from VAT and are not permitted to charge VAT on their sales. Although they may be required to register for VAT if they are in receipt of fourth schedule services as outlined above.
Examples of exempt activities are certain financial services, education, medical services, charities and taxis.
When it comes to VAT rates, there are no hard and fast rules. For example, there is a myth that goods are at 21% and services are at 13.5%. It is not as simple as that. Luckily the Revenue Commissioners have an index of VAT rates online which contains the VAT rates of thousands of services and goods. It is a good start when determining which VAT rate you should be charging on your sales. However, unless your business is straightforward, we advise seeking the advice of your local tax office or a professional advisor, before you start issuing invoices or setting up your cash register.
VAT returns are normally prepared on a bi-monthly basis (e.g. January/February would be returned together). The VAT on sales for the two months as well as the VAT on purchases for the two months must be entered on the return and the difference paid over to the Revenue Commissioners. The deadline for submission of the return is the 19th day of the month following the VAT period (e.g. 19th March for the January/February return). If the return is filed and paid online (ROS) then the deadline date is extended to the 23rd of the month. To register for ROS, go to www.revenue.ie.
Some businesses can prepare VAT returns on a six-monthly basis (whether the annual VAT liability is €3,000 or less) or four-monthly (VAT liability between €3,001 and €14,400). However, I always advise clients to prepare their VAT returns on a bi-monthly basis if possible as it ensures that the books and records are kept up to date and doesn’t allow a large VAT liability to build up over 4 to 6 months. Some clients have a separate bank account where they lodge the VAT portion of each sale so when it is time to pay their VAT liability they have the funds available.
Remember to file returns on time, otherwise penalties and/or interest will be applied – even if only a few days late.