What to do on VAT is one of the most common queries start-ups have. Here we explain what VAT is, what types of business need to register, how you should account for it and what rate you should charge.
When you register for VAT you effectively become an unpaid collection agent for the Revenue Commissioners, lucky you… You will now have to keep accurate books and records and make a return every 2-3 months (or annually in some cases). You have a new field on your invoices called “VAT” which you charge customers. You are also now entitled to reclaim VAT on most goods and services you have incurred for example a new laptop, your accountants’ fees etc…
You will be looking at the difference between the VAT on your invoices out versus the VAT on invoices in. At the end of each VAT period you hand over the difference to revenue. The VAT never belongs to you, it belongs to them…
Should you register? Well do you expect to turnover more than €37,500 if you provide a service or €75,000 if you provide a good? If yes is the answer to the second question then yes is also the answer to the first.
If you are below these limits you do not have to register but many still opt to do so from the start voluntarily. What are the considerations?
- You may expect to hit the thresholds in year 2 and want to establish good habits early on
- Being VAT registered may give your business the impression of being more established from the get-go.
- You can claim back VAT on your purchases
- Are your customers VAT registered businesses or end users read regular punters? If they cannot reclaim VAT themselves it may make you appear more costly
- You should consider additional administrative time and cost
It is possible to de-register but you should consider carefully whether registering voluntarily is the right thing to do for you now.
So, how much do you charge? There are generally three rates of VAT. The most common, 21% is charged on most goods and services. 13.5%, known as the “reduced rate”, is charged on “non luxury” services such as electricity, certain food and drink etc. 0% VAT is charged on essential goods such as medicine, children’s clothing etc. It is also charged on certain exports.
There are also some goods and services that are exempt from VAT regardless of turnover. These are mainly services that are in the public interest and include professional medical services, educational services (e.g. playschool) etc.
The main difference between the 0% and the exempt rate is that a business which supplies goods and services at 0% can reclaim VAT on purchases. Businesses that supply VAT exempt goods or services are not entitled to reclaim any VAT on purchases. If you are not sure what rate of VAT you should charge seek professional advice.
Normally, VAT is accounted for when you issue a sales invoice. Under this method, if your customer does not pay for 2 or 3 months you still have to pay Revenue. This causes small businesses to run in to cash-flow difficulties. To avoid this, consider seeing if you can avail of the “cash receipts” basis of accounting for VAT. Under this method you only pay Revenue for VAT on sales when your customer pays.
The following types of business can qualify for the cash receipts basis:
- Business with annual turnover less than €1 million; or
- Business where 90% of sales are to non VAT registered people.
If a business does not qualify for the cash receipts basis they should review their debtors. If any debts are “bad” then they should reclaim any VAT paid on these bad invoices.
Lastly, a VAT registered business can reclaim VAT incurred on most expenses. However, VAT cannot be reclaimed on the following:
- Entertainment expenses
- Petrol (can reclaim VAT on diesel)
- Accommodation (unless in a qualifying conference)
- Personal expenses