Does my Irish company need to apply for VAT Registration?
Once you have incorporated a company the next step to consider is Corporation Tax and VAT Registration. It is mandatory to register for corporation tax, but it is not mandatory to register a VAT number for an Irish Company until a turnover threshold is met. However, a company can elect to register for VAT, the benefit of this is that the company may get a deduction for VAT incurred on its purchases.
Setting up a business can often be one of the most challenging and exciting times for the owners/ individuals involved. While tax and VAT is often an area that people feel the most daunting, but this doesn’t need to be the case. This article attempts to clarify some of the main reasons a company would voluntarily declare for VAT and the advantages which can arise.
What is VAT?
VAT is short for ‘’Value added tax’’ and is an ‘’indirect’’ tax, meaning that it is not levied or controlled by the Irish government.
The Irish government cleverly transforms Irish business owners into ready made employees of the government, as it is each businesses owners own responsibility to calculate, file and declare their own tax returns.
Generally speaking, it is the final customer who would be at a loss when it comes to paying VAT.
Businesses that are VAT registered usually have the advantage of claiming back the VAT which they paid their suppliers on the invoices.
The VAT return process (VAT3) is quite a simple calculation, if the VAT you paid on your purchases to suppliers is greater than the VAT received on your sales from your customers and other sources of income, you are due a refund. Otherwise, you need to pay Revenue the difference of the two amounts.
The first issue which should be noted is that there are several requirements which the Irish government and Revenue have set in order for a company to successfully register for a VAT number.
Firstly, the company must have begun trading in order to register for any Tax or VAT in Ireland.
This system may seem a little different and ‘’backwards’’ to individuals who have traded in other countries, however, it is simply how the system works in Ireland.
Each company must meet certain requirements, such as:
- Having its own physical presence in the Republic of Ireland from which it works or trades.
- Having either an employee or director living in the country in order to show that there are individuals looking after the daily running of the business.
- Finally, the company must show evidence of trading in order to register for VAT.
This can often be shown by simply providing an invoice to a customer living in Ireland.
(This invoice does not have to be a certain/minimum amount, it must simply show that there has been trade with customers in the Irish market).
Voluntarily registering for VAT
Some people may view the process of VAT registration just about as pleasant as a trip to the dentist, this is the reasoning a lot of individuals often seek professional assistance when it comes to VAT registration.
The reason being that many promising business people view tax and VAT registration as a potential manner to improve their business operations as opposed to viewing the matter as a ‘’chore’’.
However, as mentioned, the optimist individuals of the business world often attempt to capture value in nearly every transaction and daily routine in which they perform.
To many people’s surprise, VAT in the business world could become a catalyst for the businesses life and capture unexpected value.
One area where this can be evident appears in tax credits. A business has the opportunity to claim back a certain amount of expense on transactions in regard to the VAT paid on an invoice.
VAT may also offer a certain image of professionalism for business customers, partners and suppliers.
It may also give the delusion to some business colleagues that they will be receiving a percentage of their own money back, should they take advantage of claiming VAT back on purchases.
Going back to a theoretical aspect, the cognitive avoidance theory can also be seen to be present in terms of VAT registration.
Put simply, this theory states that people often act in a certain way or perform certain tasks in order to avoid punishment. This theory can be relevant to this discussion regarding VAT registration. Should a company actually be legally required to apply for VAT registration yet fail to do to so, the penalties for such acts can be very high, for instance, a fixed penalty for failing to register for VAT is €4,000
Currently, there is a legal requirement to register a VAT number for an Irish Company, if you go over or can reasonably predict that you will go over the VAT registration thresholds.
The VAT thresholds for providing services currently stands at €37,500, while the threshold for goods and services, or simply goods stands at €75,000.
There are of course a number of other thresholds for different services being provided. In addition, registration for companies trading in Ireland is compulsory in the following scenarios:
- Distance sales from outside the Irish region into Ireland to the amount of €35,000;
- Acquisitions from other countries located in the EU to the amount up to €41,000;
- Foreign trade, even when turnover is zero for the company trade.
Should the nature of your business go over the designated threshold, then there will be a legal requirement to register for VAT.
Invoice/Cash basis registration
There are 2 main types of registrations a company can apply for.
As the title of this section has already provided a spoiler to this question, the answer is, of course, cash basis and invoice basis.
Put simply, this would state whether the company chose to file and pay its VAT bill either when the invoice is issued, or alternatively when payment is received for the service/goods provided.
Many start-ups often choose to select the cash basis, as this can be more beneficial in the daily operations of the business. It would also mean that the company would only be liable for VAT when it actually receives payment and not beforehand.
The alternative would be an invoice basis. This could potentially be a strain on the business with regards to its cash flow, as the company would be liable to pay the VAT the second the invoice is issued, however, the customer may not pay for the service for a number of months.
What VAT rate should I charge?
To make things that little bit more complicated, the Irish government and Revenue commissioners have created a number of different tax brackets in which a company can fall into.
There are currently four main tax rates in Ireland which a company can fall into.
- Exempt – examples include certain financial, medical and educational companies and providers. They don’t charge VAT on their sales to customers and as a result, they are not entitled to claim VAT on their purchases from suppliers of the company.
- Zero – the main example would be companies providing food and drink as their line of business. They charge a 0% VAT rate; however, they are entitled to claim back the VAT paid on their purchases from suppliers.
- 13.5% – two examples would be the building service providers and photography services. They can charge a reduced VAT rate and still have the ability to claim back the VAT paid on their purchases for the business.
- 23% (Increased from 21% on 1st January 2012) – This would be the normal and generic tax rate in which most businesses and individuals would fall into.
There’s no simple answer as to which tax rate a company should fall into, unfortunately, as the products and services which the company sells and provides would best establish the tax bracket.
The majority of businesses and companies, however, would fall into the 23% category, although it is important to remember that a company could have a number of different tax rates, depending on the number of services and goods which they provide.
After all of this process has been completed, there is the matter of submitting the VAT returns.
If you are VAT registered, you will be required to submit VAT3 returns on the 19th of the month following the VAT period.
For example for the first return, January to February, your submission must be completed and returned by the 19th of March.
If however you are a bit more technology minded and are registered with the Revenue Online System (ROS), you will have a little bit extra time and have until the 23rd of the month to submit such files through the online submission.
These submissions are done either on a monthly basis or alternatively on an annual basis should there be a low level of return.
As initially stated the main purpose of this article was to provide a little bit of information on VAT.
Due to the excessive level of information available and guidelines put in place, it was hoped to send only the relevant information which might be of relevance to new business owners.
The secondary goal of this piece was to demonstrate the number of benefits which a company can claim as a result of VAT registration, and how the process may not be as daunting as it first appeared.
For more information on registering an Irish company, or for assistance with ensuring your company is VAT compliant, please don’t hesitate to contact the experts at RegisterACompanyinIreland click here.