After you’ve formed your business, the following step is to register for Corporation Tax and VAT. The registration for corporation tax is required, however the registration for a VAT number for an Irish company is not required until a certain turnover threshold is reached. A firm can, however, choose to register for VAT, which has the advantage of allowing the company to deduct VAT paid on purchases.
For the owners/individuals involved, starting a business can be one of the most hard and exhilarating times of their lives. While tax and VAT are frequently the most intimidating topics for people, this does not have to be the case. This article aims to clarify some of the key reasons why a business may voluntarily declare for VAT, as well as the benefits that can result.
What is Value Added Tax
VAT stands for “Value Added Tax,” and it is a “indirect” tax, meaning it is neither imposed or regulated by the Irish government.
Because it is each business owner’s obligation to compute, file, and report their own tax returns, the Irish government skillfully transforms Irish business owners into ready-made government employees.
In general, when it comes to paying VAT, it is the ultimate consumer who is at a loss.
VAT-registered businesses typically have the advantage of reclaiming the VAT they paid on invoices to their suppliers.
The VAT return procedure (VAT3) is a straightforward calculation: if the VAT you spent on purchases from suppliers exceeds the VAT you earned on sales from customers and other sources of revenue, you are entitled to a refund. If you don’t, you’ll have to pay Revenue the difference between the two sums.
Registration for the Value Added Tax
The first point to mention is that the Irish government and Revenue have established a number of standards that must be met in order for a firm to properly register for a VAT number.
To register for any tax or VAT in Ireland, the firm must have started trading.
Individuals who have dealt in other nations may find this approach strange and odd, but it is simply how the system works in Ireland.
Each business must satisfy specific criteria, such as:
1.Having its own physical presence in Ireland, where it operates or trades.
2.Having either an employee or a director residing in the nation to demonstrate that the firm is being managed on a daily basis.
3.Finally, in order to register for VAT, the firm must provide evidence of trading.
Simply delivering an invoice to a consumer in Ireland may frequently demonstrate this.
This invoice does not have to be for a specific or minimum amount; it only has to indicate that business was conducted with clients in the Irish market.
VAT registration on a voluntary basis
Some people may find the procedure of VAT registration to be about as enjoyable as going to the dentist, which is why many people seek expert help when it comes to VAT registration.
The reason for this is that many aspiring entrepreneurs see tax and VAT registration as an opportunity to improve their business operations rather than a “chore.”
However, as previously said, business optimists frequently strive to capture value in practically every transaction and everyday routine they do.
VAT in the business world could, to many people’s surprise, become a spark for the life of the business and capture unanticipated value.
Tax credits are one area where this is noticeable. In relation to the VAT paid on an invoice, a firm can claim back a specific amount of transactional expenses.
For company customers, partners, and suppliers, VAT may also project a professional image.
It may also convey the impression to certain business associates that if they claim VAT back on purchases, they would be receiving a part of their own money back.
Returning to the theoretical side of things, the cognitive avoidance theory can also be seen in terms of VAT registration.
Simply put, this idea suggests that people often act in specific ways or complete certain activities to avoid punishment. This hypothesis may be applicable to the current VAT registration debate. If a corporation is legally required to apply for VAT registration but fails to do so, the consequences might be severe; for example, a fixed penalty for failing to register for VAT is €4,000.
Thresholds for Value Added Tax
If you go over or can reasonably foresee that you will go over the VAT registration thresholds, you must currently register a VAT number for an Irish company.
- Distance sales of up to €35,000 into Ireland from beyond the Irish territory;
- Acquisitions of up to €41,000 from other EU nations;
- Foreign trade, even if the corporate trade has no turnover.
If the nature of your business exceeds the designated level, you will be required by law to register for VAT.
Registration on an invoice/cash basis
A corporation can apply for one of two types of registrations.
The solution to this question is, of course, cash basis and invoice basis, as the title of this section has previously shown.
Simply put, this indicates whether the firm opted to submit and pay its VAT bill when the invoice was issued or when payment was received for the service/goods delivered.
Many start-ups prefer to operate on a cash basis since it is more convenient in the day-to-day operations of the company. It would also imply that the firm would only be responsible for VAT after receiving payment, rather than before.
A different option is to work on a per-invoice basis. This could put a strain on the firm’s cash flow because the company would be responsible for paying the VAT the moment the invoice is issued, but the client may not pay for the service for several months.
What should my VAT rate be?
To make matters even more difficult, the Irish government and Revenue Commissioners have devised a variety of tax bands into which a business might fall.
In Ireland, there are four primary tax rates into which a corporation might fall.
- Exempt – organisations and providers in the financial, medical, and educational sectors are examples. They do not charge VAT on their client sales, and as a result, they are unable to claim VAT on their purchases from the company’s suppliers.
- Zero – the most obvious example would be businesses that sell food and beverages. They charge no VAT, but they are eligible to reclaim the VAT they paid on their purchases from suppliers.
- Building service providers and photographic services, for example, account for 13.5 percent. They can charge a lower VAT rate while still being able to recover back the VAT they spent on commercial purchases.
- 23 percent (up from 21 percent on January 1, 2012) – This is the standard and generic tax rate that most firms and individuals would be subject to.
Unfortunately, there is no clear answer as to which tax category a company should be in, as the items and services that the company sells and offers will determine the tax bracket.
The bulk of enterprises and corporations, on the other hand, would fall into the 23 percent tax bracket, though it’s worth noting that a company could have multiple tax rates depending on the number of services and items it offers.
Please don’t hesitate to contact the professionals at TAS Consulting if you need help ensuring your firm is VAT compliant.