What is VAT?
VAT is a tax on consumer spending. It is collected by VAT-registered traders on their supplies of goods and services effected within the State, for consideration, to their customers. Generally, each such trader in the chain of supply from manufacturer through to retailer charges VAT on his or her sales* and is entitled to deduct from this amount the VAT paid on his or her purchases.
[* In some circumstances, particularly in the construction industry, VAT is not charged by the supplier, but instead the customer simply accounts for the VAT as if it had been charged.]
The effect of offsetting VAT on purchases against VAT on sales is to impose the tax on the added value at each stage of production – hence Value-Added Tax. For the final consumer, not being VAT-registered, VAT simply forms part of the purchase price.
What is VAT charged on?
Most goods or services supplied in Ireland are subject to VAT. Goods imported into Ireland from outside the E.U. are also subject to VAT – this is charged by Customs at the point where the goods enter the State. In addition, where a person engaged in business in Ireland receives goods from a trader within the E.U., or services ( with certain exceptions) from any trader established anywhere outside Ireland, including outside the E.U., he or she is generally required to account for VAT on the receipt of the goods or services as if he or she had actually made the supply. This applies to traders generally, and also to other bodies that would not normally register for VAT, such as local authorities, government departments, charities etc.
What are the rates of VAT?
VAT is charged at a number of different rates. See Current & Historic VAT Rates. Most goods and services in Ireland are liable to at the standard rate of VAT. There is also a reduced rate, a second "temporary" reduced rate and a zero% rate. These lower rates cover a mix of goods and services and cannot be easily categorised. However, it is worth noting that the reduced rate, the temporary reduced rate applies to a number of labour-intensive services, and the zero% rate applies to many foods and medicines, and to children’s clothes. Finally, there is a special rate which applies principally to the sale of livestock by VAT-registered traders only. (There is a special scheme dealing with agricultural supplies made by farmers, who are generally not required to register for VAT). In addition to these rates, there are a number of activities which are exempt from VAT. These include many services supplied in the public interest, for example in the areas of health, childcare and education. The goods and services that are exempt from VAT as well as the goods and services that are liable at the zero or reduced rates are all listed in VAT legislation. All other goods and services are standard rated and accordingly there will never be a complete list of standard rated goods and services.
Who must register for VAT?
A trader is generally required to register for VAT for making supplies of goods and/or services, subject to his or her turnover exceeding certain thresholds. The most common are €37,500 for the supply of services, and €75,000 for the supply of goods. Some traders are generally not required to register for VAT, although they may choose to do so. These include traders whose turnover does not exceed the thresholds above, and also farmers. Traders engaged in exempt activities are not permitted to charge VAT. However, they may, in common with farmers, Government Departments and other bodies be required to register for VAT, in order to account for VAT on services or goods received from suppliers outside Ireland.
Accounting for VAT
The basis of the VAT system is the invoice issued by a VAT registered trader in respect of a supply of goods or services. Each such invoice must contain specific information, including the VAT number of the supplier, the rate of VAT, and the amount of VAT charged. In the case of supplies to which the reverse charge is applied the rate and amount will not be required. The customer, if registered for VAT, may generally reclaim or deduct all VAT charged to him or her on foot of a valid invoice (no deduction is allowed in respect of certain items, such as passenger motor cars and entertainment expenses). In some circumstances, it may be agreed that the person receiving the goods or services may issue a 'settlement voucher' to the supplier, rather than an invoice passing the other way.
The document used by traders to account for VAT is called a VAT Return (Form VAT 3). This must be filled out by a trader at the end of each taxable period. A taxable period is normally two months long, and is counted from the start of the year – January/February is the first one each year. The VAT return will contain figures reflecting the transactions carried on by the trader, including the amount of VAT charged by him or her, and the amount of VAT that he or she wishes to reclaim. Any imbalance between these two figures will indicate either a payment of tax due from the trader to Revenue, or a repayment due from Revenue to the trader. In certain circumstances, a trader may be permitted to make returns at different frequencies.