Kieran Coughlan: How not to be surprised by a big VAT bill

Kieran Coughlan: How not to be surprised by a big VAT bill

"We must add on the vodka and tonic."

A client was recently going through his costings on a building project with me, and his reference to cocktails of the alcoholic variety left me bamboozled.

I wasn’t sure what drinking spirits with mixers had to do with his costings, and doubted sincerely that turning to alcohol would speed up the project, until the penny dropped, and I realised his reference was slang for value added tax.

His comments have prompted me to cover some key Vat principles that are often overlooked by business persons, and indeed by private individuals and farmers, which can leave them surprised by a big Vat bill.

Firstly, farmers are pretty unique when it comes to Vat, in that they can remain unregistered for Vat, or can choose to register, and in doing so, claim back Vat on purchases used in their business, and pay Vat on their sales.

An unregistered farmer can reclaim Vat on fixtures and fittings, building work, roadways and fencing, but cannot claim back Vat on movable goods, repairs, or day-to-day consumables.

Instead, such farmers are compensated with a flat rate farmers addition top-up to their sales price.

In my experience, as a broad rule of thumb, tillage farmers are predominately better off registered for Vat.

Beef farmers are also generally better off registered for Vat, albeit the administrative costs can make registering not worthwhile, and dairy farmers are predominantly better off remaining unregistered.

Of course, each farm is different, and what’s good for one may not be good for another.

Equally, choosing the right path might vary at different phases of a business lifecycle.

For example, it might be better to be registered for Vat for a while, when incurring a lot of otherwise unrecoverable Vat costs, and then to deregister at a different phase.

As a side note, there are rules which seek to limit the advantages of swapping in and out of Vat registration with impunity.

The “normal” rule that applies to most other businesses is that when the annual turnover in any 12-month period exceeds €37,500, in the case of services, or €75,000 in the case of goods, then the business is obliged to register, and charge and remit Vat as appropriate to Revenue.

For farmers, the registration thresholds needn’t be adhered to in respect of the supply of the majority of farming goods, but must be adhered to in respect of the supply of agricultural services.

Therefore, for example, a farmer supplying agricultural contracting services is obliged to register for Vat, once his turnover exceeds or is expected to exceed the threshold of €37,500.

There is a little wriggle room on that figure, thanks to yet another rule!

Once a farmer is obliged to register for Vat, as a result of exceeding the services threshold, then he or she is obliged to account for Vat on all supplies.

In practical terms, this means that a farmer supplying contracting services totalling more than €37,500 in any 12-month period is obliged to register for and account for Vat at the appropriate rate on all of their sales.

So, a farmer, engaged in beef farming, for example, and also providing agricultural services for a consideration exceeding €37,500, must register for Vat, and account for Vat on cattle sales and contracting sales.

Indeed, a farmer carrying on two separate trades, and who is registered for Vat in respect of one trade, must also register for Vat in respect of his farming trade.

For example, a part-time beef farmer also works as a Vat-registered, self-employed mechanic.

He must register for Vat in respect of both trades.

Apart from exceeding the thresholds for the supply of services or goods as described above, other rules can also make it obligatory to register for Vat.

These can include instances where an otherwise unregistered farmer acquires goods in excess of €41,000 from another EU state, or where the farmer acquires a new means of transport from another EU state.

For example, an Irish dairy farmer, who is unregistered for Vat, buys a second-hand tractor from the UK.

The price of the tractor is €60,000 inclusive of UK Vat of 20%.

He trades in his old tractor for €30,000 to the dealer, and writes out a cheque for a net figure of €30,000.

In this instance, the Vat unregistered Irish farmer has neglected his duty to register for and properly account for Vat.

What should have happened is that the Irish farmer registers and obtains an Irish Vat number solely for the purpose if the import; and quotes his Irish Vat number to the UK dealer — at which point the UK dealer charges the farmer an ex-Vat price of €50,000, less the trade-in of €30,000, meaning the farmer writes a cheque to the UK dealer for €20,000.

At the point of import, the farmer pays Irish Vat at 23% costing him €11,500.

So the total cost to the Irish farmer under this arrangement has been €31,500, which of course is more expensive than what he initially thought it was going to cost him.

But them’s the rules.

The reason behind this rule is to prevent unfair competition allowing consumers to effectively shop in the EU country with the cheapest Vat rate, to the detriment of their own domestic economy.

Similarly, private Irish individuals who purchase new means of transport in another EU state, and bring such a vehicle back to Ireland, must pay Irish Vat at the point of import into Ireland.

For example, an Irish person buys a lovely new yacht for personal use in Luxembourg, and sails home to Ireland, thinking he’s saved himself a packet.

The Vat rate in Luxembourg is 17%, versus our 23%.

Unfortunately, the yacht buyer will get a sinking feeling when he discovers that not alone has he paid Vat in the wrong country, but that he must also pay 6% more than what he had expected.

The upshot is that Vat is tricky stuff, it’s always a good idea to check out whether you’re on the right side of the law.

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