Watch out for Vat pitfalls when carrying out farm business
The vast majority of farmers are unregistered for Vat, and similarly, private consumers' only interaction with Vat is paying it as a cost as a final consumer.
Vat is one of those taxes that need special care and attention or the consequences of not applying the rules correctly can result in a major blowout.
Unfortunately, Vat is also one of those taxes which does not come to mind readily, especially so if one is not used to applying Vat. The vast majority of farmers are unregistered for Vat, and similarly, private consumers' only interaction with Vat is paying it as a cost as a final consumer.
Some other businesspersons such as medical practitioners and those operating in the insurance industry do not charge Vat, as their supplies are exempt from VAT.
The majority of other businesses in the country such as builders, shopkeepers, accountants and mechanics charge Vat on their sales and can claim Vat back on their input costs.
As such, this cohort has the advantage of being aware that their activities can be vatable. Individuals who supply services and goods do not have to operate Vat and can remain unregistered where the supply of services remains below €37,500 per 12-month period and €75,000 in respect of goods.
One Vat pitfall that can occur arises when a person fails to register for Vat, having exceeded the relevant thresholds — this can happen where a business is growing.
Another pitfall arises when an individual makes an assumption that their activities are exempt from Vat, for instance, someone supplying homoeopathy or acupuncture is obliged to register for Vat where their total income is over the prescribed limits.
Yet a further pitfall arises when an individual is carrying on two potentially taxable trades, in which case the combination of the two activities should be aggregated for the purposes of determining whether the threshold is exceeded.
For instance, a person providing yoga classes, and aromatherapy, would need to determine if their total income exceeds the relevant annual thresholds.
Another pitfall can occur when a farmer who is normally regarded as not Vat registered becomes registered in respect of a second trade, which causes their farm business also to become registered for Vat.
For example, a farmer who also undertakes work as an electrician. His electrician income exceeds €37,500 in 2022, which causes his farm business to lose its Vat unregistered status.
Mistakes can also be made in relation to claiming Vat back on certain inputs which are debarred from being deductible.
Such costs which are not allowable include; food (except as stock in trade), entertainment, petrol (other than stock in trade), accommodation (except for certain conferences), entertainment, passenger cars (exceptions apply) and other personal costs. As can be seen, there are a host of exceptions and special rules applying to specific situations.
Another Vat pitfall that has become much more apparent over recent years as a result of Brexit is the application of Vat on the import of goods from outside of the EU.
An example of this includes the importation of second-hand cars, even where such cars were owned by private individuals in the UK who would not charge Vat to a customer based in the UK. At the point of import into Ireland, Vat now applies as well as VRT and Nox taxes. Yet more pitfalls can arise in relation to the development of the property.
Vat can apply where an individual is carrying on a business. An individual who is not a builder buys an old building which was formerly a commercial premise. There was no Vat paid on the purchase of the property. The individual applies for planning to convert it into three residential units and employs a builder to undertake work on the conversion. From a Vat perspective, the change in use of the building along with the motives of the owner means the property sale is now subject to Vat on the whole sales proceeds even though no Vat was claimed on the purchase.
Each of the above scenarios highlights how Vat can creep into transactions and without careful consideration, a hefty tax cost can arise.
Getting professional advice ahead of time is the surest way to avoid Vat pitfalls. Professional tax advice should be obtained appropriate to each specific circumstance.
