5 things you need to know about VAT as a Contractor
This week, we’re exploring what VAT is, why it is important to understand VAT, and how exactly to implement VAT as a Contractor.
Peter O’Boyle from iContracting has outlined the top five things you need to know about VAT for Contractors, including an example of a contractor’s situation.
- Value Added Tax (VAT) is a form of taxation imposed by the State as a cost of doing business in Ireland, much like income tax or PAYE/PRSI. VAT is added on to the cost of goods or services in Ireland.
- A Limited Company or business is obliged to register for VAT if they supply professional services to their end users to the value of €75,000 in a 12-month period.
- As it is an ‘indirect’ tax or self-assessment, the onus is on the company to self-regulate itself and register for VAT as soon as they believe that this threshold will be reached.
- If the VAT on your company purchases is greater than the VAT on your company sales, you are due a refund. If not, you need to pay Revenue the difference.
- Failure to register for VAT or failure to file VAT returns when they fall due will incur penalties and interest by Revenue Commissioners.
Here is an example of VAT in a Contractors’ situation:
Erin, an IT engineer has set up a Limited Company, and has started trading and believes she will provide services to customers in the first 12 months of trading, worth €120,000. Therefore, Erin must immediately inform Revenue by way of registering for VAT.
Once registered for VAT, Erin must then charge VAT at the prescribed 23% rate for professional services on all services supplied to customers.
Hence if the first invoice raised amounts to €5,000, Erin must add on 23% VAT of €1,150 and show this separately on the invoice to her customer.
Gross total = €6,150, including VAT.
The customer then pays the €6,150 including the VAT to Erin.
Erin then pays the VAT amount of €1,150 to Revenue, less any purchase VAT if any was incurred in that period.
NOTE: Because most Umbrella Companies have numerous contractors providing services within that company umbrella, the VAT threshold will always be reached and therefore VAT will always apply.