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.

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.

Do you want to know how to minimise your taxes each month and maximise your take home pay? iContracting provides a full-service package including the formation of a Limited Company, minimising personal involvement in financial administration.
Visit today.

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