Getting to grips with VAT can be tricky if you’re just starting out in Business. Bullet sheds light on a few VAT basics, with some other stuff most guides don’t tell you.
Generally you have to register for VAT if you expect to turnover:
- €37,500 a year or more for a service based business, such as a Security Company or an IT Consultant
- €75,000 a year or more if you’re a product based business, such as a Manufacturing Business or Shop fitter.
- Some Businesses are Product/Service combined. The general rule here is to work off the €37,500 number if you think you might need to register
If you’re starting out part way through the year and your accounting from Jan to Dec, you may not hit the threshold that legally requires you to register for VAT immediately. One advantage of not registering could be that you can offer lower prices. There are some deceiving aspects to that however:
- Repeat Customers may feel the pinch when you do have to start charging them VAT
- Using prices that don’t include VAT on your Website or in your advertising material could set a precedent you may not recover from. It’s great to be able to undercut your competitors, but this may not be a clever way to do it in the long term. Customers may continue to demand the “VAT Free” price. If you have to give in, it means you’re reducing your profit!
‘It’s definitely worth considering to register for VAT, even if you don’t expect to hit the limit in your first year of business. You can offset VAT on your Purchases against the VAT you collect from your Customers. This reduces your costs and positively affects your Cash Flow. This scenario is especially handy if you’ve bought a lot of raw materials but have not offloaded much of your finished product yet or are waiting to get paid. On some occasions, you could have an excess of Purchases over Sales so you’ll be due a refund.
Another advantage is that VAT registered Businesses are generally regarded as more established and professional by prospective Customers.
The best way of paying your VAT is by using the Revenue Online Service. You can simply upload your VAT Return and pay your VAT by Direct Debit. Here’s the form to register. Bullet Software looks after the VAT Return for you automatically, so you just need to click a few buttons to send it off.
There are two ways of Accounting for VAT:
- Invoice Basis: You are accountable for the VAT on any invoice you issue during the Tax Period. This means you must pay the VAT charged on your Invoices, whether you’ve been paid yet or not. Bullet keeps you up to date on what VAT charges you’ve built up and the VAT return deadline. You could issue credit notes for invoices you’ve not been paid for in the period. Be cautious as this affects tracking of your Debtors Behaviour and deciding on Credit Terms in the future.
- Monies Received Basis: You are accountable for VAT only when you get paid by your customer. Use this basis if:(a) expected annual turnover will be less than €1,250,000 (increased to €2,000,000 Oct 2013)or (b) at least 90% of your expected annual turnover will come from supplying goods and services to persons who are not registered, e.g. hospitals, schools or the general public.
The majority of new business opt for the Invoice Basis, simply because they intend to use an Invoice Tool but this can often be a mistake. As you can see, the Cash Basis is the best option for your Cash Flow Management. You don’t have a VAT liability until you’ve actually been paid the VAT by your Customer. If one of your Debtors is slow to pay, you’re not out of pocket for the VAT you still haven’t collected. When you’re using Bullet Invoice Tool, you have the option to issue estimates for work done and simply convert the estimate to an invoice when you get paid. You can just go straight to invoice however, as it’s the Money Received that’s key, not the date of the invoice.
It’s important to maintain your Business Bank Account correctly in this case. Encourage your Customers to pay you by EFT (Electronic Funds Transfer) by putting your Bank Details on your invoices. Keep records of your lodgements and reconcile your Bank Account regularly. Records must be kept for 6 years. A Bank Reconciliation is simply matching items on your Bank Statement, such as lodgements, to items on your Accounts System such as Invoices. Bullet has a simple tool built in that makes it a breeze for you do this yourself, so you don’t need an Accountant.
Remember, it’s the final customer who actually pays the VAT, not you. You’re just obliged to collect and pass on the VAT to the Revenue Commissioners. Guess what, you’re a de facto Tax Collector. Isn’t that nice!
Once you’ve registered for VAT, you can some back here to sign up for Bullet. The first month is free and you only pay a low monthly fee after that.