Fundamentals of the Irish Vat System

Vat stands for Value Added Tax and is a tax on the supply of goods and services. Its basic structure is such that the person who pays for the vat element of any product or service is the final consumer and the person who collects the tax and sends it to the Revenue Commissioners is the business that provides the good or service. As a product is sold through the chain of distribution up to the final consumer each of the businesses in the chain can in turn claim the vat element that they have paid for the product or service from the tax man. So if a manufacturer sells a chair to a distributor the manufacturer charges vat and the distributor then claims this vat back from the Revenue Commissioners. The distributor then sells the chair on to a retailer and charges the retailer vat on the sale and the retailer claims this vat back. When the chair is sold to a private consumer the retailer charges the consumer vat on the sale and the consumer can’t claim this back and the retailer must pay the vat to the tax man. So up until the final consumer the vat position for the tax man is nil. The manufacturer charges vat to the distributor and then pays this vat to the revenue commissioners. The distributor however claims this vat back and so as the Revenue Commissioners receive the vat in it also pays it back out again.




In the construction industry a major financial anomaly arose because the main principal contractors who paid subcontractors claimed the vat that they were charged immediately however in some cases the subcontractor who charged the vat didn’t submit and pay the corresponding vat until much later, or may not have paid it at all. Therefore the revenue commissioners were at a huge loss. As a result a Reverse charge system was put in to place as and from 01 September 2009 which meant that the subcontractors no longer accounted for vat at all but instead the principal contractor accounted for both sides of the transaction in his vat return thus the net effect to the Revenue Commissioners is nil.



In practice how vat works is that a business registered for vat calculates how much vat it has charged on its sales for a certain period. It then calculates how much vat it has been paid on its purchases for the same period. If the vat on sales is more than the vat on purchases then the business owes the difference to the tax man and must pay it in a timely fashion or face interest and collection charges. If the vat on purchases is greater than the vat on sales then the business is owed vat from the tax man and will claim this back in its periodical vat return. Such refunds in Ireland can be offset against other outstanding tax liabilities or can be refunded to the business’s bank account if all its tax affairs are up to date.



In Ireland the periods for vat returns are every two months or four months or six months depending on the size of the annual vat liability of a business. At the end of each year a business must also submit a trading return showing the net values for vatable sales and purchases during the preceding year i.e. this is the amount of total invoices before vat is charged.

Subject to approval by the revenue commissioners a business may also set up a monthly direct debit for vat based on an estimated annual vat liability. The business then just puts in one annual vat return and pays or reclaims the difference between the total yearly direct debits and the actual return.



A further article will look in more depth at the actual procedures and processes of accounting for Vat in Ireland.



The turnover thresholds for registering for vat in Ireland are as follows:

• a) €37,500 in the case of persons supplying services,

• (b) €37,500 for persons supplying goods liable at the 13.5% or 21.5% rates which they have manufactured or produced from zero rated materials,

• (c) €37,500 for persons making mail-order or distance sales into the State,

• (d) €41,000 for persons making intra-Community acquisitions,

• (e) €75,000 for persons supplying goods,

• (f) €75,000 for persons supplying both goods and services where 90% or more of the turnover is derived from supplies of goods (other than of the kind referred to at (b) above) and

• (g) A non-established person supplying taxable goods or services in the State is obliged to register and account for VAT irrespective of the level of turnover.