VAT Considerations for Consultants

With the move to working from home, many people are now finding themselves in a position where they are considering moving from PAYE employment to consultancy work on a freelance basis. When becoming self employed registration and accounting for the relevant taxes must be considered, and depending on the level of income involved, VAT may now be on your radar.

So, should you register for VAT? The registration threshold for those selling goods is €75,000, however if you are providing a service and your turnover is €37,000 or more, you are required to register and account for VAT.

Even if you are below these limits and are not required to register, you can choose to do so voluntarily. While it seems best to avoid registration unless you have no choice, in certain circumstances a registration may be of benefit to you.

  • If your clients are based outside of Ireland, you may not have to charge them vat as following the rules of supply they may be required to account for it themselves. If this is the case being VAT registered could leave you in a repayable situation.
  • If you expect to hit the threshold further down the line, then you may want to establish good habits early on.
  • Some people feel that being VAT registered gives their business the impression of being more established from the start.
  • If you are spending a lot setting up your business then you may want to claim back the VAT on your purchases

There are however downsides to being vat registered.

  • Are your customers VAT registered or are you selling your services to the general public? If you deal with the general public then your service is going to be more expensive to them as they can’t claim back the vat. This is relevant if you work in a field where your competitors may not be registered. If you are working as a consultant however, your clients may be VAT registered businesses and as such the VAT won’t be a cost to them.
  • Vat returns will need to be calculated and filed every two months, so you should consider the additional administrative time and cost.

If you are vat registered, then what do you need to know?

The most common issues that we tend to see is clients reclaiming VAT on items that are specifically disallowed. For example:

  • Petrol (however you can reclaim VAT on diesel)
  • Accommodation (unless attending a qualifying conference)
  • Entertainment expenses
  • Personal expenses

Even though some of these may be allowable business expenses, they are specifically disallowed for VAT purposes and so any VAT paid on them should not be re-claimed.

Assuming that VAT has been charged on all expenses is also a common pitfall that can lead to you reclaiming vat when you shouldn’t. If a receipt doesn’t specify a rate of VAT, you can’t assume that the correct rate is 23% or that VAT is even included in the cost. There are a number of expenses that are VAT exempt, for example insurance costs, loan payments etc. These costs are outside of the scope of VAT and should never be included in your return.

Another common issue is reclaiming foreign VAT that you’ve paid on business purchases. If you’re charged VAT on a foreign purchase, then unfortunately you can’t re-claim it on an Irish VAT return.

Normally if you’re VAT registered and purchasing from within the EU, you can provide your VAT number to the foreign supplier and they won’t charge you VAT. You will then have to make an adjustment to your VAT return to account for the VAT that would have been charged had those goods been purchased in Ireland.

Although it might sound complicated, the key to VAT is keeping good records so that you can back up the figures on your return should Revenue select you for audit.

Other posts you might like:

Do you need to file a tax return?

Do you need to file a tax return?

With the October income tax deadline approaching, you may be wondering if you need to file an income tax return. If you have any income not taxed at source then you may be required to file a return.

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Claiming business expenses

Claiming business expenses

A common question that people ask when running a business is what can I claim as a business expense? While some things are specifically disallowed, there’s not really a black and white answer as to what constitutes a business expense.

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