By Miriam Berney, VAT Education Manager at Sage
VAT can keep a business owner awake at night and can affect the bottom line if it’s not managed properly. As the second highest generator of calls to our customer service team in Sage, it is clearly a big issue for small businesses and SMEs. With many different rates and ever-changing legislation, Ireland’s VAT system is one of the most complex in Europe. A recent survey we carried out showed that only 53% of businesses are very confident they are processing their VAT correctly.
It can be difficult to know which rate to use; standard (23%), reduced (13.5%, 9%, 4.8%), parking (13.5%) zero rated, exempt or non-vatable. If a shop keeper sells plain digestive biscuits they attract the reduced rate of 13.5% VAT but chocolate biscuits are deemed as a luxury item and attract the standard rate of 23% VAT.
Another example is the supply of certain items of food and drink to take away is liable to VAT at 0%. These include cold food such as sandwiches and yoghurts, and milk and certain milk based drinks. However, where these items of food and drink are sold to ‘eat in’ in a coffee shop or snack bar, they become liable to VAT at the reduced rate.
Fortunately there are ways you can make VAT as painless as possible by looking at planning, accuracy and VAT schemes.
Planning – Sometimes businesses owners have a perception that when a sale is made, the full sale value belongs to the company. This is not the case; only the net value of the sale is theirs and the VAT account is owed to the Revenue – the business is simply collecting it for them. When businesses do not plan ahead and keep money aside for VAT, it can put cash-flow under severe pressure which can often cripple or close a business. A practical tip to small owners is to lodge the VAT element of a sale into a separate bank account, so you are planning ahead, your cash-flow is intact and the business has the money when the VAT return comes around.
Accuracy – Data entry mistakes such as duplicate entries can lead to paying double the amount of VAT, losing a business money. If the return is processed manually or by people lacking the expertise to ensure the return is accurate, problems can arise. While 71% of businesses use an accounts software package to calculate VAT, 10% of businesses use Excel and 5% calculate VAT manually. Investing in the right software and expertise is essential to ensure accurate returns.
VAT Schemes - It was good to see the government increasing the threshold for the Cash VAT Accounting scheme to €1.25m in the last budget but more businesses need to consider if they can avail of this scheme. The Cash VAT Accounting scheme helps small businesses with their cash-flow as they only pay the VAT to the Revenue when their customer pays them, so they are never out of pocket. 66% of Irish businesses registered for VAT are on the Cash VAT Accounting scheme but 28% of businesses do not understand what Cash VAT Accounting is so there is potentially a number of businesses that could be availing of this scheme.
If a company has a turnover of €1.25m and even 5% of their invoices go unpaid they could be overpaying up to €14,000 in VAT if on the Invoice Basis. This overpayment can be claimed back using VAT bad debt relief but any business unaware of this would end up overpaying. With many clients taking longer to pay, the Invoice Basis can put a heavy strain on an SME’s cash flow as VAT is payable in the VAT period when the Invoice is first raised.
From 1st July 2014 businesses will have to separately account for EU services on the VAT 3 form in the new ES1 and ES2 boxes. In addition to managing the usual VAT Returns, businesses trading within the EU have to complete a VIES Return every quarter and some categories of traders must submit monthly via ROS or to the VIMA office in Dundalk. The VIES return relates to the supply of goods or services to VAT registered traders in other EU counties.
The world of VAT is ever changing; all VAT registered business will be affected by the up and coming changes in the Return of Trading Details (RTD). Most businesses probably don’t know about these changes but their software providers should. From my experience in Sage, software providers need to be agile to changes in legislation to ensure they provide the software to keep their customers compliant. The right software, processes and expertise can help with the complexities of VAT, give businesses the freedom to succeed, explore new markets and have confidence to run their business effectively.