What is VAT? A guide to VAT for small businesses in Ireland

VAT is a tax charged on goods and services added at each stage of production. And distribution and each VAT registered business, from producer or manufacturer to wholesaler and retailer, collects the VAT from their customer on behalf of the government.

We’ve put together a guide for small business owners to help you understand what is VAT and how to navigate the complexities of the VAT system.

This article will cover the basics of VAT for small businesses, providing guidance on what VAT is, the current rates, when business needs to register for VAT and the steps required to submit VAT returns.

It covers the following:

• What is VAT?
• Rates of VAT in Ireland
• VAT thresholds for businesses in Ireland
• How to calculate VAT in Ireland
• Registering for VAT
• How to submit VAT returns
• Final thoughts on VAT in Ireland

What is VAT?

VAT stands for Value Added Tax. It’s a consumption tax calculated as a percentage of the value of goods and services sold by businesses that are registered for VAT in Ireland.

Businesses that are registered for VAT can also claim refunds of the VAT they have paid for supplies, raw materials and other business-related expenses.

The total sales price for consumers will usually include VAT, which appears on the invoice or sales receipt.

Rates of VAT in Ireland

There are four main rates of VAT in Ireland: the standard rate of 23% and three reduced rates, plus a 0% rate.

Standard rate

The standard rate applies to most goods and services, including computers, cosmetics, household appliances, petrol, paper, toys, bottled water and some medicines (non-oral).

Reduced rate

The reduced rate of 13.5% applies to coal, heating oil, vet fees, building services and cleaning and maintenance services.

Certain services and sectors were assigned reduced rates of VAT in recent years as part of measures to support businesses during the Covid-19 restrictions and more recently to manage the cost of living amid rising energy prices.

Second reduced rate

The second reduced rate of 9% was temporarily applied to gas and electricity prices in May 2022 and this measure has been extended to 31 October 2023.

The VAT rate for the hospitality and tourism sector was temporarily reduced from 13.5% to 9% during the Covid-19 restrictions and remained in place until 31 August 2023.

This rate also applied to entertainment services such as cinemas, theatres, amusement parks and other services including hairdressing. It’s now returned to 13.5%

The livestock rate

The livestock rate of 4.8% applies to the agricultural sector including livestock (excluding chickens), the hire of horses and greyhounds.

Zero rate

A zero VAT rate applies to a range of food and drink products, books, children’s clothing and footwear, seeds, animal feed, oral medicines for both humans and animals.

Disability aids such as wheelchairs and hearing aids are also zero-rated.

Further details on VAT rates

To help you determine the correct VAT rate for your goods, you can find a comprehensive list of goods and services and their corresponding VAT rate on Revenue’s database.

Depending on the nature of your business, one or more rates may apply.

Additional categories were assigned to zero-rate VAT in Budget 2023 and became effective from 1 January 2023.

These include a zero rate for non-oral medicines for hormone replacement therapy (HRT), nicotine replacement therapy, defibrillators and period products. A zero rate was also extended to newspapers – including digital editions.

Certain services are exempt from VAT, including financial, medical and educational services. Live musical and theatrical performances are also exempt from VAT.

What’s the difference between zero-rated and exempt VAT?

If a business supplies taxable goods or services, including zero-rated ones, they can claim the VAT back from Revenue on their business-related purchases.

However, if the business supplies only exempt goods or services, they can’t reclaim VAT.

VAT thresholds for businesses in Ireland

Turnover is based on a 12-month rolling period, which means you should review your turnover at the end of each month to ensure it hasn’t exceeded the VAT threshold in the previous 12 months.

The following guidelines will assist you to determine whether you are obliged to register for VAT,

Note: You may still choose to register for VAT even if your turnover is unlikely to reach the threshold limit.

The main VAT thresholds are:

• €37,500 if your business supplies services only
• €75,000 if your business supplies goods only
• If your business supplies both goods and services and if 90% or more of your turnover is from the supply of goods, the €75,000 threshold applies.

Another threshold that may apply to your business is (note, this is based on a calendar year rather than a rolling 12-month basis):

• Businesses receiving goods from another EU Member State worth more than €41,000.

In some instances, your turnover amount may be reduced by the amount of VAT already paid on stock that was purchased for resale. In this case, the reduced turnover figure may be used to determine if your turnover exceeds the threshold.

if you’re unsure about VAT thresholds and how they affect your business, it’s worth speaking to a tax expert or accountant, who can help with your queries.

How to calculate VAT in Ireland

VAT is calculated on the sales price of the product or service.

The first step in calculating your VAT liability is to identify the VAT rates applicable to your business. Depending on the nature of your business and the goods and/or services you provide, you may need to use one or more of the VAT rates.

First, you must know the correct VAT rate that applies to the product or service and include it in your invoices and sales receipts.

Invoices should include the following details:

• The sales price before VAT
• The VAT rate
• The amount of VAT
• The total sales price, including VAT.

The rate of VAT applicable to food and drink depends on how the product is supplied.

For example, basic food products such as bread, milk and potatoes are subject to the zero rate. However, the second reduced rate applies to prepared or cooked foods, for example, cooked chips (under the category of food and drink for human consumption).

Fruit juice and soft drinks are subject to the standard rate of VAT. However, if they’re supplied as part of a restaurant or catering service, the second reduced rate applies.

Once you’ve determined the correct rate for each product category, you can calculate the VAT amount by multiplying the net value of the goods or services by the correct rate.

So for example, if you’re selling an item for a net value of €100, you multiply this by 23% or 0.23 to get the VAT amount = €23.

To calculate the total price, you must either add the VAT amount to the net or multiply by 1.23.

So the total price, inclusive of VAT, is €123.

If you use accounting software, this will be done for you automatically once you apply the correct rates.

Registering for VAT

Businesses that are trading and registered in Ireland are eligible to register for VAT.

You must register your business for VAT via Revenue Online Service (ROS) and complete form TR1 form for sole traders or partnerships or the TR2 form for limited companies.

Businesses that aren’t established in the State should complete and submit a paper version of the TR1 or TR2 forms to the Business Taxes Division.

(It’s worth noting that if you’re a non-resident business and trade in Ireland, you have to register for VAT straight away.)

Registration will take effect from the date you’ve stated on your registration form and you may be able to backdate your registration.

You may also elect to register for VAT even if your turnover does not exceed VAT thresholds. You might choose to register so you can claim VAT paid on eligible purchases.

However, if you elect to register for VAT, you may only do so from the beginning of the current VAT period.

If you wish to re-register for VAT following cancellation, you can do so via ROS.

How to submit VAT returns

Your VAT return is a report of the total VAT amounts you’ve collected from goods sold or services provided and the VAT you have paid on purchases for the business during the relevant VAT period.

The difference between the two figures will be either a payment to Revenue or a refund due to your business.

VAT is due on the 19th of the month following the end of the VAT tax period.

So VAT for January and February is payable on 19 March, VAT returns for March and April are due on 19 May, and so on.

Note: If you’re filing your VAT returns through Revenue Online Service (ROS), the date to do so is extended to the 23rd of the month.

When filing your VAT return, you’ll need to provide details, including your VAT registration number, the VAT period and the amount of VAT collected and paid.

Below are the steps to submit your bi-monthly VAT return:

(If you’ve already registered with ROS, log into your ROS account using your digital certificate. For information on how to register for a ROS account, check out the ROS registration page on the Revenue website.)

1. Go to My Services and click on ‘Complete a Form’ Online. Next, select VAT from the dropdown menu.
2. Click on VAT 3 and select the relevant return period, such as Jan/Feb 2023.
3. Open each section and fill in the relevant fields with the net value of the goods and services – excluding VAT.
4. Review all of the information to ensure everything is accurate, including that all sales transactions have been included, all relevant purchases you are claiming VAT for, that correct VAT rates have been applied and recheck the VAT calculations.
5. Once you are ready to submit, the ROS system brings you through the process.
6. Depending on the total figures, you may need to make a payment or be entitled to a refund of VAT.
7. Follow the instructions on-screen to submit a payment and ensure that your bank details are up to date if you are eligible for a refund of the VAT paid.

Final thoughts on VAT in Ireland

VAT rates and regulations can change over time, so it’s advisable to keep up to date with the VAT rates that apply to your business – particularly after the annual Budget and any mini-Budgets or government announcements.

Understanding the VAT system and filing your VAT return may seem daunting at first.

However, with careful preparation and planning to ensure you are applying the correct rates and checking the calculations, your VAT returns will soon become part of the normal business processes.

And talking of business processes, you can use cloud accounting software to easily create VAT returns, choose the right VAT rate, and record all of your VAT activities and actions,

If you need further support with VAT, it’s worth speaking to your accountant, if you have one, or a tax adviser.