Taxation RoI

Revision 4

Topic: VAT

Ciarán Armstrong

19th May 2020

VAT system

VAT is essentially a Sales tax that is collected at each stage of the supply process.

Example:

A business produces an item which it then sells to a retailer for €100 and the

retailer in turn sells it to the consumer for €160 (all before VAT @ 23%).

• The producer will charge the retailer €123 and remit €23 to Revenue.

• The retailer charges the consumer €196.80 (€160 + VAT €36.80)

• The retailer will remit €13.80 to Revenue (outputs of €36.80 less inputs of

€23).

• The consumer effectively incurs the full VAT charge of €36.80.

• The producer and retailer are both collecting the VAT for Revenue.

Accounting for VAT

Invoice basis is the default basis when accounting for VAT, Output VAT comes from

the Sales book and Input VAT from the Purchases book.

If a trader meets the conditions (see p175) they can apply to account on a Receipts

basis. Output VAT will derive from Receipts from customers, but Input VAT will still

come from Purchase invoices.

VAT computations (see handout for more detailed explanation)

Refer to VAT template.

In a VAT question it is likely there will be Cash and Credit customers irrespective of

the basis used.

• Usually best to start with calculating the Inputs from the Purchases book.

• If Invoice basis take Output VAT for Credit customers from Sales book.

• Calculating Output VAT from Receipts will depend on whether a proper Cash

book has been maintained. If it hasn’t you will need to start with the

Lodgement figure and work backwards.

Be careful to note which figures are inclusive/exclusive, net/gross of VAT.

Cash figures will be inclusive.

Other key elements of a computation.

EU imports

Self-supply

• Own use

• Exempt activity

Inputs specifically disallowed

• Claw-back

• Valid invoice

Bad debts

Other important issues

0% v Exempt

When to register (see recent past papers)

Returns and Penalties

VAT template

VAT on Outputs

Credit customers

Cash customers

Self-supply

EU imports

Motor clawback

Bad debts recovered

Input Credits

Purchases for resale

Purchases not for resale

EU imports

Bad debts

VAT payable

VAT exam questions The VAT question can come in several forms, below are some examples of the

different types you may encounter.

Explaining VAT treatment

Comparison of receipts basis and invoice basis

Receipts basis computation

Invoice basis computation

Computation as above with narrative/explanations section

Multiple parts (usually 4 or 5) comprising calculations and explanations

- The first & last types now appear to be the preferred VAT questions

‘Accounting’ type question:

When dealing with an ‘accounting’ type VAT question, ensure you have a good read

through the question and establish some basic information:

1. Invoice or Receipts basis?

2. If Invoice basis, are there also cash customers?

3. If Receipts basis, are there both cash and credit customers?

Remember that if the question asks you for VAT payable/repayable or to complete

VAT 3 form (same thing) you will usually be trying to work out the information for

the template above.

In an ‘accounting’ type question there are potentially three elements to be worked

out – purchases, sales, and receipts.

Purchases:

The input credits for purchases will always be from purchase invoices and therefore

the purchases book (irrespective of whether receipts or invoice basis applies).

Usually the best way of dealing with purchases is to take the final line of the

purchases book as given in the question, and adjust for items as required - not

allowable, errors, omissions

Sales – Invoice basis:

Figures for credit customers should come from sales book, therefore if available

follow similar format to that for purchases book and ignore any receipts/cash

figures relating to credit customers.

Figures for cash customers can come from cash (receipts book) as adjusted for

errors and omissions or lodgements plus receipts not lodged (wages, drawings or

other expenses paid in cash) minus anything lodged not related to sales (loan etc).

Sales – Receipts basis:

Occasionally you are given sales opening/closing debtors (receivables) and have to

derive the receipts from the control account. In this case, closing balance + sales –

opening balance = receipts from credit customers.

Generally, if there have been problems with the recording of cash you should start

with the lodgement figure and work back to the original receipts from customers.

Note: all amounts received from customers will be inclusive of VAT

VAT questions – general points

1. To claim an input credit a valid invoice must have been received (see

manual for what constitutes a valid invoice). If you are in doubt as to

whether the circumstances outlined constitute a valid invoice, the likelihood

is it is not!

2. Be careful of disposals of laptops, equipment etc to employees or others for

cash amounts. The amount received should be treated as VAT inclusive.

3. VAT on capital items is generally allowable as an input credit.

4. Only restrict an input credit for personal use by the employer, not the

employees.

5. Take care to check if an amount is inclusive or exclusive of VAT

VAT – narrative/explanation questions TOPICS

Zero v exempt Self-supply

Invoice v receipts basis Availing of receipts basis Filing of returns

Cross border trade Maintenance of records

Registering/Thresholds EXPLANATIONS

Non-deductible VAT (pages 147-148) Valid invoice

Input credit – payment period Part payment

Bad debts Gifts Self-supply

EU imports

NON-COMPLIANCE Penalty of €4,000 for failure to submit VAT returns Interest on late payment is charged at 0.0274% per day (10%)

VAT question: Tony Tony owns a plumbing supplies business and has supplied you with the following

information:

Purchase book summary July/August 2019: €

Purchases for resale at 23% – VAT inclusive 45,264

Purchases not for resale at 23% - VAT inclusive 7,626

Purchases not for resale at 13.5% - VAT inclusive 4,313

EU imports for resale 6,000

Bank lodgements for July/August totalled €122,002.

Included in the lodgements were,

Term loan for purchase of new van € 8,000

Refund from supplier for invoice paid twice €605

Tony did not keep a cash book. His only available record of sales is the bank

lodgement totals and details of cash payments made prior to lodgements

being made to the bank.

For July/August period the following cash payments have been made:

Drawings €6,300

Wages €9,378

Motor expenses €1,322

Tony’s sales are at the 23% rate and has also supplied you with the following

details

(i) He imported goods for resale from China which cost €20,000. When

the good were delivered to Dublin Port, Tony had to pay €4,600 VAT

before the goods were released by the customs authorities. It was

explained to him that this is referred to as ‘VAT at point of entry’.

(ii) He has had a problem with one customer who refuses to pay.

Following discussions with his solicitor. Tony has now decided that it

is pointless pursuing the issue any further and the amount owing of

€5,043 (VAT inclusive) has now been written off as a bad debt.

(iii) A delivery van was purchased on 31 July for €16,500 plus VAT at

23%. This purchase was financed by a term loan for €8,000 and

trade-in of €12,000 on a company car. This car was originally

acquired on 31 July 2018 for €22,140 inclusive of VAT at 23% and

qualified at the time for an input credit.

None of these transactions have been recorded as Tony is awaiting your advice

regarding the VAT implications of each transaction.

Requirement

Quantify the amount of VAT payable/refundable for the July/August VAT period

Solution: VAT – Tony

VAT on Outputs: €

Sales (note 1) 24,380 EU imports 1,380 Claw-back on car (note 2) 414

26,174

Input credits:

P for resale 23% 8,464 P not for resale 23% 1,426

P for resale 13.5% 513 EU imports 1,380

Point of entry – Chinese imports 4,600 Purchase of van (note 2) 3,795

20,178

Payable 5,999

Note 1: Lodgments 122,002

Not subject to VAT (€8,000+€605) (8,605) Cash payments (€6,300+€9,378+€1,322) 17,000

130,379

23/123 24,380

Note 2:

Van allowable input: €16,500/@23% €3,795

Claw-back €4,140@20% = 828/2 €414

VAT QUESTION – Liam Geatai Ltd

Liam Geatai Ltd operates an Irish based business selling electronic components.

During the May – June 2019 VAT period it recorded the following transactions.

SALES (exclusive of VAT) €

Sales in Ireland 1,000,000

Sales to Hungarian VAT registered customers 400,000

Sales to non-VAT registered customers in NI 20,000

Sales to VAT registered customers in NI 200,000

Sales to customers located in non-EU countries 100,000

COSTS (inclusive of VAT where applicable) VAT

rate

€

Purchase of materials from Irish suppliers 23% 486,000

Purchase of equipment from Romanian supplier 23% 200,000

Purchase of equipment from Irish supplier 23% 243,000

Repairs and maintenance of equipment 13.5% 17,025

Audit and accountancy fees 23% 12,150

Diesel for sales staff cars 23% 6,075

Electricity 13.5% 2,270

Salaries and wages - 180,000

Marketing costs 23% 36,450

All Irish suppliers and the Romanian supplier are VAT registered

businesses.

Requirement:

Calculate the VAT payable or repayable for the May – June VAT period

Liam Geatai: Solution

VAT on outputs VAT

rate

€ (excl) €

VAT

Sales in Ireland 23% 1,000,000 230,000

Sales to Hungarian VAT registered customers 0% 400,000 0

Sales to non-VAT registered customers in NI 23% 20,000 4,600

Sales to VAT registered customers in NI 0% 200,000 0

Sales to customers located in non-EU countries 0% 100,000 0

134,600

EU Imports - Romanian supplier 23% 200,000 46,000

280,600

Input VAT VAT

rate

€ (incl) €

VAT

Purchase of materials from Irish suppliers 23% 486,000 90,878

Purchase of equipment from Irish supplier 23% 243,000 45,439

Repairs and maintenance of equipment 13.5% 17,025 2,025

Audit and accountancy fees 23% 12,150 2,272

Diesel for sales staff cars 23% 6,075 1,136

Electricity 13.5% 2,270 270

Marketing costs 23% 36,450 6,816

148,836

€ (excl)

Purchase of equipment from Romanian supplier 23% 200,000 46,000

194,836

VAT payable 85,764

VAT Question: John

(a) John is registered for VAT and accounts for VAT on a receipts basis. He has

asked you to explain the VAT treatment of a few issues that have arisen during the

Nov/Dec 2018 VAT period and to calculate the amount of VAT due or refundable for

the period.

1. John was considering the purchase of a warehouse to be used for storage

purposes for his business. He engaged the services of an engineer to

prepare a report on the premises that was offered for sale. Following the

report, John decided not to purchase the warehouse as there was a major

fault in the roof of the building. The engineer submitted a bill for €1,000

plus VAT at 23%. John has not recorded the invoice as he feels the VAT rate

should be 13.5% and he is unsure how to proceed.

2. In December 2018, John advertised a machine for sale in the local

newspaper. The machine is surplus to requirements and John hopes he will

get approximately €3,500 when it is sold. An invoice has been received for

the advertisement dated 20th December but not payable until the 20th

January 2019. The invoice from the newspaper regarding the advertising

shows a charge of €100 VAT exclusive plus VAT at 23%.

3. In July, John purchased three new computers for the office. The cost of the

three computers was €3,690 VAT inclusive at 23%. In November, John

decided that one of the computers was surplus to requirements and he

moved the computer to his home where it is being used by his children for

school research projects.

4. John has had a problem with one customer who refused to pay. Following

discussions with his solicitor John has now decided that it is pointless

pursuing the issue any further and the amount owing of €4,920 (VAT

inclusive at 23%) has now been written off as a bad debt.

None of these transactions have been recorded as John is waiting for advice from

you regarding the VAT implications of each transaction.

The following summary information has been extracted from the records kept by

John.

Purchases Book

€ For

resale

Not for resale VAT

Total 23% 23% 13.5% 0%

105,068 69,000 13,800 2,800 290 19,270

The cross totals and VAT calculations do not agree and following investigation you

discover the following errors:

(i) An invoice not for resale shows the VAT exclusive cost as €200 plus VAT of €46.

This was recorded as €200 in the total column, €246 in the 13.5% column and €46

in the VAT column.

(ii) An invoice was received in respect of goods for resale stg£3,525 which were

purchased from a UK supplier. John recorded the transaction in the purchases book

as follows: Total €3,525; for resale at 23% €3,000 and VAT €525. You discover

that the cost of the goods when paid for amounted to €3,900.

John has asked for a brief explanation regarding the correction of the errors made

in the purchases book.

Sales Book

Invoices are written for all sales to credit customers. These invoices are recorded in

the Sales book and the totals for November and December are as follows:

€ Total VAT excl. VAT

November 43,542 35,400 8,142

December 39,114 31,800 7,314

Cash Book

Summary of the totals for November/December per the cash book.

€ €

Bank loan 10,000 Expenses 1,500

Cash sales 36,800 Drawings 8,400

Debtors 81,500 Lodgements 121,900

Bounced cheque 3,500

131,800 131,800

The bounced cheque was originally lodged on the 14th November and re-lodged on

the 18th December. The amount of €3,500 was received in respect of cash sales.

John has made you aware that €4,000 taken from cash sales has been paid to

John’s wife as wages and not recorded in the cash book.

Requirement

Write a letter to John explaining your treatment of the items above and quantify

the amount of VAT payable/refundable for the November/December VAT period.

Solution: VAT question - John

Dear John,

As requested, I have calculated the amount of VAT payable for

November/December and details of my calculations are attached.

You also asked for an explanation regarding the treatment of items identified and

these are set out below.

1. Invoice from engineer:

The VAT content of this invoice is reclaimable as it represents a business expense

for you. You are obliged to record the invoice as presented to you, it is not your

function to query the rate of VAT charged as this is a matter for the supplier to

determine.

2. Invoice from newspaper:

The VAT content of this invoice is reclaimable as it also represents a business

expense. It is reclaimable by reference to the date on the invoice and not the date

of payment.

3. New computers:

The VAT on the computers purchased would have been claimed as an input in the

June/July VAT return. As one of the computers is now being used for personal

purposes it represents a self-supply and the VAT will have to be repaid to Revenue.

5. Bad Debt:

As you account for VAT on a Receipts basis no adjustment is required.

Purchases Book:

Error (i) has been rectified by changing the position of the figures recorded.

In error (ii) the UK VAT should not have been recorded as you are not entitled to

claim credit for UK VAT paid. When purchasing from an EU supplier you should

have provided your Irish VAT number and the goods would have been supplied free

of VAT. You will need to contact the UK supplier to reclaim the UK VAT charged.

If you have any further queries, please do not hesitate to contact me.

Purchases:

€ total for resale not for resale VAT

23% 23% 13.5% 0%

Per Q 105,068 69,000 13,800 2,800 290 19,270

Error 1 -200 -246 -46

246 200 46

Error 2 -3,525 -3,000 -525

1. 1,230 1,000 230

2. 123 100 23

3. Self- supply

4. Bad debt (no impact)

102,942 66,000 15,100 2,554 290 18,998

Sales: €

Cash sales 36,800

Cheque re-lodged 3,500

Cash sales not recorded 4,000

Receipts from debtors 81,500

125,800

VAT @ 23% 23,524

VAT Nov/Dec €

VAT on Sales 23,524

Self-supply 230

EU import (€3,900@23%) 897

24,651

Input VAT 23,598

EU import (€3,900@23%) 897

24,495

VAT payable 156

VAT QUESTION - HOBO HOBO Ltd. is registered for VAT and accounts for VAT on sales at 23% on a

receipts basis. The following information has been extracted from the business records for the period September - October 2019.

(1) The sales manager has the use of a company car. He travels extensively for business purposes and approximately 15% of his travel is for private

use. In October 2019, he was involved in a crash while travelling to business customers. The invoice for crash repairs amounts to €1,200 plus

VAT at 13.5%. (2) In October 2019, a credit customer lodged €9,000 directly into the bank

account of HOBO Ltd. by credit transfer. The lodgement was in respect of the part payment of goods sold on credit in August 2019 amounting to

€12,000 plus VAT of €2,600. (3) Premises were purchased in February 2019 with the intention of opening

a new shop after renovations. Legal fees associated with the purchase amounted to €4,920 VAT inclusive at 23%. In addition, the architect’s bill

for drawing up plans for the new shop and submitting these with the planning application amounted to €2,460 VAT inclusive at 23%. Both invoices have been received in September 2019.

(4) A bad debt amounting to €3,690 was written off in the July 2018

accounts. In September 2019, a cheque for €2,000 was received from the debtor and this amount has been treated as a bad debt recovered.

(5) In October 2019 a new laptop was purchased for the sales manager at a cost of €1,230 VAT inclusive at 23%. The old laptop was sold to an

employee for €300. The cash received was not recorded but was taken by the managing director for his personal use.

(6) A small delivery from a regular supplier on 31st October of €123 was paid by cash. The delivery note has been clearly annotated ‘inclusive of VAT

at 23% - invoice to follow’.

Requirement Compute the amount of VAT chargeable or recoverable in respect of each of the above transactions. Your answer should include a brief explanation of

your treatment of each of the transactions.

VAT Question: Dolores Dentium Dolores Dentium is a dentist providing standard dental services to the community.

During the VAT accounting period May/June 2019 she had receipts from customers of €120,000 and purchases, inclusive of 23% VAT, amounted to

€24,600. At the start of May she imported new dental equipment from a supplier in Slovenia at a cost of €50,000 net. The supplier is registered for VAT in

Slovenia. This equipment would be charged at the 23% rate if purchased in Ireland.

Outline the steps Dolores should take and calculate her VAT position for May/June 2019.

VAT Question: Aries

Aries started business as an Interior Designer on 1 January 2018 and registered for VAT on a Receipts basis. His services are accountable at 23%.

1. He issued invoices during January/February for €150,000 net. These were all paid during March/ April.

2. To finance his business, he decided to sell his house and live in a rented apartment. The sale was completed in March and he received the full proceeds of €300,000 during April.

3. In addition to the customers in (1) above he also carried out design work on the refurbishment of his sister Mercury’s home. He invoiced

Mercury for his work on 26th February and received full payment of €13,530 on 17th March.

4. Apart from the monies above there were no other receipts during

March/April or January/February. 5. Purchases – all inclusive of VAT at 23% - were as below:

€ Invoices received Invoices paid January 46,740 0

February 12,300 46,740 March 18,450 18,450

April 24,600 24,600

January purchases include a van (CO2 category B) costing €29,520

gross and studio equipment €14,760 (VAT inclusive) which he intends writing off over three years.

Calculate Aries’ VAT position for each of the periods January/February and March/April, explaining your treatment of each item above.

VAT – MCQs

1. Due date for the submission of an annual VAT return for the y/e 31st Oct 2019 is:

(a) 19th November 2019

(b) 30th November 2019

(c) 19th December 2019

(d) 31st December 2019

2. Sammy accounts for VAT on an invoice basis. The following details have been extracted

from the business records kept for the January/February 2019 VAT period.

Invoices issued VAT inclusive ........................................145,684

Credit notes issued VAT inclusive ........................................ 363

Money collected from debtors .........................................200,618

If the VAT rate applicable to sales is 23%, the VAT due on sales for the

January/February 2019 VAT period amounts to: -

(a) €27,174

(b) €33,507

(c) €46,142

(d) €47,500

3. ATN Ltd. operates an electrical shop in Dundalk. A customer from Northern Ireland

has ordered a television which they intend using in their private residence in Belfast. ATN

Ltd. has engaged a courier to deliver the television to Belfast. The VAT rate applicable to

the sale of the television is: ‐

(a) 13.5%

(b) 23%

(c) Zero%, as the goods are being exported

(d) Nil, as the transaction is an exempt transaction

4. For VAT purposes which of the following is an exempt supply: ‐

(a) Supply of medical services by a medical doctor

(b) Supply of medical equipment

(c) Supply of materials to be used to construct an extension to a medical waiting room

(d) Supply of accountancy services to a medical doctor

5. Simon commenced business as a builder’s providers on the 1st January 2019. In the

year ended 31st December 2019 his turnover including VAT at 23% amounted to €460,000

and closing receivables (debtors) were €26,200. If Simon accounts for VAT on a receipts

basis the amount of VAT due on outputs for the year ended 31st December 2019 is: ‐

(a) €54,714

(b) €81,117

(c) €86,016

(d) €99,774

6. Which of the following persons does not have to register for VAT in Ireland:

(a) Persons whose supplies of taxable services exceed €40,000 in any 12 month period.

(b) Persons whose supply of taxable goods will exceed €76,000 in any 12 month period.

(c) Person whose sale of a principal private residence is likely to exceed €525,000.

(d) Persons whose supplies of goods and services exceed €38,000 in any 12 month period.

7. Which of the following transactions is deemed to be a supply for VAT purposes:

(a) Sale of electrical goods in the course of business.

(b) Goods provided as security for a loan or debt.

(c) The transfer of a business from one VAT registered person to another.

(d) Goods supplied free of charge as replacement for original goods under a warranty or

guarantee.

8. VAT records must be kept for a period of at least:

(a) 3 years

(b) 4 years

(c) 6 years

(d) 5 years

9. AFT Limited commenced to trade on 1 January 2019. Their monthly turnover for the

first six months was €7,500 per month. From 1 July 2019 they expect the turnover to rise

to €8,000 per month. With regard to registration for VAT, AFT Limited:

(a) Is obliged to register from 1 January 2019,

(b) Must elect to register for VAT in November 2019,

(c) Is obliged to register for VAT from 1 July 2019 when it appears the turnover will

exceed the relevant limit,

(d) Is obliged to register for VAT from 1 October 2019.

10. An insurance broker purchased office furniture costing €12,300, including VAT at

23%, for use in his business. The amount of VAT reclaimable by the insurance broker is -

(a) €2,300

(b) €1,350

(c) €Nil

(d) €1,870

11. Sean has a business selling televisions and music systems in Salthill, County Galway.

Sean imports the televisions from the UK as he finds he can buy them at a better price.

The appropriate UK VAT rate is 17.5% and the Irish VAT rate is 23%. He was charged

€4,000 by the UK Company excluding VAT. The VAT amount Sean should return under

purchases on his VAT 3 in respect of the import of televisions is:

(a) €Nil

(b) €700

(c) €920

(d) €748

12. Kathleen commenced trading on the 1st March 2019 providing an alteration and dress

making service. On commencement she expected her turnover to be €5,000 per month.

The turnover for the first three months amounted to €13,500. Kathleen was disappointed

with this figure but following a recent increase in business she expects the turnover to

average €5,500 for the remaining nine months of the year. In these circumstances

Kathleen is obliged to register for VAT with effect from:

(a) 1st March 2019.

(b) 1st June 2019.

(c) 1st March 2020.

(d) None of the above

13. Jonathon commenced business as a builder’s providers on the 1st January 2019. In the

year ended 31 December 2019 his turnover, including VAT at 23%, amounted to €589,500

and his closing debtors were €86,100. If Jonathon accounts for VAT on a cash receipts

basis, the amount of VAT due on sales for the year ended 31 December 2019 amounts to:

(a) €94,132

(b) €110,232

(c) €126,332

(d) None of the above

14. AAA Ltd. operates a jewellery shop in Dundalk. A private customer from Northern

Ireland has ordered a watch. AAA Ltd. has arranged to courier the watch to Belfast. The

VAT rate applicable to the sale of the watch is:

(a) 13.5%

(b) 23%

(c) Zero% as the goods are being exported

(d) Nil as the transaction is an exempt transaction