Post on 17-Jun-2020
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