Right to deduct VAT – What’s the General Rule?

If you are in business and registered for VAT then, generally speaking, you may deduct the VAT charged on most goods and services which are used for the purposes of your business, to arrive at the VAT due or repayable for the VAT period.  You are not entitled to deduct VAT on goods and services used for any other purpose, such as VAT exempt activities.

To be entitled to claim a deduction for VAT on purchases you must have a proper VAT invoice or relevant Customs receipt as appropriate. With effect from the 1st January 2014  if you deduct VAT in a taxable period but you do not pay the supplier within 6 months of the end of that taxable period, then the VAT deducted relating to the unpaid invoice must be repaid to Revenue. A re-adjustment is provided for in the event of subsequent payment or part payment for the goods or services.

Persons required to register for VAT in respect of intra-Community acquisitions only are not entitled to a deduction in respect of that VAT.

A deduction for VAT is allowable only on purchases which are for the purposes of a taxable business.  However, it may be that a portion of your purchases are for the purposes of a taxable business and the remaining portion for your private use, for example, electricity, telephone charges or heating expenses where the business is carried on from your private residence. It may also arise that purchases of goods and/or services may be used for both taxable and non-taxable activities. In such cases, only the amount of VAT which is appropriate to the taxable business is deductible. Similarly if you supply both taxable and exempt activities it is necessary to apportion the VAT on purchases between the inputs used for taxable and exempt activities.

It is extremely important that you both issue proper VAT invoices to your customers and that you receive proper VAT invoices from your suppliers.  The Revenue regularly request invoices to back-up the figures declared on a VAT return - Listed below is the information required on VAT invoice

The VAT invoice issued must show:

1. the date of issue of the invoice,

2. a sequential number which uniquely identifies the invoice,

 3. the full name, address and the registration number of the person who supplied the goods or services to which the invoice relates,

4. the full name and address of the person to whom the goods or services were supplied,

5. in the case of a reverse charge supply (excluding a supply of construction services subject to Relevant Contracts Tax) the Value-Added Tax identification number of the person to whom the supply was made and an indication that a reverse charge applies,

6. in the case of a supply of goods, other than a reverse charge supply, to a person registered for Value-Added Tax in another EU Member State, the person’s Value-Added Tax identification number in that Member State and an indication that the invoice relates to an intra-Community supply of goods,

7. the quantity and nature of the goods supplied or the extent and nature of the services rendered,

8. the date on which the goods or services were supplied or, in the case of early payment prior to the completion of the supply, the date on which the payment on account was made, in so far as that date differs from the date of issue of the invoice,

9. in respect of the goods or services supplied: 

• the unit price exclusive of VAT,
• any discounts or price reductions not included in the unit price, and
• the consideration exclusive of VAT.

10. in respect of the goods or services supplied, other than reverse charge supplies:

• the consideration exclusive of tax for each rate (including zero-rate) of VAT, and
• the rate of VAT chargeable.

11. the VAT payable in respect of the supply of the goods or services, except in the case of:

• a reverse charge supply, or
• goods supplied: under the margin scheme for second-hand goods, or under the special scheme for auctioneers, where the invoice should be clearly endorsed ‘Margin Scheme – this invoice does not give the right to an input credit of VAT’.

12. In the case where a tax representative is liable to pay the VAT in another Member State, the full name and address and the Value-Added      Tax identification number of that representative. 

Imelda Prendergast is Director in OSK Contracting and OSK Small Business Support. Call OSK on 01 439 4200 for more details of our contractor accounting services.