Vat Reclaim for non-registered farmers - a false economy?

just do it

I've done a bit of number crunching here. Reclaiming Vat for non-registered farmers is only available on capital expenditure. The resultant cost exVAT must be then written off over 8 years at 12.5% each year.

Example - €1,000 spent on fencing materials this year @ vat rate of 23%. Total cost €1,230. Assuming taxpayer is in higher bracket i.e. 52%.

1. Making the VAT reclaim. Reclaim €230 vat and 52% of €125 = €65. At end of year 1 out of pocket €935. For the next 7 years reclaim value of €65 -> Yr2 out of pocket €870 -> Yr3 €805, Yr 4 €740, Yr5 €675, Yr6 €610, Yr7 €545, Yr8 €480.
2. No Vat reclaim and written off in year 1 as an expense - out of pocket 48% of €1,230 = €590.

It's a long wait to feel the benefit of the Vat reclaim! And if you're running your farming business on credit any benefit is probably eaten up by bank interest.

I know lads write it off as an annual expense but beware, that leaves you open to a hefty tax bill should you have an audit.

just do it

I should also mention option 1 leads to more preliminary tax as well! Income tax I can stomach - the preliminary tax I find *********

KCTK

just do it wrote: »

I've done a bit of number crunching here. Reclaiming Vat for non-registered farmers is only available on capital expenditure. The resultant cost exVAT must be then written off over 8 years at 12.5% each year.

Example - €1,000 spent on fencing materials this year @ vat rate of 23%. Total cost €1,230. Assuming taxpayer is in higher bracket i.e. 52%.

1. Making the VAT reclaim. Reclaim €230 vat and 52% of €125 = €65. At end of year 1 out of pocket €935. For the next 7 years reclaim value of €65 -> Yr2 out of pocket €870 -> Yr3 €805, Yr 4 €740, Yr5 €675, Yr6 €610, Yr7 €545, Yr8 €480.
2. No Vat reclaim and written off in year 1 as an expense - out of pocket 48% of €1,230 = €590.

It's a long wait to feel the benefit of the Vat reclaim! And if you're running your farming business on credit any benefit is probably eaten up by bank interest.

I know lads write it off as an annual expense but beware, that leaves you open to a hefty tax bill should you have an audit.

If you go for option 2 and you have a Revenue audit you will be facing a hefty tax bill as capital expenditure can not be written off as an expense in 1 year, it must be capitalised and claimed as capital allowances over its deemed life (per tax legislation), now chances you will be hit with an audit unless you have large amount of such expenses would be very slim. If you claim the vat back and put as expense in year 1 then you could be in double trouble with the Revenue....

Timmaay

What KCTK says is spot on, so don't push your luck with it. However JDI, you're right, some people try to put as much down as capital, so as they can claim back the vat, when they would be better off putting it down as maintenance. Stuff that they can genuinely put down as maintenance, repairing fencing, upkeep of land/drainage etc etc.

KCTK

Timmaay wrote: »

What KCTK says is spot on, so don't push your luck with it. However JDI, you're right, some people try to put as much down as capital, so as they can claim back the vat, when they would be better off putting it down as maintenance. Stuff that they can genuinely put down as maintenance, repairing fencing, upkeep of land/drainage etc etc.

Exactly, if really maintenance then put down as so, cause as JDI has shown above relief from higher rate of tax is worth alot more than vat reclaim and capital allowances in first year, and a Euro in your pocket today should be worth alot more than a Euro in 7 or 8 years time!!

blue5000

JDI I suppose it is a false economy, but we are not all paying tax at 48% if you have no taxable income, then it is worth getting the vat back. Ifac are pushing forward the idea that more farmers should register for vat, then have to submit reciepts every 2 months, guess what, more work for Ifac......

just do it

KCTK wrote: »

If you go for option 2 and you have a Revenue audit you will be facing a hefty tax bill as capital expenditure can not be written off as an expense in 1 year, it must be capitalised and claimed as capital allowances over its deemed life (per tax legislation), now chances you will be hit with an audit unless you have large amount of such expenses would be very slim. If you claim the vat back and put as expense in year 1 then you could be in double trouble with the Revenue....

Valid point KTCK.
I was just interested to see how the figures worked out. I take the advice of my accountant on these things

Justjens

KCTK wrote: »

Exactly, if really maintenance then put down as so, cause as JDI has shown above relief from higher rate of tax is worth alot more than vat reclaim and capital allowances in first year, and a Euro in your pocket today should be worth alot more than a Euro in 7 or 8 years time!!

If you're paying tax in the higher rate you'd benefit by making a lump sum payment into your pension.

Claim the VAT now and increase your pension in your old age.

just do it

blue5000 wrote: »

JDI I suppose it is a false economy, but we are not all paying tax at 48% if you have no taxable income, then it is worth getting the vat back. Ifac are pushing forward the idea that more farmers should register for vat, then have to submit reciepts every 2 months, guess what, more work for Ifac......

Vat returns are straight forward and something you can do yourself. I always just found them a pain in the h*le to do. Hard enough to get it all together once a year!

On the plus side you've most the work done when it comes to your annual return

Dampintheattic

Justjens wrote: »

If you're paying tax in the higher rate you'd benefit by making a lump sum payment into your pension.

Claim the VAT now and increase your pension in your old age.

Except the wanker fund managers, who look after your pension investment, more often than not, decrease the net value by as much as the tax would have in the first instance.

Justjens

Dampintheattic wrote: »

Except the wanker fund managers, who look after your pension investment, more often than not, decrease the net value by as much as the tax would have in the first instance.

By 48%? Don't know where you're investing.

The pension does also increase in value, and an income when you want to hand over the land would come in handy, state pension will probably be gone by the time we reach that age.

bob charles

Did I ever mention that im a part time farmer - full time revenue official.

just do it

bob charles wrote: »

Did I ever mention that im a part time farmer - full time revenue official.

Now there's a waste of talent

KCTK

Justjens wrote: »

If you're paying tax in the higher rate you'd benefit by making a lump sum payment into your pension.

Claim the VAT now and increase your pension in your old age.

That's all good, but if you claim vat back on an non capital item and revenue come a calling (Bob in his alter ego) then you will have to repay that vat plus fines and interest, just reclaim on all capital items and put as capital expense in accounts and straight expense all non capitall items with no reclaim of vat.

just do it

KCTK wrote: »

That's all good, but if you claim vat back on an non capital item and revenue come a calling (Bob in his alter ego) then you will have to repay that vat plus fines and interest, just reclaim on all capital items and put as capital expense in accounts and straight expense all non capitall items with no reclaim of vat.

i.e. do it right, it's always the best option in the long run

td5man

Are many of ye vat registerd?

epfff

td5man wrote: »

Are many of ye vat registerd?

Registered here

whitebriar

td5man wrote: »

Are many of ye vat registerd?

Interesting question as I presume being vat registered means you claim back on maintenance and don't have to capitalize.
So 23% back on non feed costs,full write off on ex vat costs but you lose your circa 5% vat credit on sales?
Worth doing the maths on that including a quote on the extra book keeping.,the vat claimed off your accounting fees might pay for that alone?

KCTK

whitebriar wrote: »

Interesting question as I presume being vat registered means you claim back on maintenance and don't have to capitalize.

Unfortunately not that simple, if expenditure is if a capital nature (eg buildings, roads etc) then must be capitalised from tax perspective, just means that as vat registered you can claim back on all your expenses where vat charged, but no vat on fertiliser and feedstuff so alot of inputs in most livestock/ dairy farms has no vat cost in first place, so make sure to do your sums with loss of 5% add on sales before rushing into vat registering.

Farmer Pudsey

There are certain advantages of capital allowances. If you build up generous capital allowances it has the advantages of allowing you to draw money out of the farm years down the line.

Take it if you make a large capital purchase and have generous capital allowances 10K/year. This might be an investment property, your own house, or land. Often trying to get money out of the farm can be very heavily taxed, however this would allow you to draw 10K/year. Disadvantage is I think you pay USC on it however it saves on tax otherwise.

Capital allowances give a certain long term tax security however I would be loath to avoid paying tax at the high rate to build up. If you show too much as day to day running expenses revenue will on an audit go thought with a fine tooth comb( they go through everything with a fine tooth comb anyway) however capital expenses seems to be less of an issue.

milkprofit

F P
can u clarifiy
quote There are certain advantages of capital allowances. If you build up generous capital allowances it has the advantages of allowing you to draw money out of the farm years down the line.