Simple vat and income tax question

mcneil

If someone is self employed and sole trader say in construction. A block layer, a plasterer, a painter or even all together and he pays 20% income tax on his earnings. If he registers for vat, does he now pay 13% income tax or does he still pay the 20% on his earnings and another 13% he's added on top of his jobs.

drunkmonkey

Think of the 13% as a tax you have to collect, that needs to be paid to the revenue.
Once your registerd for vat you can then claim back vat, carpenter who is vat registerd needs a new saw would pay 23% vat when he buys it. The vat amount on the saw let's say is €100 so he's now paid that in vat.

Now let's say all the 13% vat the carpenter collected in the month adds to €600 euro, he can deduct the vat he owes the revenue by €100 (the vat paid on the saw) when making his vat return. So he only owes the revenue €500

That's basically it. You owe the vat you collect, your owed the vat you paid.

Nothing to do with income tax.

mcneil

drunkmonkey wrote: »

Think of the 13% as a tax you have to collect, that needs to be paid to the revenue.
Once your registerd for vat you can then claim back vat, carpenter who is vat registerd needs a new saw would pay 23% vat when he buys it. The vat amount on the saw let's say is €100 so he's now paid that in vat.

Now let's say all the 13% vat the carpenter collected in the month adds to €600 euro, he can deduct the vat he owes the revenue by €100 (the vat paid on the saw) when making his vat return. So he only owes the revenue €500

That's basically it. You owe the vat you collect, your owed the vat you paid.

Nothing to do with income tax.

What's the point in charging vat though on top of your price. That has a potential to lose one a job if the client has to pay another 13 % on top of the price plus 20% then another 13%. Tradesmen could price tgemselvesf out of work doing this.

the_pen_turner

where are you getting 13 % +20%+ 13%

if you do a job for 500 labour plus 500 materials. . that is 1000 ex vet or 1130 including vat.
that's all the customer pays.
you would also be able to get back the vat on the materials so the 500 for materials only really cost you 416.66 when you claim it back.


you will be liable for income tax on the labour if you personally take the money out of the business and not buy something with it for the business like a tool

TitianGerm

mcneil wrote: »

What's the point in charging vat though on top of your price. That has a potential to lose one a job if the client has to pay another 13 % on top of the price plus 20% then another 13%. Tradesmen could price tgemselvesf out of work doing this.

You agree to do do a roof on a house for €13,500.

If your registered for Vat €11,895 of that is yours (13,500/113.5*100) and €1,605 is owed to Revenue for Vat on Sales. You pay income tax on the €11,895 that is yours. Assuming your below the Higher Rate Band then that €11,895 would be taxed at 20% (not including any credits you may have).

If your not registered for Vat the €13,500 is yours and you pay Income Tax on that €13,500.

If your a Sub Contractor the guy employing you should be stopping 20% of your payment at source for RCT until Revenue instruct otherwise.

You have to register for Vat if you earn over €37,500 in any year if you provide a service.

If your registered for Vat then you can claim all the Vat back on your purchases relating to your trade and you must include Vat in all your sales.

Geuze

emmetkenny wrote: »

You agree to do do a roof on a house for €13,500.

If your registered for Vat €10,000 of that is yours (13,500/113.5*100) and €3,500 is owed to Revenue for Vat on Sales. You pay income tax on the €10,000 that is yours. Assuming your below the Higher Rate Band then that €10,000 would be taxed at 20% (not including any credits you may have).

Maths error here.

VAT is 13.5%, not 35%.

TitianGerm

Geuze wrote: »

Maths error here.

VAT is 13.5%, not 35%.

Yup stupid me

Have fixed the above.

mcneil

the_pen_turner wrote: »

where are you getting 13 % +20%+ 13%

if you do a job for 500 labour plus 500 materials. . that is 1000 ex vet or 1130 including vat.
that's all the customer pays.
you would also be able to get back the vat on the materials so the 500 for materials only really cost you 416.66 when you claim it back.


you will be liable for income tax on the labour if you personally take the money out of the business and not buy something with it for the business like a tool

So if one does a job and 10k is for labour and 5k with the materials used. One pays 20% on the labor and then 13% on the materials and if he's registered for vat, he can claim the 13% back and use towards his business.

TitianGerm

mcneil wrote: »

So if one does a job and 10k is for labour and 5k with the materials used. One pays 20% on the labor and then 13% on the materials and if he's registered for vat, he can claim the 13% back and use towards his business.

No that's wrong.

You do the job for €15,000 total.

The €15,000 includes Vat at 13.5% which totals €1785. The Customer pays you the €15,000 for the work you've done. You now owe the €1785 to Revenue for your Vat on Sales and the rest is your taxable income.

At the end of the year you then do a tax return and state that you made sales totaling €13,215 excluding Vat for the year.

Now that €13,215 is chargeable to income tax which you have to pay out of your own money.
Assuming no credits and all your income is charged at 20% totaling your Income Tax bill would be €2643.

dogsears

emmetkenny wrote: »

Yup stupid me

Have fixed the above.

Not quite. Look again

TitianGerm

dogsears wrote: »

Not quite. Look again

Em now? I really wasn't switched on there at all

K.Flyer

mcneil wrote: »

So if one does a job and 10k is for labour and 5k with the materials used. One pays 20% on the labor and then 13% on the materials and if he's registered for vat, he can claim the 13% back and use towards his business.

Not quite there yet...

You have done the job and you have been paid 1,135.00 euro incl vat @13.5%.
Of the that amount, 135.00 euro is typically owed to revenue.
Now lets presume you (your business) paid 500.00 inclusive of vat @ 23% out to the supplier in materials for that job. (23% vat of 500.00= 93.49 euro.)
You deduct the 93.49 from the 135.00 leaving you with 41.51 to be paid back to revenue for your vat return.
Off the remaining 500.00...
If you draw that full amount from the business for personal use and spend it all, then you, not the customer, will be liable to pay income tax on that amount, so when drawing from that amount you should not take it all as you will have nothing left to run your business, or pay your income tax from.
You are only liable for income tax on the amounts that you personally take out from your business.
Now lets say out of the remaining 500.00 euro you spend 123.00 inclusive of vat on new equipment for your business. 23.00 euro of this is vat. You can also deduct this amount from the 41.51 euro, further reducing your vat return amount.
So now you are left with 377.00 to run the business and take your personal income, including income tax from.
Hope that helps somewhat.

mcneil

emmetkenny wrote: »

No that's wrong.

You do the job for €15,000 total.

The €15,000 includes Vat at 13.5% which totals €1785. The Customer pays you the €15,000 for the work you've done. You now owe the €1785 to Revenue for your Vat on Sales and the rest is your taxable income.

At the end of the year you then do a tax return and state that you made sales totaling €13,215 excluding Vat for the year.

Now that €13,215 is chargeable to income tax which you have to pay out of your own money.
Assuming no credits and all your income is charged at 20% totaling your Income Tax bill would be €2643.

13.5% of 15000 is 2075 is it not. You have 1785.


Very confusing all that. I always thought it was how I wrote above.

So basically it's best just to get the client to buy materials and of its 10k for labor then all I need to do is pay 20% of this.

TitianGerm

mcneil wrote: »

13.5% of 15000 is 2075 is it not. You have 1785.


Very confusing all that. I always thought it was how I wrote above.

So basically it's best just to get the client to buy materials and of its 10k for labor then all I need to do is pay 20% of this.

€15,000 includes the Vat so the €15,000 is in fact 113.5% not 100%.

If the client buys the material you still have to include Vat on your labour.

mcneil

emmetkenny wrote: »

€15,000 includes the Vat so the €15,000 is in fact 113.5% not 100%.

If the client buys the material you still have to include Vat on your labour.

So if one does a job and it takes x amount of hours to finish and that's 600euro for your time a week. One has to charge 600+13% vat then 20% gets taken from that?

I thought one only charged vat if registered

barneystinson

Jesus wept.

If ever there was a thread that needed a do over its this one.

McNeil - first thing first - this 20% you're talking about, are you by any chance a subbie and is it the RCT that the principal contractor deducts out of your payment?

TitianGerm

mcneil wrote: »

So if one does a job and it takes x amount of hours to finish and that's 600euro for your time a week. One has to charge 600+13% vat then 20% gets taken from that?

I thought one only charged vat if registered

You only charge Vat if your registered. If you earn over €37500 in a year you have to register.

If your not registered and you invoice the client €600, then that €600 is chargeable to Income Tax at 20%. Your left with €480 take home.

If you are registered for Vat you can include the Vat in the €600, so €529 ex Vat and €71 Vat.
You would then pay Income Tax on the €529 at 20%. Your left with €423.

Or if your registered for Vat you can charge €600 ex Vat and add the Vat on top of €81. So you would give the client an invoice of €681. You are then charged Income Tax on €600 and your left with €480.

I think your best option would be to contact a local accountant and ask for a meeting and go through all this with them in person. They shouldn't charge for an initial consultation.

mcneil

barneystinson wrote: »

Jesus wept.

If ever there was a thread that needed a do over its this one.

McNeil - first thing first - this 20% you're talking about, are you by any chance a subbie and is it the RCT that the principal contractor deducts out of your payment?

Any work done asca subbie, the contractor pays 20% to revenue. Also do private work so when I price work, I price 124 a day, 100 for me, 20% for revenue as income tax. Was looking into see if registering for vat benefitted me but seems not.

mcneil

emmetkenny wrote: »

You only charge Vat if your registered. If you earn over €37500 in a year you have to register.

If your not registered and you invoice the client €600, then that €600 is chargeable to Income Tax at 20%. Your left with €480 take home.

If you are registered for Vat you can include the Vat in the €600, so €529 ex Vat and €71 Vat.
You would then pay Income Tax on the €529 at 20%. Your left with €423.

Or if your registered for Vat you can charge €600 ex Vat and add the Vat on top of €81. So you would give the client an invoice of €681. You are then charged Income Tax on €600 and your left with €480.

I think your best option would be to contact a local accountant and ask for a meeting and go through all this with them in person. They shouldn't charge for an initial consultation.

Looking at that, registering for vat and one is worse off

TitianGerm

mcneil wrote: »

Looking at that, registering for vat and one is worse off

You might have no choice though if your over the limit.

Bear in mind all the above figures for not include Vat on Purchases which would be deductible from your Vat on Sales. Vat can be claimed on diesel, telephone, purchase of a new van, materials and tools etc.

mcneil

emmetkenny wrote: »

You might have no choice though if your over the limit.

Bear in mind all the above figures for not include Vat on Purchases which would be deductible from your Vat on Sales. Vat can be claimed on diesel, telephone, purchase of a new van, materials and tools etc.

Don't earn over 37k so safe for now. I'd be happy with just staying below the threshold. Have no major outgoings so happy with between 400-650 a week.

mfceiling

Also remember that VAT is only paid by the "principal" contractor...

Therefore if you are a subbie under another contractor then it's more than likely that he is charging VAT and you don't charge him VAT on your labour.

It's a better system tbh...I remember working for a lad who I had to charge VAT to...He was charging VAT to the subbie who he had taken the work from...that contractor was then charging VAT to the developer who was in charge of the whole site!!

barneystinson

Ahhhh lads, seriously this is blind leading the blind stuff!!!

This 20% income tax on your €600 that ye keep talking about is just plain WRONG and ye need to stop. You pay income tax, plus USC, plus PRSI, on your PROFIT as a sole trader. This is all of your €600's in the year, minus all of your allowable outgoings like materials, diesel and motor running costs, insurance, phone, wear & tear on plant & equipment etc... What rate of income tax you actually end up paying depends on what your profit is, what tax credits you have available (which will depend on your personal circumstances i.e. married or single).

The 20% that the principal deducts, is paid over to Revenue and stands to your credit when you get to the end of the year and work out your actual tax liability on the basis I just set out above - unless you've got virtually no overheads, and if your sales is less than the VAT threshold of 37.5k then there's no way you will actually have a tax bill of 20% of your invoiced total.

Coincidentally - if you do have virtually no overheads i.e. if you are providing labour only to your principal contractor, then the likelihood is that you aren't actually a sole trader at all on those jobs but are an employee and should be paid through the PAYE system. This is more of a problem for him than you in all likelihood though.

As for VAT the bottom line is you need to understand that when you are working for a principal contractor, or for any customer who is a business registered for VAT, then it makes no difference whether you charge them VAT or not. If you do a job in my shop tomorrow and charge me €600 and no VAT, then I pay you €600. If you charge me €600 + VAT @ 13.5% a total of €681, then I pay you €681 and I claim back the €81 in VAT from Revenue and the cost to me is ......... <drum roll>..... €600. VAT is NOT a cost in a business to business transaction like that - it is only a cost to the end user, the private consumer, like a householder. So it's only on those jobs that the customer actually cares whether they are charged VAT or not, on top of your magical €600.

Iker

mcneil, VAT charged by a sole trader is not profit. VAT is money that goes to Revenue. You won't get charged Income Tax on it.
If your earnings from trade exceed €37,500 per annum, then you are considered a chargeable person by law and have to register for and collect VAT (i.e. add it to your invoices). You also have to keep invoice records, file VAT returns on ROS (usually bi-monthly) and pay it all to Revenue.
If not over the threshold (€37,500), people in some trades still register for VAT for diverse reasons.
One is that once you get your VAT number, you can buy supplies/services for your business free of VAT. Or if you pay VAT for them, you will be entitled to a credit for the amount paid. But any VAT you charge your customers, goes to the Revenue (after your credit is deducted). The rates of VAT will depend on the activity or trade, not necessarily 13.5% or 23%. But it won't be more than 23%.

Income Tax has nothing to do with VAT, and I think no one is doing you a service by getting the two of them mixed up in their answers.
With VAT, you don't gain of lose money. You simply collect it for the Revenue. It does help some businesses because it increases the cashflow (because you charge more) and also reduces the upfront costs of buying supplies and services. But it is an added worry having to file returns on time and pay religiously.
With the Income Tax, you basically file your return once a year and pay your 20% up to the cut-off point on your earnings (i.e. trade, rental income) and 40% on anything over the cut-off point. Same rates like everybody else on PAYE. Of course, if you have other more exotic incomes they might be taxed at a different rate; or not taxed under Income Tax at all if they've ve been taxed under other taxeheads.

The only time the VAT and Income Tax would meet, is if you had some unused VAT credits and an Income Tax liability, then you could offset them against it. Otherwise, they are two separate things.
VAT will not affect how much Income Tax you end up paying because it is neither profit nor loss.
Whether customers are put off by the VAT on top or not, once registered if you don't charge it it'd come out of your end.... so charge it anyway because Revenue gets paid no matter what.

Iker

mcneil, VAT charged by a sole trader is not profit. VAT is money that goes to Revenue. You won't get charged Income Tax on it.
If your earnings from trade exceed €37,500 per annum, then you are considered a chargeable person by law and have to register for and collect VAT (i.e. add it to your invoices). You also have to keep invoice records, file VAT returns on ROS (usually bi-monthly) and pay it all to Revenue.
If not over the threshold (€37,500), people in some trades still register for VAT for diverse reasons.
One is that once you get your VAT number, you can buy supplies/services for your business free of VAT. Or if you pay VAT for them, you will be entitled to a credit for the amount paid. But any VAT you charge your customers, goes to the Revenue (after your credit is deducted). The rates of VAT will depend on the activity or trade, not necessarily 13.5% or 23%. But it won't be more than 23%.

Income Tax has nothing to do with VAT, and I think no one is doing you a service by getting the two of them mixed up in their answers.
With VAT, you don't gain or lose money. You simply collect it for the Revenue. It does help some businesses because it increases the cashflow (because you charge more upfront) and also reduces the upfront costs of buying supplies and services. But it is an added worry having to file returns on time and pay religiously.
With the Income Tax, you basically file your return once a year and pay your 20% up to the cut-off point on your earnings (i.e. trade, rental income) and 40% on anything over the cut-off point. Same rates like everybody else on PAYE. Of course, if you have other more exotic incomes they might be taxed at a different rate; or not taxed under Income Tax at all if they've ve been taxed under other taxeheads.

The only time the VAT and Income Tax would meet, is if you had some unused VAT credits and an Income Tax liability, then you could offset them against it. Otherwise, they are two separate things.
VAT will not affect how much Income Tax you end up paying because it is neither profit nor loss.
Whether customers are put off by the VAT on top or not, once registered if you don't charge it it'd come out of your end.... so charge it anyway because Revenue gets paid no matter what.

BorneTobyWilde

If he does work for various people , build a wall for a old man, plasters a ceiling for a desperate house wife he would most likely get paid cash, and his invoice would be a handshake.

barneystinson

BorneTobyWilde wrote: »

If he does work for various people , build a wall for a old man, plasters a ceiling for a desperate house wife he would most likely get paid cash, and his invoice would be a handshake.

Until he has a row with someone over a job and they report him, and tell about any other cash jobs they know of him doing...

Or someone who does things by the book loses out on work to him, and does likewise...

A lot to be said for a clear conscience and a good night's sleep.

dogsears

K.Flyer wrote: »

Not quite there yet...

You have done the job and you have been paid 1,135.00 euro incl vat @13.5%.
Of the that amount, 135.00 euro is typically owed to revenue.
Now lets presume you (your business) paid 500.00 inclusive of vat @ 23% out to the supplier in materials for that job. (23% vat of 500.00= 93.49 euro.)
You deduct the 93.49 from the 135.00 leaving you with 41.51 to be paid back to revenue for your vat return.
Off the remaining 500.00...
If you draw that full amount from the business for personal use and spend it all, then you, not the customer, will be liable to pay income tax on that amount, so when drawing from that amount you should not take it all as you will have nothing left to run your business, or pay your income tax from.
You are only liable for income tax on the amounts that you personally take out from your business.
Now lets say out of the remaining 500.00 euro you spend 123.00 inclusive of vat on new equipment for your business. 23.00 euro of this is vat. You can also deduct this amount from the 41.51 euro, further reducing your vat return amount.
So now you are left with 377.00 to run the business and take your personal income, including income tax from.
Hope that helps somewhat.

This is wrong. Please stop.

duckcfc

dogsears wrote: »

This is wrong. Please stop.

Are sure! or is one supposed to pay 20% on what gets paid rather than what one takes as wages to spend

dogsears

duckcfc wrote: »

Are sure! or is one supposed to pay 20% on what gets paid rather than what one takes as wages to spend

Yes, I'm sure. If you are a sole trader (which is the scenario given by OP) you get taxed on what your business earns in profits. That's already your money regardless of whether you draw it out or not.

If you run your business through a limited company its different. Then you pay tax on the salary the company pays you and the company pays tax on its profits (after taking a deduction for your salary). But the money in the company isn't yours till you take it either as salary or as a dividend and pay tax.