What is VAT?
VAT (Value Added Tax) is a multi-stage consumption tax on goods and services consumed within Ireland. Businesses registering for VAT must collect VAT from their customers and remit it to the Revenue Commissioners. However, businesses can also reclaim the VAT they have paid on eligible business expenses.
Criteria for eligible VAT reclaim
To qualify for VAT reclaim, expenses must meet the following criteria and have a clear and measurable connection to the business’s core operations. Expenses that are partially or entirely for personal purposes cannot be reclaimed.
Any eligible expenses must be adequately documented with invoices, receipts, or supporting documents to substantiate the business purpose and eligibility for deduction.
Examples of VAT-Deductible Expenses
- Goods and services directly used in business include raw materials, manufacturing supplies, equipment, and tools used to produce goods or services.
- Professional fees: expenses for accounting, legal, financial, and other professional services related to the business, such as tax preparation, legal advice, and financial consulting.
- Rent and property expenses: rent paid for business premises, property taxes, maintenance costs, and insurance premiums related to the business premises.
- Utilities: electricity, gas, water, and internet services used exclusively for business purposes.
- Travel and accommodation: expenses incurred while travelling for business purposes, including airfare, hotel stays, and meals.
- Marketing and advertising costs include marketing and advertising campaigns, website design, and printing.
- Training and education: expenses for employee training and professional development.
Business vs. Personal expenses
In Ireland, VAT can only be reclaimed on expenses incurred for business purposes. Any costs for personal use or unrelated to the business’s operations are not eligible for VAT reclaims. Here’s how to determine the difference between a business and personal expense.
- Business expenses are incurred to generate income or maintain the business. They include office supplies, rent, utilities, staff salaries, marketing and advertising costs, and travel expenses for business trips.
- Personal expenses are incurred for the benefit of the individual rather than the business. They include groceries, clothing, transportation, and leisure activities.
VAT rules on expenses
VAT deductions are not always straightforward and may be subject to specific rules and conditions. Here are some examples of VAT deductions with particular considerations:
Entertainment expenses
VAT incurred on entertainment expenses is generally not deductible unless the entertainment is directly related to business purposes and is subject to specific conditions. These conditions include:
- Direct business purpose: The entertainment must be directly related to the generation of income or the maintenance of the business. For instance, entertainment for clients or potential customers to discuss business opportunities may be eligible for a partial deduction.
- Reasonable and proportionate: The entertainment must be reasonable in cost and duration, considering the business’s size and the event’s purpose. Excessive or lavish entertainment is not deductible.
- Documented expenses: All entertainment expenses must be adequately documented with invoices or receipts to support the business purpose and deductibility.
Gifts Expenses
VAT incurred on gifts to employees or suppliers is generally not deductible. However, small tokens of appreciation, such as promotional items or meals, may be eligible for a partial deduction if they meet specific criteria:
- Limited value: The value of the gifts should be modest and not excessive. Generally, gifts valued at €50 or less per recipient per year are considered deducible.
- Business connection: The gifts must have a clear business connection and not be personal gifts. They should be promotional or symbolic items that promote the business or express gratitude for business relations.
- Documented expenses: All gift expenses must be properly documented with invoices or receipts to support the business connection and deductibility.
Cars and Motoring Expenses:
VAT deductions for cars and motoring expenses are complex and depend on the purpose of the vehicle and how it is used. The two main categories are:
- Company cars: Company cars used primarily for business purposes are eligible for VAT deduction on the proportion of business use. This is determined by the percentage of business kilometres driven compared to the total.
- Private vehicles: Private vehicles used partly for business are eligible for VAT deduction pro-rata based on the number of business kilometres driven. This requires careful record-keeping of business and private mileage.
Additional considerations to reclaim VAT
- Substantiation requirements: All VAT-deductible expenses must be substantiated with proper documentation, such as invoices, receipts, and travel logs.
- VAT reclaim period: Businesses must reclaim VAT within the prescribed timeframe, typically within four years from the end of the VAT period in which the expense was incurred.
- VAT audits: Revenue may conduct audits to verify VAT compliance, including expense deductions. Businesses should maintain accurate records and be prepared to provide documentation upon request.
It’s important to note that these are general guidelines, and the specific VAT rules on expenses may vary depending on the circumstances. Consulting with a tax advisor or VAT specialist is crucial to ensure accurate compliance and maximise VAT reclaim opportunities.
Real-world scenarios
Scenario 1: marketing agency organises client dinner
Reclaimable VAT:
- VAT incurred on meals and entertainment for clients to discuss a new project and generate business leads.
- Expenses related to venue rental, catering, and promotional materials for the dinner.
- Documented proof of client attendance, meeting agenda, and follow-up discussions or contracts.
Not Reclaimable VAT:
- Excessive or lavish entertainment that exceeds a reasonable cost and duration.
- Entertainment for personal enjoyment, such as socialising or recreation.
- Meals for non-business guests, such as spouses or friends of clients.
- Entertainment that does not directly support business objectives, such as networking or building relationships.
- VAT incurred without proper documentation, such as a guest list, meeting agenda, and invoices.
Scenario 2: software development company purchases new laptops for employees
Reclaimable VAT:
- VAT incurred on purchasing new laptops for employees who need them to perform their work.
- Expenses related to laptop configuration, delivery, and software installation.
- Documented proof of employee roles, laptop specifications, and IT policies mandating laptop usage.
Not Reclaimable VAT:
- Laptops used for personal purposes by employees.
- Laptops that are not essential or appropriate for the employees’ work.
- Laptops purchased without clear IT policies defining their use.
- Laptops that employees do not utilise for their designated work purposes.
- VAT incurred without proper documentation, such as employee roles, laptop specifications, and usage logs.
In both scenarios, the key to reclaiming VAT is maintaining accurate records and demonstrating a clear business purpose for each expense. Proper documentation, including invoices, receipts, and supporting documents, is crucial to support the deduction and substantiate the business connection. Consulting with a tax advisor or VAT specialist can enhance compliance and optimise VAT reclaim opportunities.
Seek expert guidance
Seeking professional guidance is essential when navigating VAT regulations and maximizing our VAT reclaims in Ireland. That’s why we recommend consulting with a tax advisor or VAT expert. We are equipped to provide comprehensive advice tailored to your business needs. From optimising deductions to ensuring compliance with VAT filings, we help you to make the most of your VAT opportunities. Contact our team today to discuss a tailored proposal to suit your needs.
Kiera leads the Bookkeeping, VAT, and Payroll Teams at Accountant Online. Kiera has worked in the financial services industry for over 18 years. She is passionate about helping businesses to get their finances in order so they can get back to what’s important: running your business. Kiera holds a part-qualified accountant qualification from ACCA.