Contractor - Sole Trader - Income Tax & VAT

[Dillon R]

Hi,

I started working for the first time as a contractor in November 2007. As such I was aware that I would need to register as either a Sole Trader or a Ltd company. To date I have done neither (9months on)

The reason being that I was under the impression that, as a sole trader, Income tax is payable by the 31st October following the year of trade. Therefore once my tax return for 2007 is submitted to revenue pre 31st October 2008 I would not have any interest to pay. Going forward with this idea, I did not see the huge rush to arrange my taxes as I was putting away a sizeable amount of income aside to ensure I could deal with this situation. However I was just made aware of the dreaded VAT.

I had no idea that I would ever have to deal with VAT, I taught that that was only fro ltd companies etc, and not sole traders, however I found this was not necessarily the case. And that if your income was expected to exceed the threshold of €37,500 (service industry) you were required to register for VAT. I would expect to make in the region of €48,000 on my salary per annum, therefore I presume I must register for VAT.

The problem is because I have worked for 9mths not registered, I have not invoiced the company I'm working for the additional VAT onto my bill. So really my questions are thus.

1) INCOME TAX: Have I really messed up by not registering as a sole trader yet, or will it not matter because I have not been required to file a tax return yet.

2) VAT: As I am expecting to earn more that the VAT threshold, do I have to register for VAT?

3) VAT: If I register for VAT, am I required to pay VAT on all earnings, or just those over the threshold (i.e. all 48,000 or 10,500 (48k-37.5k))

4) VAT: If I am required to pay on the entire €48,000 will I have to front the bill for the VAT I have not charged onto my bill? Is it acceptable to retrospectively charge the company I work for for the additional VAT for the previous 9mth period (they are VAT registered).

Basically through inexperience and naivety I am afraid that I have compromised myself hugely and don't know what I can do to fix this situation, or how bad this situation is. I have had no intension of not registering; I just put it off, thinking it wasn't as urgent a situation as it may be. I may ass I only work for one company they are the source of my entire income to date.

Would appreciate any/all the experienced help and advice anyone can offer.

Regards,

Dillon R

 

[Domo]

1) You should register as a sole trader as soon as possible and complete the form (TR1) giving the commencement dates of your business.

2) You are pbliged to register for VAT if your turnover exceeds or is likely to exceed the turnover limit within the following 12 months. Therefore if you knew that your turnover was likely to exceed the limit when you started, you should have registered at the start. However, you need only to register from the date that you estimate that your turnover will exceed the limit, so you need to take advice on that.

3) You should charge VAT on all transactions from the date of registration.

4) You need to take advice on the particular circumstances.

I would suggest that you get tax advice as soon as possible, and the tax advisor will let you know exactly what your situation is for the past and for the future.

 

[Blondie1]

Would be able to advise Dillon R re Vat and Tax obligations , if he is able to send me private message. I don't know how to pm, which I presume is send private message

 

[Graham_07]

I don't know how to pm, which I presume is send private message

For general PM information , click on the posters name in their post box, the drop down menu lists options including sending private messages. Note some posters may have disabled private messages.

 

[Sean-C]

Hi Dillon,

How did this work out for you, I'm looking at setting up as a sole trader myself so it would be great if you answered your original questions.

Regards,
Sean

 

[Mark_Mc]

Hi Dillon,

Firstly, as you are a sole trader the most important thing from your perspective is ensuring that your tax affairs are correctly managed. With this in mind I must advise you that the date your prepare your first set of profit and loss calculations to plays a very big part in determing WHEN and HOW much is paid against your first year's trading. Also, you should note that there is a series of rules set out in tax law which are used to calculate your tax liabilities for the first 3 tax years. The dates used to prepare your accounts over these first 3 tax years play a big part in these calulations and remember, these calculations will hit you directly in the pocket so I would suugest that perhaps someone qualified as a tax advisor might be best to assist and advise you on how best to determine the most suitable dates to use.

On the VAT issue if you are expecting to exceed the service threshold you should register for VAT and account for VAT on your sales. Either charge on a price plus VAT basis or strip out the VAT from what you receive. This would be calculated by dividing the amount you receive by 121 (this is the standard rate of VAT in most cases although the nature of the service can result in it being 13.5% e.g. construction) and multiply the resulting figure by 21 (or 13.5 as appropriate. If you are dealing with a VAT registered business then charging on a price plus VAT basis would not increase the cost base of the customer and so you should be able to so as if you don't your pocket will be lighter.

When completing the form to register for VAT make sure to tick the box that makes reference to is likely to exceed the threshold as ticking another box could cost you money down the road in the future if you were to de-register as the form is prepared in accordance with the legislation underpinning the VAT system and each basis for VAT registration has different implications at the time of de-registering.

You would be expected to charge/account for VAT on all earnings. You should account/charge VAT on all invoices issued on or after the beginning of the VAT period that your VAT registration is effective from. The confirmation letter from Revenue will/should say the effective date. Your fourth question below is slightly confusing. Do you mean pay the VAT out of the €48,000 in advance prior to receiving it or do you mean the 48,000 in the entire amount to be received? Basically VAT is paid over to Revenue onthe 14th of a month for the preceding 2 month period and is calculated by deducting VAT incurred on purchases and expenses from the VAT on your sales. The difference (refund if purchases VAT exceed sales VAT of liability if sales VAT exceeds purchases VAT) is what you actually pay to Revenue on the 14th of the month. The VAT periods are Jan/Feb (deadline 14th March), March/Apr (deadline 14th May), etc etc to Nov/Dec and then the cycle starts again in Jan.

It is possible to set up a direct debit with Revenue to pay your VAT and if you expect to have the same liability every 2 months then multiply your 2 monthly figure by 6 and divide by 12 for the monthly direct debit total. You should note that you need to carefully and regularly review the direct debit figure if there are variations in your income/expenses as if you underpay by a percentage of your final total VAT liability you can incur interest backdated to the middle of the year (if paying by direct debit).

If I can be of any more assistance just let me know.

Hi,

I started working for the first time as a contractor in November 2007. As such I was aware that I would need to register as either a Sole Trader or a Ltd company. To date I have done neither (9months on)

The reason being that I was under the impression that, as a sole trader, Income tax is payable by the 31st October following the year of trade. Therefore once my tax return for 2007 is submitted to revenue pre 31st October 2008 I would not have any interest to pay. Going forward with this idea, I did not see the huge rush to arrange my taxes as I was putting away a sizeable amount of income aside to ensure I could deal with this situation. However I was just made aware of the dreaded VAT.

I had no idea that I would ever have to deal with VAT, I taught that that was only fro ltd companies etc, and not sole traders, however I found this was not necessarily the case. And that if your income was expected to exceed the threshold of €37,500 (service industry) you were required to register for VAT. I would expect to make in the region of €48,000 on my salary per annum, therefore I presume I must register for VAT.

The problem is because I have worked for 9mths not registered, I have not invoiced the company I'm working for the additional VAT onto my bill. So really my questions are thus.

1) INCOME TAX: Have I really messed up by not registering as a sole trader yet, or will it not matter because I have not been required to file a tax return yet.

2) VAT: As I am expecting to earn more that the VAT threshold, do I have to register for VAT?

3) VAT: If I register for VAT, am I required to pay VAT on all earnings, or just those over the threshold (i.e. all 48,000 or 10,500 (48k-37.5k))

4) VAT: If I am required to pay on the entire €48,000 will I have to front the bill for the VAT I have not charged onto my bill? Is it acceptable to retrospectively charge the company I work for for the additional VAT for the previous 9mth period (they are VAT registered).

Basically through inexperience and naivety I am afraid that I have compromised myself hugely and don't know what I can do to fix this situation, or how bad this situation is. I have had no intension of not registering; I just put it off, thinking it wasn't as urgent a situation as it may be. I may ass I only work for one company they are the source of my entire income to date.

Would appreciate any/all the experienced help and advice anyone can offer.

Regards,

Dillon R

 

[ubiquitous]

Firstly, as you are a sole trader the most important thing from your perspective is ensuring that your tax affairs are correctly managed. With this in mind I must advise you that the date your prepare your first set of profit and loss calculations to plays a very big part in determing WHEN and HOW much is paid against your first year's trading. Also, you should note that there is a series of rules set out in tax law which are used to calculate your tax liabilities for the first 3 tax years. The dates used to prepare your accounts over these first 3 tax years play a big part in these calulations and remember, these calculations will hit you directly in the pocket so I would suugest that perhaps someone qualified as a tax advisor might be best to assist and advise you on how best to determine the most suitable dates to use.

In most cases, it will be most tax-efficient to use 31 December as your annual accounting date. As always in situations like this professional advice is recommended. However there is no necessity that this be from "someone qualified as a tax advisor". Any reputable accountant or tax consultant should suffice, particularly one who comes recommended to you by friends or family you can trust.

 

[Mark_Mc]

Cashflow issues aswell as tax issues need to be considered by a sole trader starting out.

E.G. if a client starts trading in August 2008 and prepares the first set of accounts to 31 December 2008 and then his next sets of account ended on 31 December 2009 and 2010 what (I am speaking rhetorically myself) is the affect of this, in terms of timing and amounts, on his tax liability arising from any profit made in the sole trade for the first year?

If the sole trader instead prepares first accounts to end Jan 09 and then Jan 2010 and Jan 2011 what is the benefit of him doing so? Are these dates more beneficial than the December dates and if so in which context? Solely cashflow, quantum of tax liability or perhaps both (again I am speaking rhetorically)?

Does anyone have any views on this?

In most cases, it will be most tax-efficient to use 31 December as your annual accounting date. As always in situations like this professional advice is recommended. However there is no necessity that this be from "someone qualified as a tax advisor". Any reputable accountant or tax consultant should suffice, particularly one who comes recommended to you by friends or family you can trust.