Vat registered competing with non-Vat registered

[Brendan Burgess]

A friend of mine provides services to clients, most of whom are not registered for VAT and so cannot reclaim it.

He is registered for VAT (21.5%) as his revenue is above the €37,500 threshold for services.

His problem is that most of his competitors are smaller businesses which are not registered for VAT. So if they are quoting €10k for a job, he has to quote €10k including VAT, so his fee is effectively €8,230.

Is there any legitimate tax planning way around this? He is a sole trader.

For example, could he set up a limited company for part of the business and put the unregistered clients through that?

Brendan

 

[Caveat]

VAT issue aside, is there maybe any kind of back-up, customer service element your friend could push/offer to give him a competitive edge?

 

[z109]

Brendan, I am self-employed, but I contract through a Dutch company to clients outside Ireland, so my VAT is zero rated (as an export). I don't know whether there is a foreign invoicing service he could use or whether that would be seen as evasion by the authorities.

I agree that the VAT limits for services are very low and are a disincentive to expand business. I know of a couple of people who have refused to expand their business preferring to stay under the VAT limit - the reasoning being that if they go over the limit, they will lose business so in a year's time they will be back where they started (under the limit), but having lost customers during that time.

I did hear about a change to the VAT regime with a higher limit for service companies that don't reclaim VAT back on their purchases, but I didn't follow it up and I don't know if the change came in. Anyone know? (There was, for sure, a change in the UK VAT regime to allow this).

 

[ubiquitous]

The best argument your friend can make, if they get the opportunity, is that they are a serious business, with a decent level of turnover, and that is why they are VAT registered. Their competitors are unregistered because they don't have a decent level of turnover, most commonly because they are unproven startups or "lifestyle" part-time operations that cannot offer the same level of service or quality as your friend.

 

[Nige]

Brendan, I am self-employed, but I contract through a Dutch company to clients outside Ireland, so my VAT is zero rated (as an export). I don't know whether there is a foreign invoicing service he could use or whether that would be seen as evasion by the authorities.

that won't work as the customer, if they are a business, will be obliged to "self-account" for the VAT which effectively means they charge themselves the VAT. If the customer is not a business, the foreign VAT rate will apply.

 

[Brendan Burgess]

Thanks for the ideas folks.

I wonder could my friend come to some sort of arrangement to swop his unregistered VAT clients with a competitor's VAT registered clients.

It does not arise in this case, but what is the situation with a partnership? I presume it is still subject to the €37,500 limit.

A partnership should really operate as two sole traders with one doing the VAT registered clients and the other doing those which are not VAT registered.

Brendan

 

[LouthLass]

I used to work within a field that was very much concerned with VAT in the UK so forgive me if the information may not be technically correct for Irish legislation but I believe the principals may be the same.

If a business decided to split part of its operation in order to avoid reaching the threashold required to register for VAT then it was subject to a 'Artificial Separation' investigation. This investigation would determine the following: Why did the business, whether it is a sole trader, partnership, Ltd company, split the level of income received - what was their explanation? VAT investigators would also look at factors such as the registered business premises and establish the following: Who pays the utility bills, who pays the rent, who employs the staff, who pays the staff costs such as PAYE, NI contributions etc, is it a fair and reasonable split between the businesses for costs etc, do the two different separate business entities have similar/common trading activities, do they share customers/suppliers/bank accounts/accountants?. If the VAT inspector believed that the business was artifically separted then an assessment would be issued with the relevant penalties and potential further charges for fraudulent evasion of VAT with possible court action.

As I said, this is based on the UK revenue action but I believe that the Irish revenue may take a similar view on possible deliberate artifical separation?