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VAT Implications of Common Transactions

VAT on sales


The three main classes of sales a taxable person will make are:

  • Sales to customers outside the EU
  • Sales to customers in the EU
  • Sales to customers in Ireland

Sales to customers outside the EU

Sales to customers outside of the EU do not attract a charge to Irish VAT. The vendor must retain proof that the goods were dispatched to a customer outside of the EU in order to be permitted to not charge VAT on the supply. Such supplies are not exempt supplies but rather zero rated supplies. This is a very important concept in VAT as when a taxable person makes exempt supplies it is disallowed from reclaiming VAT on related purchases whereas when a taxable makes zero rated supplies it is entitled to reclaim VAT on related purchases.

Sales to customers in the EU

When sales are made to customers in other EU member states the supply will be zero rated in the same way as for sales to customers outside the EU. In order to zero rate the supply the vendor must obtain proof that the customer is a VAT registered trader. If the supply is to a private individual the rules differ and requirements to register in other countries may arise.

Sales to customer in Ireland

When sales are made to customers in Ireland, VAT has to be charged at the applicable rate. There are no different rules for supplies made to business customers or private individuals.

VAT on purchases

The three main classes of purchases a taxable person will are:

  • Purchases from suppliers outside the EU
  • Purchases from suppliers in the EU
  • Purchases from suppliers in Ireland

Purchases from suppliers outside the EU

As a general rule, imported goods are liable to VAT at the same rate as that which applies if they were purchased from a supplier in Ireland. The VAT must be paid at time of importation. If the purchase relates to the taxable activities of the taxable person the VAT can be reclaimed in the normal way.

Purchases from suppliers in the EU

When goods are purchased from a supplier in another EU Country the supplier will not charge VAT on the supply. In order for the supplier to be permitted to charge no VAT on the supply the supplier must be furnished with a valid Irish VAT number. The Irish customer will then self account for the VAT on a reverse charge basis. This is done by calculating the VAT at the appropriate Irish rate and including it as both VAT on sales and VAT on purchases on the same VAT return. The example below illustrates how self accounting works.

When goods are purchased from a supplier in Ireland the supplier will charge VAT at the appropriate rate. The VAT charged by the supplier can be reclaimed on the company’s VAT Return.

To help give clarity on treatment of the three types of purchases the following numerical example illustrates the treatment of the VAT when a purchase of goods to the value €10,000 is purchased from a supplier from each category (assume the standard VAT rate is applicable).

From a non EU Supplier

If the materials were purchased from a supplier outside the EU, a charge to VAT at 23% will arise at time of importation. The purchaser will receive an invoice for €10,000 from the supplier plus a document showing the VAT of €2,300 which was paid on the importation. The purchaser will reclaim the VAT charged on the purchase on its VAT return. The net cost of the materials to the company is therefore €12,300 - €2,300 (VAT reclaimed) = €10,000.

From another EU Country

The supplier in the other EU Country will not charge VAT if the supplier is furnished with an Irish VAT number. The Irish company will pay the supplier €10,000. The Irish company will then calculate the VAT that would have been charged had they purchased the goods from an Irish company €10,000 * 23% = €2,300. This amount will then be included in the next VAT return as both a VAT on sales and purchases. This will neutralise the charge to VAT. Therefore the cost of the materials to the company is €10,000.

From an Irish Supplier

If the material were purchased from an Irish supplier the Irish company would charge VAT at 23% on the supply. The purchaser would therefore receive an invoice for €10,000 + VAT of €2,300. The purchaser would pay the supplier €12,300. The supplier will return the VAT on the sales on its VAT return. The purchaser will reclaim the VAT charged on the purchase on its VAT return. The net cost of the materials to the company is therefore €12,300 - €2,300 (VAT reclaimed) = €10,000.

As can be seen above the net cost of the purchase is the same to the taxable person irrespective of where the supplier is located.

There is a large volume of rules and regulations in the area of VAT and this is just a brief introduction which covers the more common transactions a company will enter into.