Is the VAT reduction the Silver Bullet?

Why the reduction of Value Added Tax (VAT) rate to 9% is not the Silver Bullet.

On engaging with a business in trouble, the first question asked is ‘what is the situation with VAT payments?’ The second is about waste – but that is for another day:  A number of answers have been offered.

‘We owe €25k,’

 ‘We had to take out a loan to make the payments’

‘We can’t keep up with the payments.’

‘We pay once a year, and we never know if we will have enough money to pay it’

‘I let the accountant look after that at the end of the year’

‘I don’t know just at the moment’

‘We are up to date; we have a direct debit system set up to make payments.

‘We have a second account into which monies are transferred to keep ahead of

 payments’

The answers given tell a lot about how a business is managed.

Marching on the streets last year with thousands of other disenchanted employers in hospitality and other retail sectors, it soon became clear that

  1. Most people did not want to be there.
  2. The VAT 9 campaign was a handy hook for the much bigger issues.
  3. There were far bigger issues than VAT.

Will the VAT reduction help; of course it will, however if your business is dependent for its survival on the reduction of VAT from 13.5% to 9%, your business is in much bigger trouble than you realise. Of course, pubs that don’t serve food won’t benefit at all as the VAT on alcohol is 23%.

How does VAT work in Ireland?

If your business’s sales of goods or services exceed the VAT registration thresholds (€42,500 for services or €85,000 for goods within 12 months), VAT registration becomes mandatory. If your sales are below these thresholds, you can register voluntarily. The VAT you pay out is calculated against the VAT you take in from customers. For more information on all the nuances therein, go to revenue.ie.

In short, the money does not belong to you -ever.

It is being collected by you from your customers so the government can then collect from you and use it as they see fit- not my area of expertise. The money is passing through the business like a train passing through a station- it picks up passengers and drops them off at the next one.

To repeat, it never ever belongs to you. It is not for paying wages, buying a second home in the south of France, paying for a holiday, the kids’ education or a yacht. This is important and the reason it is stated here is that all the above have been offered as reasons for being behind on payments.

It is one of the most fundamental financial housekeeping systems to put in place. When you are setting up the business or if you are currently in business, speak to your accountant and insist that they set up a robust system to manage VAT payments.

Just for the record, if you don’t have the money to pay the VAT when it is due, the revenue will come looking for it, it is not their problem if your business is not being financially well managed.

The curious thing about VAT is that some businesses feel that they can ‘borrow’ VAT to pay for other expenses and then somehow hope that the money will materialise out of thin air when it is due. The most important financial discipline is to completely obliterate any possible uses of the VAT money from your thinking – other than paying revenue.

How to ensure that you will never have to take out a loan (further expense) to pay VAT.

  1. Insist that your accountant sets up a ring-fenced system for monies which will be available to pay VAT when due.
  2. Set up a second account to take monies for VAT and other ‘must pay’ expenses – get in touch for more information on this.
  3. Set up a direct debit system to revenue based on sales.
  4. Set up at least quarterly payments, preferable every two months.
  5. Ensure that correct VAT rates are applied on the Point-of-Sale system – common mistake.
  6. Consider messing around with VAT at your peril.

Supposing you are already in trouble with VAT, have had to take out a loan and are still in deep do do?

Carry out the steps above today, even if you only have €50 weekly (as with the client who owed the €25k), start the discipline of separating VAT and sleep easy at night.

To have a full CSI – Culinary Scene Investigation of your business, call Blathnaid Bergin at 00353876790854 for onsite or online mentoring.
We also have short, sharp, practical, laser focused courses coming up which might help your business grow, improve and thrive.

info@thebusinessoffood.iewww.thebusinessoffood.ie