Notional VAT

What is Notional VAT?

Notional VAT is VAT you charge yourself when a supplier didn’t charge it to you, usually because they’re in another country. If you’re allowed to claim it back, you claim it straight back at the same time when doing the VAT Return.

On your VAT return, you write the VAT down twice: once as VAT you owe, and once as VAT you’re reclaiming. For most businesses the two cancel out, so no money changes hands. 

That’s why it’s called “notional”, it’s always recorded, but usually not paid.

Why bother?

Writing it down means the purchase is taxed the same as if you’d bought it in Ireland. If you can normally claim VAT back, it costs you nothing. If you can’t (because your business is VAT-exempt or the item isn’t claimable), you pay the VAT, just as you would buying locally. It also tells Revenue about the purchase, so they can match it against what the foreign supplier reported.

Let's look at an example!

• Lets take Liffey Bikes Ltd, a VAT-registered bike shop in Dublin that sells and repairs bikes. For this example we will use a 23% VAT rate.

• Liffey Bikes orders €10,000 of bikes from a manufacturer in the Netherlands. 
  
  

• The Dutch supplier charges no VAT because Liffey Bikes can only give its Irish VAT number. 

When doing their VAT return, Liffey Bikes then needs to self-account for this.

We know there is a 23% Vat Rate on this Purchase and 23% of €10,000 is €2,300 

So they put €2,300 in box T1 and again put €2,300 into box T2. 

Then simply report the full €10,000 in box E2 (goods from other EU countries). 

NOTE: Dont worry, Big Red Cloud handles these figures for you and even tells you where these figures go on your VAT Return, You just need to focus on recording your Purchases correctly in Big Red Cloud. (Please see the bottom of the article for how this is handled)

What happens on the Dutch side

The Dutch supplier doesn’t self-account for anything. They treat the sale as zero-rated because it’s going to a VAT-registered business in another EU country. They report it on their own Dutch VAT return and on a list (VIES) that’s shared with other EU tax authorities, saying “we sold €10,000 of goods to Liffey Bikes, Irish VAT number IE1234567X”. That’s all they do. Liffey Bikes does nothing in the Netherlands.

What happens on the Irish side

The VAT doesn’t disappear. It moves from the Netherlands to Ireland. Liffey Bikes is now responsible for the Irish VAT instead of the supplier, so they record €2,300 owed in T1. Because they’re a VAT-registered business buying stock for their business, they’re also entitled to claim it back, so they record €2,300 in T2. Net: nothing to pay.

OK, lets compare it to buying from an Irish supplier

If Liffey Bikes bought the same bikes from a supplier in Cork, they’d pay €12,300 and then reclaim the €2,300 on their VAT return. Their real cost is still €10,000.

So in both cases the bikes cost Liffey Bikes €10,000. VAT-registered businesses almost never end up bearing VAT on their business purchases, whether they buy at home or abroad. Buying from the Netherlands just skips the step of paying €2,300 and claiming it back.

So who actually pays VAT?

The final customer. When Liffey Bikes sells one of those bikes to a member of the public for €1,000 plus €230 VAT, they pay that €230 to Revenue. That’s where the tax is really collected. VAT is designed as a tax on the end consumer, and businesses are mostly just collectors along the way.

It’s not about bikes

It applies to pretty much any goods bought from a VAT-registered business in another EU country by a VAT-registered business in Ireland. Bikes, laptops, coffee beans, office chairs, anything.

Why notional VAT instead VAT exempt?

Because “exempt” would mean no Irish VAT is ever due on the purchase, and that would create a loophole. Notional VAT means the VAT is due; most businesses just get to claim it straight back.

For Liffey Bikes it makes no difference. Exempt or notional, they pay nothing extra, because they can reclaim VAT anyway. The difference shows up with businesses that can’t reclaim VAT.

Take a dental practice. Dental services are VAT-exempt, so the practice can’t claim back VAT on what it buys. If it buys €10,000 of equipment:

• From an Irish supplier: it pays €12,300. The €2,300 VAT is a real cost.

• From a Dutch supplier, with Notional VAT: it records €2,300 owed in T1 but can’t claim it in T2, so it pays €2,300 to Revenue. Total cost is €12,300, the same as buying in Ireland.

So Notional VAT keeps things fair. Buying from another EU country is never cheaper or dearer, VAT-wise, than buying at home. If it were treated as exempt, every business that can’t reclaim VAT would buy abroad to avoid it, and Irish suppliers would lose out.

The same applies to any normal business buying things it can’t claim VAT on.

There’s also a practical reason. Recording it as notional VAT, with the €10,000 in box E2, lets Revenue match your return against what the Dutch supplier reported selling to you. An exempt label would hide that.

How would we record this on Big Red Cloud?

We would record this in the Purchases Book in Big Red Cloud, just as we would for a normal purchase within Ireland, the only difference is that we ensure the correct VAT type is selected, in this case "Other EU". This is what tells Big Red Cloud that Notional VAT applies here.

When running your VAT report, you will then have the correct figures. 

The nice thing about doing this with Big Red Cloud is that it highlights exactly what figures go where on your VAT report to eliminate any guesswork!