INCOME TAX vs VAT - Only one affects your Profit!
Both Income Tax and VAT will affect your CASHFLOW , but only Income Tax is really an expense for accounting purposes.
TAKE very good note – VAT laws and TAX laws have different rules on how expenses are treated. Therefore this will result in different treatment of your expenses.
In a nutshell – in this case , what is good for the goose is NOT good for the gander and Vice versa
For example: Business Expenses on which there is NO VAT such as : Insurance , Bank Charges, Interest and Wages will naturally not enter in your VAT Return.
Meaning that they cannot deducted from your Output VAT due to the VAT Dept.
However these are allowable as deductions for Income Tax Purposes and so they will be deducted from your Profits and in turn reduce your Income Tax bill!
CASHFLOW VS PROFIT
Example
A person is registered for VAT under ART 10 . This means the person is under the VAT Refund system and so whilst the person has to charge 18% or applicable VAT rate on top of the business Sales, the same ART10 person can also deduct any VAT incurred.
Therefore assuming person is registered under Art 10 – this person must charge VAT but can deduct VAT incurred.
Assuming the below figures relates to a new ART 10 start-up Business operating in its first 3 months – October till December:
Net Income before VAT | VAT | Gross Amount | |
Sales | 10,000 | 1,800 | 11,180 |
Telecommunications | 500 | 90 | 590 |
Advertising | 1,000 | 180 | 1,180 |
Wages | 4,000 | NIL | 4,000 |
Insurance | 200 | NIL | 200 |
Permit | 100 | NIL | 100 |
Rent | 1,200 | NIL | 1,200 |
Next – below we will learn how all figures feature in Tax Return, but not all in your VAT return.
VAT RETURN WORKINGS
Your VAT Return Computation would be as follows:
Item Net VAT
Euro Euro
Sales 10,000 1 ,800 – Output Vat due
Telecommunications 500 (90) – Input Vat deductible
Advertising 1,000 (200) – Input Vat deductible
_______
VAT Due: 1,510
Note: Items which do not have VAT such as wages, insurance, permits and rent are not listed in the VAT RETURN.
It appears that the VAT dept is owed €1,510 as there was more output VAT on Sales, than input VAT from Expenses.
Either way the VAT has already been collected from your clients (hopefully). It just a matter of passing the VAT due to the Govt as the good indirect tax collectors that we essentially are!
TAX RETURN WORKINGS
Remember, only NET amounts will go in your tax return.
Below is how you’re Profit & Loss (for calculating and submitting your TAX Return) would look like:
Profit and Loss
01.10.2019 till 31.12.2019
Sales 10,000
Less Expenses
Telecommunications 500
Advertising 1,000
Wages 4,000
Insurance 200
Permit 100
Rent 1,200
______
Total Expenses (7,000)
______
Net Profit 3,000
Note: Wages, insurance, permit and rent expenditure did not have VAT, however whilst they do not affect or feature in your VAT return, they are deductible from your Sales Revenue and therefore reduce your NET Profit.
Hold your horses though… we’re assuming that all these expenses relate to the business, and are not personal expenses!
That sorted, the 3,000 Eur falls in the Tax Free Tax Bracket and so no tax is due on the profit, if this was your only income for the year!
For more help to distinguish between your VAT workings and your Income Tax workings contact us for a complimentary meeting.
