VAT on royalties

summereire

Hi, I'm trying to understand the role VAT would play in royalty payments in a business licensing situation.

If I charge 20% to a company to license an idea, and they in turn will charge VAT on the sale of the product based on that idea, do I include VAT on top of the 20% or include it within it?

It's all the more complicated because we're not currently VAT registered due to being under the threshold so if we were to charge VAT would that mean changing the rate of the royalty at the point (if reached) where we go over the threshold?

Any tips on how this is normally done would be much appreciated.

thegolfer

summereire wrote: »

Hi, I'm trying to understand the role VAT would play in royalty payments in a business licensing situation.

If I charge 20% to a company to license an idea, and they in turn will charge VAT on the sale of the product based on that idea, do I include VAT on top of the 20% or include it within it?

It's all the more complicated because we're not currently VAT registered due to being under the threshold so if we were to charge VAT would that mean changing the rate of the royalty at the point (if reached) where we go over the threshold?

Any tips on how this is normally done would be much appreciated.

In a business to business arrangement VAT is not a cost, and will not alter the underlying transaction between the two companies.

In this instance royalty-copyright VAT would be 23% Thus you would charge an additional 23% to your customer, and then you pay that over to Revenue.

VAT is a neutral tax between the majority of businesses, baring a few exceptions. Only Joe public in reality pays VAT on the consumption of products services etc.

You would add VAT on to your product or service. The added benefit to this is that you also get to reclaim VAT which has been charged to you.

If you are charging to another VAT registered entity then there will be no repercussions

If to a non VAT registered entity this may alter your pricing structure, as their costs will increase with the additional VAT, which they cannot claim.

summereire

Thanks, that's very helpful. It will all be business to business but I will likely be dealing with (a) VAT registered, (b) VAT non-registered (as small) and (c) VAT exempt business with this licensing/royalty arrangement.

If the royalty percentage is then 20% is it then best to charge 20% plus VAT to everyone, and (a) will be able to claim it back but b will have to pay more?

Otherwise if I keep it at a flat 20% for all of the above would that mean in effect I would have to pay the VAT for (b) and (c)?

TiGeR KiNgS

summereire wrote: »

Thanks, that's very helpful. It will all be business to business but I will likely be dealing with (a) VAT registered, (b) VAT non-registered (as small) and (c) VAT exempt business with this licensing/royalty arrangement.

If the royalty percentage is then 20% is it then best to charge 20% plus VAT to everyone, and (a) will be able to claim it back but b will have to pay more?

Otherwise if I keep it at a flat 20% for all of the above would that mean in effect I would have to pay the VAT for (b) and (c)?

Your understanding of VAT is clearly not competent and should therefore seek professional advice to bridge this gap.

FYI, C is VAT exempt so does not even fall into the equation.

summereire

A VAT-able business selling to a VAT-exempt business would still attract VAT in the transaction, right? The exempt business would still have to pay it as I understand it.

TiGeR KiNgS wrote: »

FYI, C is VAT exempt so does not even fall into the equation.

exaisle

No. If a business is vat exempt then on display of their vat exemption cert you do not charge them vat. The vat exemption applies to purchases/inputs.
As mentioned above you should seek the services of a professional.

summereire

Thanks. Yes I'm more presearching this in advance.

Is it then that as a VAT charging business that you don't charge VAT to those that are VAT exempt and do to those that are under the VAT registered threshold amount?

Also for VAT exempt how would that work say for retail purchases where they automatically include VAT in prices?

exaisle wrote: »

No. If a business is vat exempt then on display of their vat exemption cert you do not charge them vat. The vat exemption applies to purchases/inputs.
As mentioned above you should seek the services of a professional.

TiGeR KiNgS

summereire wrote: »

Thanks. Yes I'm more presearching this in advance.

Is it then that as a VAT charging business that you don't charge VAT to those that are VAT exempt and do to those that are under the VAT registered threshold amount?

Also for VAT exempt how would that work say for retail purchases where they automatically include VAT in prices?

This link is comprehensive overview;
http://www.revenue.ie/en/tax/vat/index.html

Professional guidance will be your next step.

summereire

It seems that VAT exempt businesses DO get charged VAT from my reading of that link. Am I missing something?

"17. Who may not register in respect of supplies of goods or services?
A person carrying on only exempt activities or a person carrying on activities otherwise than in the course or furtherance of business may not register for VAT. However, a person carrying on exempt activities may be required to register in respect of intra-Community acquisitions of goods, and services received from abroad that are taxable where received from persons not established in the State (see paragraph 2). There is no provision for deductibility of VAT on purchases of goods and services by exempt persons."

http://www.revenue.ie/en/tax/vat/guide/registration.html#section17

summereire

Any reading I've done up on this seems to involve lots of confusion, for example an old thread: http://www.askaboutmoney.com/threads/invoicing-a-vat-exempt-client.48237/

Any conclusive answer/source as to whether a VAT Exempt business is able to buy goods and services without being charged VAT? Even professionals seem to have different opinions on this.

barneystinson

There's two different kinds of "VAT exempt" and that's what causes confusion because people start talking at cross purposes, and then getting cross!

The first type of VAT exempt status is a trader who makes exempt supplies - insurance companies, doctors, banks are all examples - in general they neither charge VAT on their services nor can they recover any VAT that is charged to them. From the perspective of their suppliers, however, it is irrelevant whether or not they are exempt. The supplier still has to account for VAT in the same way as they would for any other customer.

The second type of VAT exempt status is this: http://www.revenue.ie/en/tax/vat/leaflets/zero-rating.html - in general it applies to businesses who derive most of their sales from exports. These types of company can get an authorisation under Section 56 of the VAT act, which they give to anyone supplying them in the state, and that person then charges them VAT at zero percent.

So basically, if the rate of VAT that is applicable to your services is 21%, that is what you should charge unless and until you have a copy of a Revenue authorisation telling you to zero rate your invoices to that customer.

summereire

Thank you very much for your extraordinarily clear answer!

So a doctor for example can't claim back VAT. This is also the case even if a proportion of their income is VATable, for example if they sell products- is that correct? However if over the threshold they wold need to register to charge VAT right, but could they get any back, even a proportion?

barneystinson wrote: »

There's two different kinds of "VAT exempt" and that's what causes confusion because people start talking at cross purposes, and then getting cross!

The first type of VAT exempt status is a trader who makes exempt supplies - insurance companies, doctors, banks are all examples - in general they neither charge VAT on their services nor can they recover any VAT that is charged to them. From the perspective of their suppliers, however, it is irrelevant whether or not they are exempt. The supplier still has to account for VAT in the same way as they would for any other customer.

The second type of VAT exempt status is this: http://www.revenue.ie/en/tax/vat/leaflets/zero-rating.html - in general it applies to businesses who derive most of their sales from exports. These types of company can get an authorisation under Section 56 of the VAT act, which they give to anyone supplying them in the state, and that person then charges them VAT at zero percent.

So basically, if the rate of VAT that is applicable to your services is 21%, that is what you should charge unless and until you have a copy of a Revenue authorisation telling you to zero rate your invoices to that customer.