VAT Pitfalls and Opportunities
VAT legislation has been changing at quite a pace in recent times. In the past six months alone, taxpayers and practitioners have had to deal with:
- A new margin scheme for travel agents and tour operators (TAMS)
- A new scheme for dealers of second-hand means of transport (and phasing out of the old one)
- An impending change to the VAT status of local authorities and public bodies
- A change to the place of supply rules for certain services, a new method for reclaiming VAT incurred in other countries, as well as increased compliance requirements for some service providers (all part of ‘The VAT Package’)
- A myriad of smaller amendments and tweaks to the legislation
That's without mentioning the whole new system for dealing with VAT & property transactions which was introduced with effect from 1 July 2008.
In turbulent times, it's more important that we don't lose sight of the basics. VAT impacts on virtually all businesses and it can be a significant cost, especially so if not dealt with correctly. From experience, Revenue audits have in recent times become increasingly focussed on VAT. In the current economic climate, many businesses will not be operating at a profit; however, VAT is a tax on transactions (not profits) which means that even very unprofitable businesses can incur substantial VAT liabilities. For this reason, VAT audits are likely to remain as popular as ever with Revenue.
Common VAT Pitfalls
Below are some common VAT pitfalls which are frequently encountered during Revenue audits. These should be avoided as they can easily lead to settlements.
Vat cannot generally be reclaimed on the following items:
- Entertainment for clients, staff, personal use etc (VAT recovery relating to business entertainment is currently being examined by the ECJ)
- Food and drink (unless acquired as stock-in-trade for resale)
- Accommodation (unless at a ‘qualifying’ conference)
- Passenger cars (20% of VAT is recoverable on purchase or hire of certain new passenger vehicles used for business purposes)
- Goods/expenses incurred that relate to a VAT exempt activity carried on by the business
Valid invoices must be received in order to reclaim VAT – these should include:
- date of issue and sequential number
- VAT number of supplier
- Details of goods/services supplied
- Full name and address of supplier and customer
- Invoice amount, VAT rate and VAT amount
- VAT in question must be Irish VAT expressed in Euros
Errors in VAT frequently occur where properties are bought or sold or where leases are being granted, assigned or surrendered. It is vital that VAT advice is taken prior to entering into any such transactions, particularly in light of the amendments to the legislation in this area.
Care must be taken when dealing with cross-border transactions. In many cases, VAT is not chargeable as the invoice will be zero-rated. However, this treatment generally requires that certain conditions are satisfied. It is vital that invoices are not issued without VAT (in error) as the supplier remains liable for the VAT, and possibly interest and penalties. It is equally important not to pay VAT to suppliers (where it is not correctly chargeable) as it may be extremely difficult to recover any such VAT.
Businesses need to ensure the correct rate of VAT is applied to all goods and services supplied. While the standard rate of VAT in Ireland is 21%, the reduced rates of 13.5% and 0% apply to many goods and services and many services are also exempt from VAT. Many businesses make supplies at different rates and this can equally apply where a mixture of goods/services are supplied for a single consideration.
Statistical forms and general compliance
The penalties for a range of offences (including failing to submit VAT returns in a timely manner) have recently been substantially increased. It is therefore important that businesses complete and submit returns on-time. This applies to VAT returns, Annual Return of Trading Details, Intrastat returns, VIES returns etc.
Common VAT Opportunities
It is equally important for businesses to be able to identify where VAT savings can be made. In some cases, cash-flow savings can be achieved which may be vital in the current downturn. In other cases, real savings can be made which will impact significantly on the bottom line for the business. Below are some common opportunities which businesses may be able to avail of.
Bad debt relief
Can you claim a refund of VAT already paid to Revenue? Many businesses have utilised this relief as debts have become increasingly difficult to collect.
Cash receipts basis
Can you account for VAT when paid by your customers rather than when the invoice is raised? Businesses can opt for the cash receipt basis of accounting if annual turnover does not exceed one million or supplies are almost exclusively (at least 90%) made to customers who are not registered for VAT, or are not entitled to claim a full deduction of VAT.
Timing of issue of invoices
Can you delay issuing invoices to defer the time at which the VAT is due? This may be possible where goods or services are supplied.
Can a cash-flow or real VAT saving be generated by using a VAT group? Real savings can be made where one of the parties is involved in exempt activities and the parties make supplies to each other.
Retained deposits / cancellation fees
Can you claim a refund of VAT where a deposit or advanced payment from a customer has been retained but no supply has taken place? This relief is available to more than just hotel operators.
Review of input tax recovery methodology
Should you be reclaiming more VAT? There are many ways to calculate the appropriate percentage recovery (not just turnover basis) and these should be examined.
VAT 13B certificates
Is 75% or more of your turnover generated from customers established overseas? If so, you may be able to have your suppliers invoice you without charging VAT.
VAT on ‘qualifying’ accommodation in Ireland
Can you reclaim VAT incurred on these costs which relate to attending conferences?
VAT on ‘business cars’
Can you reclaim VAT incurred on such purchases? From 1 Jan 2009, this is possible assuming certain conditions are satisfied.
Reclaiming foreign VAT
Have you incurred VAT abroad – can this be reclaimed? From 1 Jan 2010, EU VAT refund claims are made to the Irish Revenue who in turn seek the refund from the other country.
Timing of VAT returns
Is it possible to submit your VAT returns less frequently if you have small liabilities or more frequently if you are in a continuous refund position?
Large asset purchases/unprocessed supplier invoices
Are you reclaiming VAT at the earliest opportunity?
VAT rates applied
Should you be accounting for VAT at a lower rate? Suppliers should review whether there are opportunities to reduce their VAT liabilities, particularly where they supply a wide range of goods to persons who do not have VAT recovery for those items.
The above are only a selection of the more common pitfalls and opportunities, there are many others. It is vital that businesses dedicate time to evaluating their VAT position as this can help to ensure that liabilities are less likely to accrue and may well open up the possibility of some actual savings. It all adds up....!
Finbarr O'Connell is VAT Director with Grant Thornton Financial and Taxation Consultants Limited.
T: +353 (0)1 680 5771