55 Amendment of section 1 (interpretation) of the VAT Act 1972

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1 54 Interpretation (Part 3) This section contains definitions of the legal citations used in Part 3. This is a conventional provision in Finance Acts. It allows abbreviated terms to be used in reference to previous legislation. This section has effect from date of passing of the Act. 55 Amendment of section 1 (interpretation) of the VAT Act 1972 This section adds a new definition of taxable dealer to section 1 of the VAT Act. This section along with changes in sections 56, 58 and the relevant parts of sections 60, 64 and 65 are part of the VAT package of measures transposing into national law EU Council Directive 2003/92/EC, which deals with the VAT treatment of natural gas and electricity. A taxable dealer is one that is in the business of buying and selling goods in certain situations. This section defines a taxable dealer as a dealer who is in the business of supplying natural gas and electricity by providing that a taxable dealer has the meaning assigned to it by section 3 of the VAT Act. The section adds this new definition to the existing definitions of taxable dealer in relation to the supply of used means of transport and the supply of margin scheme goods. There was no change to the treatment of these taxable dealers. In the case of the gas and electricity Directive, a taxable dealer could be Bord Gáis, the ESB or any other supplier of gas or electricity. This section has effect from 1 January Amendment of section 3 (supply of goods) of the VAT Act 1972 This section makes two amendments to section 3 of the VAT Act which deals with the supply of goods. These amendments are part of the VAT package of measures transposing into national law EU Council Directive 2003/92/EC, which deals with the VAT treatment of natural gas and electricity. EU Council Directive 2003/92/EC regarding VAT on natural gas and electricity provides for a number of changes to the current VAT treatment of these products when traded across frontiers. The Sixth VAT Directive rules were unclear as to the place of taxation of these products. This is because it is difficult to determine where electricity or gas is at any one time. The new rules clarify the place where these supplies are taxable.

2 The new Directive is consequential to the liberalisation of the electricity and natural gas markets brought about by Directives 96/92/EC and 98/30/EC respectively. This liberalisation has led to increased cross border trade in gas and electricity and consequently to a review of the relevant VAT rules. Paragraph (a) provides that when natural gas or electricity is supplied to a taxable dealer either in the State, in another Member State, or outside the Community the place of taxation is, the place where the taxable dealer has established the business concerned or has a fixed establishment for which the goods are supplied, or in the absence of such a place of business or fixed establishment the place where the taxable dealer has a permanent address or usually resides. It also provides that when gas or electricity is supplied in the State to a person other than a taxable dealer, the place of taxation is the place where the customer uses and consumes those goods. Paragraph (b) provides the new definition of taxable dealer. It defines a taxable dealer as a person whose main business is the supply of natural gas or electricity for consideration and whose own consumption of those goods is negligible. (a) (b) For the purposes of VAT law, the supply of gas and electricity is considered a supply of goods. The new rules do not impose any additional tax charge on customers. Supplies of gas and electricity consumed in the State will continue to be taxed as before. The Directive provides that where there is a supply of gas through the natural gas distribution system, or a supply of electricity, to a taxable dealer, whose main activity involves reselling such gas or electricity, then the place of taxation is where the reseller is located. Thus for example, if the ESB purchases electricity from an operator in Northern Ireland, for resale to private consumers in the State, then the place of taxation of that electricity is in the State, where the ESB is located, and will be subject to VAT at the reduced rate. The effect on gas and electricity suppliers will be minimal as Ireland interpreted the existing rules in a way that gave a similar result. This section has effect from 1 January Amendment of section 4 (special provision in relation to the supply of immovable goods) of the VAT Act 1972 This section confirms the Budget Resolution by amending section 4(6) of the VAT Act in relation to the disposal of developed sites. Section 4(6) deals with VAT exempt property transactions. It provides among other things that no tax will be chargeable on the disposal of property if the person making the supply was not entitled to recover any VAT in respect of the purchase or development of the property. The amendment ensures that where a person disposes of a developed site, and in connection with that disposal a construction contract is entered into, then even if that person can show that he or she was not entitled to deductibility on the development of the site, VAT applies to both the sale of the site, and the construction contract.

3 Background A scheme came to light whereby certain developers were failing to account for VAT on the sale of developed residential sites in situations where a house or apartment was being purchased under separate contracts for the sale of the site and for construction services. Such developers typically developed a site, supposedly for the purpose of a short term letting to an associated company and claimed that they were not entitled to deductibility on the development of the site. On this basis these developers claimed that they were not liable to VAT on the subsequent sale of the site. Revenue strongly contests this position and maintains that there are few developers, if any, who can show that they were not entitled to deductibility on the development of these sites. These developers ignore the fact that the sites were developed for sale and not merely for the purposes of the short term letting. Revenue are in the process of identifying such developers and entering assessments where VAT was not properly accounted for on the sale of sites. Developers who have omitted to account properly for VAT on the sale of sites may contact their local tax office and this will be taken into account should the question of penalties arise. This section has effect from 4 December Amendment of section 8 (taxable persons) of the VAT Act 1972 This section makes two amendments to section 8 of the VAT Act which deals with taxable persons. The amendments provide that certain recipients of supplies of natural gas and electricity are deemed to be taxable persons and liable to account for VAT on those supplies when they are received from abroad, from a taxable dealer who is not established in the State. Paragraph (a) is a technical amendment. Paragraph (b) provides that where natural gas or electricity is received in the State from a foreign taxable dealer by (a) (b) a taxable person, a Department of State or a local authority, a body established by statute, or an exempt person, for business purposes, then that recipient is deemed to be a taxable person and is liable for the VAT due. However, if such supplies are made to private individuals the foreign supplier continues to be required to register and account for VAT on them. This section has effect from 1 January 2005.

4 59 Amendment of section 11 (rates of tax) of the VAT Act 1972 This section amends section 11 and confirms the Budget increase in the rate of VAT on the supply of livestock, live greyhounds and the hire of horses from 4.3% to 4.4%. This section has effect from 1 January Amendment of section 12 (deduction for tax borne or paid) of the VAT Act 1972 This section makes two amendments to section 12 of the VAT Act which deals with deductibility for tax borne or paid. Subparagraph (va) provides that where tax is accounted for by a recipient of goods installed or assembled in the State by a foreign supplier, that recipient is entitled to deduct this tax subject to the usual rules on deductibility. Subparagraph (vb) provides that where tax is accounted for by a recipient of natural gas or electricity that recipient is entitled to deduct this tax subject to the usual rules on deductibility. Subparagraph (va) Section 118 of the Finance Act 2003 introduced a reverse charge rule for a taxable person, a Department of State, a local authority, or an exempt person in relation to goods installed or assembled on their behalf by foreign suppliers e.g. a shop fitting by a Northern Ireland supplier. In such instances it is the recipient of the goods who is the taxable person and not the supplier. The new provision clarifies that where the recipient who accounts for VAT is a taxable person he or she is entitled to a deduction in the same way as if a supplier had charged the VAT subject to the usual rules on deductibility. Subparagraph (vb) The amendment to section 8 of the VAT Act provides for a reverse charge mechanism for certain recipients of natural gas and electricity. This provision clarifies that where the recipient accounts for VAT he or she is entitled to a deduction in the same way as if a supplier had charged the VAT subject to the usual rules on deductibility. Subparagraph (va) has effect from the date of passing of the Act. Subparagraph (vb) has effect from 1 January 2005.

5 61 Amendment of section 12A (special provisions for tax invoiced by flat-rate farmers) of the VAT Act 1972 This section amends section 12A and confirms the Budget increase in the farmers flat-rate addition from 4.3% to 4.4%. It is known as the flat-rate scheme for farmers. The flat rate scheme obliges a flat-rate farmer to issue an invoice in accordance with section 17(2) of the VAT Act in respect of sales of produce or services showing separately the net consideration and the 4.4 per cent addition. The scheme is a simplification measure Farmers outputs (mainly foods) are generally zero rated, whereas many of their inputs are taxed at the standard rate. Thus, under the normal VAT system, most farmers, if registered, would be in a permanent repayment position. The flat-rate scheme is a practical method of applying value-added tax to farming. It seeks to compensate unregistered farmers, on an overall basis, for the VAT charged to them on their purchases of goods and services. In other words, it compensates farmers for the VAT on farming inputs incurred in the course of their farming business. This is achieved without applying the normal VAT rules for registration, record-keeping and returns. The tax compliance burden for farmers participating in the scheme is minimal and, in addition, the State is relieved of a significant administrative burden. How does the scheme work? The scheme sets out a percentage amount, known as the flat-rate refund or addition. Unregistered farmers add this percentage to their prices when selling to VAT registered businesses (co-ops, meat factories etc.). The VAT registered business treats the flat-rate amount as a normal business input in its periodic VAT return. From 1 January 2004 the flat-rate compensation to unregistered farmers is adjusted upwards to 4.4 per cent. Example An unregistered farmer sells produce worth 100 to a meat factory on 1 January The flat-rate addition means that he or she can increase the price from the factory to The factory claims back the 4.40 flat-rate addition as a VAT credit in its normal return. There is no increase in the price to the final consumer due to the flat-rate addition. This section has effect from 1 January 2004.

6 62 Amendment of section 15B (goods in transit (additional provisions)) of the VAT Act 1972 This section amends section 15B of the VAT Act which deals with the transitional arrangements for goods in transit between new and existing Member States of the European Union. The accession of the new Member States will have the effect of abolishing VAT at the point of entry to goods from accession countries entering the existing Community. From the moment of accession, transitional measures are needed to address the tax position of goods in transit by continuing to treat these goods as third country goods until they are cleared out of the transit system. The same will apply to goods under customs suspension and temporary importation arrangements. This applies to all goods on or after 1 May 2004 between each of the accession countries and Ireland. Paragraphs (a) and (b) amend the dates to allow VAT at the point of entry to apply on or after 1 May 2004 to goods from the new accession countries which are placed under a temporary importation arrangement or any customs procedure and not removed before 1 May Paragraph (c) is a technical amendment. Paragraph (d) inserts a new subsection (5A) into section 15B to provide that VAT at the point of entry does not apply to means of transport whose first use was before 1 May 1996, or where the tax due on importation does not exceed 130. The means of transport referred to are those imported into the State before 1 May 2004 from the accession countries, under a temporary importation arrangement, and are removed from that arrangement on or after 1 May (a) and (b) (c) (d) The New Accession Countries These are: The Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic. This section has effect from 1 May Amendment of section 17 (invoices) of the VAT Act 1972 This section amends section 17 of the VAT Act, which deals with invoices. It clarifies that a supplier in the State must issue a VAT invoice where he or she supplies goods or services to a customer in another Member State in a situation where the customer is liable for the VAT. The Sixth VAT Directive provides for the issuing of a VAT invoice in several situations including where a reverse charge applies. A reverse charge arises where the customer in another Member State is liable for the

7 VAT on goods or services provided by a supplier in the State. The amendment provides that in these circumstances the supplier must issue a VAT invoice. Regulations (S.I. 723 of 2003) were implemented to provide that invoices issued for these supplies must be endorsed to the effect that a reverse charge applies. This will not impose any extra administrative burden on traders, as traders would in any event normally issue a commercial invoice in these circumstances. This section has effect from date of passing of the Act. 64 Amendment of the First schedule to the VAT Act 1972 This section makes three amendments to the First Schedule to the VAT Act, which deals with exempted activities. The first amendment covers financial services and deals with collective investment schemes and securitisation transactions. The second amendment is a technical amendment. The third amendment provides for the exemption from VAT on the importation of natural gas and electricity in order to prevent double taxation. Financial Fund Management Services The first part of the first amendment clarifies the term management of an investment undertaking. Management, in this context, can be broken down into three functions i.e. investment management, administration and marketing. The amendment refers to the definition provided in Annex II to Directive 2001/107/EC of the European Parliament and Council. This Directive, commonly known as the UCITS Management Directive, was transposed into Irish law on 21 October It deals with the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). The amendment clarifies that the VAT exempt treatment of management applies to the individual functions, where the person with overall responsibility for those functions supplies them to the investment undertaking. (a)(i) Annex II to the UCITS Management Directive Functions included in the activity of collective portfolio management are listed in Annex II to the UCITS Management Directive as follows:- Investment management Administration: (a) Legal and fund management accounting services; (b) Customer inquiries; (c) Valuation and pricing (including tax returns); (d) Regulatory compliance monitoring; (e) Maintenance of unit-holder register; (f) Distribution of income;

8 (g) Unit issues and redemptions; (h) Contract settlements (including certificate dispatch); (i) Record keeping; Marketing Application of the exemption The exemption only applies to the functions of collective portfolio management where the person with responsibility for the provision of those functions supplies them in respect of the undertaking. In order to qualify for exemption, the person providing the exempt service is expected to be responsible for the provision of the services that go to make up these functions even if that person buys in some of the services. If the fund receives some management services directly, then a question might arise as to who is responsible for the provision of the function concerned. This can only be determined on the basis of the facts in individual cases. The fact that the person responsible for the provision of the function may outsource some of the services included in the breakdown does not take the person outside the exemption. That person would be charged VAT on the discrete services provided e.g. legal services, but would not be in a position to deduct the VAT because the amendment extends VAT exemption to that person s activities. VAT treatment of securitisation vehicles The last part of the first amendment is necessary following the significant changes introduced in section 48 of Finance Act These changes were introduced in order to update section 110 of the Taxes Consolidation Act, 1997 to take account of international developments in securitisation transactions and were aimed at facilitating further the development of this sector of Ireland s international financial services industry. Section 48, broadened the nature of the assets that could be securitised. This amendment ensures that the management of assets held by a Section 110 securitisation vehicle is not subject to VAT. (a)(iii) Examples The VAT position of Financial Fund Management Services is outlined below in Annex I- Annex IV. Paragraph (b) is a technical drafting amendment. (b) Amendment relating to the importation of natural gas and electricity Paragraph (c) exempts the importation of natural gas and electricity. These products will now be taxable in accordance with section 8 in the Member State where they are consumed. (c) Paragraph (a) has effect from date of passing of the Act. Paragraphs (b) and (c) have effect from 1 January 2005.

9 ANNEX 1 Chart of VAT position of Financial Fund Management Services provided in Ireland to Irish Funds Fund located in Ireland Financial Fund Management services located in Ireland Place of Supply Ireland If provided to an (i)(g) fund its exempt and no deductibility allowed (except where the investors to the fund are outside the EU) If provided to a nonqualifying fund, taxable and deductibility allowed Note: An (i)(g) Fund is a fund listed in paragraph (i)(g) of the First Schedule of the VAT Act 1972

10 ANNEX II Chart of VAT position of Financial Fund Management Services provided from abroad Fund located in Ireland Financial Fund Management services located abroad Place of Supply Ireland If provided to an (i)(g) fund its exempt and therefore deductibility is not applicable If provided to a nonqualifying fund, taxable but no deductibility allowed to the fund Note: An (i)(g) Fund is a fund listed in paragraph (i)(g) of the First Schedule of the VAT Act 1972

11 ANNEX III Chart of VAT position of Financial Fund Management Services provided in Ireland to Foreign Funds Fund located abroad Financial Fund Management services located in Ireland Place of Supply abroad No Irish VAT; entitled to deductibility

12 ANNEX IV Financial Fund Management Services located in Ireland Type of Fund Fund Located Place of Supply of the Management Services VAT Treatment Deduction allowed (i)(g) fund Ireland Ireland Exempt No * Non (i)(g) fund Ireland Ireland Taxable Yes Foreign funds Abroad Where fund located N/A Yes * However, a deduction is allowed for management expenses to the extent the investors or unit holders are situated outside the EU. Financial Fund Management Services located Abroad Type of Fund Fund Located Place of Supply of the Management Services VAT Treatment Deduction allowed (i)(g) fund Ireland Ireland Exempt N/A Non (i)(g) fund Ireland Ireland Taxable No Note: An (i)(g) Fund is a fund listed in paragraph (i)(g) of the First Schedule of the VAT Act 1972

13 65 Amendment of the Fourth Schedule to the VAT Act 1972 This section amends the Fourth Schedule to the VAT Act, which lists the services that are taxed where they are received. The amendment inserts two new paragraphs into the Fourth Schedule. The first amendment is part of the package of measures implementing the EU Directive in relation to the VAT treatment of the supply of natural gas or electricity. The second amendment extends the Fourth Schedule to include financial fund management functions. The effect of the amendment in paragraph (a) is to include the provision of access to and transportation of natural gas and of electricity through distribution systems and other directly linked services in the Fourth Schedule, thus making them taxable when received in the State. (a) This is another part of the package of measures implementing the Directive on natural gas and electricity. This amendment deals with the VAT treatment of services which are directly linked to the supply of these products, such as providing access to natural gas distribution systems and electricity grids. In this context traders, such as the ESB and Bord Gáis, for example, may be supplying to traders in other Member States and using the other Member States grid or distribution system to make that supply. In these circumstances, these bodies for example (ESB, Bord Gáis) will be the recipients of the services from the other Member States and will be taxable in the State on any charges incurred in this regard. The change provides that charges incurred for services consisting of access to, and transmission through natural gas and electricity distribution systems, are taxed where the business customer using these services is located. This treatment also applies to charges for other directly linked services such as grid management, monitoring etc. The VAT treatment of Fourth Schedule services involves a reverse charge mechanism. A reverse charge switches the VAT liability and compliance requirements from the supplier of the service to the customer. Paragraph (b) extends the Fourth Schedule to include financial fund management functions, which are part of the service of the management of an undertaking. As regards taxation, these management services will be taxable or exempt depending on whether or not the fund in question qualifies under paragraph (i)(g) of the First Schedule to the VAT Act When management services are provided to a fund in Ireland, the place of supply of the service for VAT purposes is the State. Conversely, when management services are provided to a fund outside Ireland, the place of supply of the service for VAT purposes is where the fund is located. (b) Financial fund management functions are any of the three functions listed in Annex II to Directive 2001/107/EC of the European Parliament and Council already referred to in section 64 which amends the First Schedule to the VAT Act, when supplied in the context of fund management as described in the notes to that section. Paragraph (a) has effect from 1 January 2005.

14 Paragraph (b) has effect from date of passing of the Act.