1 62 Back to Basics How to Avoid Costly VAT Compliance Mistakes Ethna Kennon Director, KPMG Anne Daly VAT Consultant, KPMG Introduction Given the economic climate, it is perhaps not surprising that businesses are seeing an increase in the volume of queries raised by the Revenue Commissioners with regard to their VAT compliance. These queries can take many forms, such as specific queries in relation to a particular item (e.g. submission of a VAT return or a VAT registration application) or other queries raised by Revenue as a result of random selection or visits to the taxpayer s business premises on a full Revenue audit. Without getting heavily into the technicalities of VAT, this article takes a step back and takes a high-level look at various aspects of Irish VAT compliance that can cause difficulties in practice, the common pitfalls for taxpayers when dealing with VAT compliance, and suggestions about what taxpayers can do to help to reduce the frequency of queries being raised by Revenue or at least efficiently address those queries. Some of the suggestions in this article may appear obvious, but nevertheless these issues commonly result in costly mistakes and VAT liabilities, and so going back to basics on VAT compliance issues is fundamental to reducing risk in any business. What Can a Taxpayer Do to Avoid Recurring Revenue Queries? The increase in Revenue queries is no surprise when you consider the decrease in the VAT Exchequer receipts over the last number
2 2011 Number 3 63 of years. To put this in context, VAT receipts have fallen c. 32% in five years from a record high in 2007 to the end of At the time of writing this article, the 2011 VAT receipts are c. 3% behind the Government s target. Given these figures, Revenue has become more compliance-driven in relation to VAT and is increasingly raising queries to ensure that taxpayers are doing things by the book. Where Revenue queries the VAT compliance of a taxpayer, it can have knock-on effect for the business as a whole, in particular where a taxpayer is in a VAT repayment position. In today s environment, where cash is king, delays in VAT refunds from Revenue can have serious repercussions for the general day-to-day operations of the taxpayer s business. For example, where Revenue queries a VAT refund submitted by a taxpayer and that taxpayer is relying on the VAT refund to pay suppliers, a delay in payment of the refund can mean that the taxpayer loses out on prompt-payment discounts given by the supplier or could even result in the taxpayer receiving a bad credit rating from suppliers. Clearly, the more complex a transaction is, the more likely it is that the VAT analysis will be complex. However, the table below sets out some of the simple, day-to-day VAT compliance issues that can result in costly errors but could be avoided or dealt with quickly if taxpayers are aware of the issues. Issue VAT registration Registering for ROS Actions Required/Suggestions Register for VAT if the VAT registration thresholds have been exceeded (currently 37,500 for services and 75,000 for goods). Consider registering for VAT as early as possible to claim VAT on set-up costs. Even where e-filing is not mandatory for the particular taxpayer, 2 register for the Revenue Online Service (ROS) so that bi-monthly VAT returns can be filed electronically by the 23rd day (instead of the 19th) of the month following the bi-monthly period to which the VAT return applies. This may have cash-flow benefits if the taxpayer is in a VAT-payable position but may cause delays if the taxpayer is in a refund position. Delays associated with filing paper VAT returns or receiving correspondence from Revenue are reduced as the correspondence is online There is no requirement to submit supporting invoices with VAT returns, but Revenue queries can be expected regarding purchase invoices making up the VAT reclaim. Ensure that any queries raised by Revenue are responded to as quickly as possible. Actively monitor and check that all invoices received from suppliers are valid VAT invoices. Preparation and filing of VAT returns Retain VAT records for the required time period (i.e. six years). Do not reclaim VAT on (i) non-deductible items that are specifically disallowed by VAT legislation, (ii) items used for non-business purposes, (iii) items that will be given away as gifts, unless gift relief applies, 3 (iv) items that relate to VAT-exempt activities or (v) invoices received from suppliers that are not valid VAT invoices Do not forget to self-account for reverse-charge VAT on taxable services/goods received from abroad (i.e. in Box T1 and Box T2 as appropriate), as well as completing the statistical Boxes E1 and E2 regarding EU transactions (goods). 1 Figures sourced from taxpolicy.gov.ie. 2 SI 223 of Regulation 5, VAT Consolidation Act 2010, provides that a gift of a good made in the course of furtherance of business that does not exceed 20 (exclusive of VAT) is not deemed to be liable for VAT.
3 64 Issue Actions Required/Suggestions Statistical VAT compliance and other tax returns Authorisations issued by Revenue (e.g. VAT 13B) 4 File Annual Returns of Trading Details. File Intrastat and VIES returns as necessary for cross-border EU transactions (taxpayers register for these by contacting the VIMA office in Dundalk). Monitor the date of expiry of the relevant authorisation ensure that it has not expired and apply for renewal in sufficient time. VAT 13B authorisation holders should ensure that suppliers are provided with a copy of a valid VAT 13B authorisation in order to zero rate the supply. Suppliers should charge VAT as normal where the VAT 13B authorisation has expired/is not provided. Do not forget to inform Revenue when your business no longer qualifies for the authorisation, as penalties may be imposed. Always check whether Revenue authorisation is required before operating a special VAT operational scheme. Ensure that you provide Revenue with all of the relevant details and confirmations required in order to VAT de-registration process a VAT de-registration form. Registering for VAT A trader who has not exceeded the VAT registration thresholds may As outlined in the table above, an Irish-established trader is required elect to register for VAT, even though there is no obligation to do to register for VAT in Ireland if its turnover from VATable activities so. This may be beneficial where the trader expects to incur large exceeds or is likely to exceed a certain threshold ( 37,500 for amounts of VAT on costs at the early stages of the business but services or 75,000 for goods) in any continuous period of 12 cannot demonstrate that the turnover will exceed the registration months. A trader may also trigger a requirement for Irish VAT threshold. Before electing to register for VAT, a trader should weigh registration where goods and services are acquired in Ireland from up the benefit of recovering VAT on costs against the obligation abroad, irrespective of value. Also, it is important to remember that to charge VAT to customers and the increased compliance costs. there is a zero VAT registration threshold for non-irish-established Traders that originally elected to register for VAT may cancel their businesses that supply taxable goods or services in Ireland. VAT registration at a later stage; however, a VAT clawback may arise if the amount of VAT accounted for on their sales is less than the VAT Registering a company or an individual for Irish VAT requires filing recovered by them from Revenue, so care should be taken on this. a registration application form (Form TR1 for an individual, partnership or unincorporated body, or Form TR2 for a company), which Preparation and filing of VAT returns with Revenue lists standard questions that will assist Revenue to get an initial As mentioned above, VAT returns are, in the majority of cases, understanding of the company s activities, e.g. name, shareholders, required to be filed with Revenue on a bi-monthly basis by the 19th activities, basis for VAT registration etc. A trader should complete all day of the month following the end of the period to which the return of the required fields in order to reduce the likelihood of Revenue relates where the taxpayer files by paper return, or by the 23rd day queries delaying the registration process (especially where the of the month following the end of the period to which the return trader needs to process the registration as soon as possible in relates where the returns are filed on ROS (as dealt with above). order to issue valid sales invoices or to reclaim VAT on set-up costs). A taxpayer may choose to provide additional information by Interest and penalties may arise unless the taxpayer ensures that way of a cover letter attached to the VAT registration application. the VAT returns submitted to Revenue are correct and are filed on a timely basis together with payment of any VAT due. Where a 4 See Other, special authorisations below for more detail on 13B authorisations.
4 2011 Number 3 65 taxpayer is consistently filing VAT returns after the due date, this could potentially raise the risk profile of the taxpayer on Revenue s systems. In addition, where a VAT return is outstanding, Revenue can issue a Section 23 estimate 5 on the taxpayer, estimating the VAT liability due for the taxable period(s). Revenue can also pursue stringent actions such as a Revenue sheriff taking possession of the taxpayer s assets (e.g. if VAT returns are outstanding for an extended period of time etc.). Input VAT It is not uncommon for Revenue to request copies of purchase invoices (or the largest invoices making up a reclaim) to see exactly how a reclaim is constituted and whether all costs are in fact deductible. Also, in the event of a Revenue VAT audit, Revenue may ask whether the business has the necessary policies and procedures in place in its organisation to ensure that non-recoverable VAT is identified and disallowed. A taxpayer should restrict the VAT incurred on expenses that are used for a non-business purpose. VAT legislation also sets out a list of expenses on which VAT cannot be reclaimed, even where the expense relates to the business. A summary of these is set out in the table below. VAT non-deductible items A taxpayer may not deduct VAT on any of the following, even when the goods and services in question are acquired or used for the purposes of a taxable business Expenditure incurred on food or drink, or personal or entertainment services Expenditure incurred on accommodation other than qualifying accommodation in connection with attendance at a qualifying conference 6 Purchase, hire, intra-community acquisition or importation of passenger motor vehicles 7 Purchase, intra-community acquisition or importation of petrol (other than as stock-in-trade) A taxpayer supplying VAT-exempt goods or services should ensure that the VAT incurred on costs in relation to providing those services is disallowed. If the taxpayer supplies a mix of both VATable and non-vatable supplies, it should carry out a periodic review of its VAT recovery rate in order to apportion the VAT it incurs on dualuse overhead costs, e.g. light and heat, rent etc. For businesses with a calendar year-end, any adjustments in the VAT recovery rate must be made by the May/June VAT period, i.e. any adjustment for businesses with a 31 December 2010 year-end was due by 19 July (or 23 July 2011, if filing electronically). VAT on sales In relation to the VAT on sales aspect of the VAT return, the taxpayer should ensure that it is issuing valid VAT invoices to its customers as appropriate (containing the invoicing requirements set out below) and that the invoices are raised within the appropriate time limits after the supply has been made. A taxpayer should also of course ensure that it is charging the appropriate VAT rate on the supply of its goods and services. Accounting for reverse-charge VAT on goods and services Businesses acquiring goods or services in Ireland from abroad must ensure that VAT is being accounted for as appropriate on the reverse -charge basis, which is often an easy item to forget when completing the return, as the entries in Boxes T1 and T2 may be VAT cash-flow neutral. This requirement is particularly important where the taxpayer receiving the goods or services has less than a full VAT recovery entitlement, as an absolute VAT cost then arises. For many larger entities, the business accounting system may automatically create a list of these reverse-charge items. However, smaller entities should have a checklist of all foreign suppliers from which they receive goods and services (Revenue may also ask for this in the event of an audit) and ensure that VAT is accounted for on the reverse-charge basis on these goods and services, where required. Dispatches of goods from Ireland to other EU countries Where the taxpayer is involved in the cross-border supply of goods from Ireland to VAT-registered customers in other EU Member States, it is important to note the requirements that must be met in order to zero-rate those supplies. It has always been essential 5 VAT Consolidation Act 2010 s Since 1 July 2007, VAT recovery may be taken under the normal rules if a hotel stay is in connection with a qualifying conference catering for at least 50 delegates. The specific requirements for VAT recovery can be found in s60 VAT Consolidation Act VAT recovery (capped at 20%) may be claimed on certain cars that are first registered for VRT on or after 1 January 2009, have CO2 emission levels of less than 156g/km and are used for at least 60% business activities.
5 66 to establish that the customer is a VAT-registered business and to retain evidence of the goods leaving Ireland (e.g. transport documentation). However, new requirements for zero-rating the supply of goods, effective from 1 January 2011, are that the sales invoice must quote the customer s EU VAT number and the goods must be dispatched from Ireland within three months of the supply. Where these requirements are not met, the zero rate does not apply and the taxpayer is technically liable to account for Irish VAT on these supplies of goods (e.g. at the standard 21% VAT rate). For the supply of reverse-charge services to foreign EU customers, the Irish supplier should satisfy itself that it is making the supply to a non-irish business (referred to as a taxable person ) and should obtain its non-irish EU VAT number. There is an online facitilty whereby businesses can check the validity of VAT numbers 8. Dealing with Revenue queries on the VAT return Where Revenue raises queries on VAT returns, from experience, they generally seek the following standard information: details of the activities of the taxpayer (these will allow Revenue to ascertain whether there are VAT-exempt activities with no VAT recovery entitlement etc.), Taxpayers should actively monitor and check whether purchase invoices received and any sales invoices required to be raised meet all of the legislative requirements of a valid VAT invoice. of its normal profile e.g. by submitting a large VAT refund claim when the taxpayer is generally in a payment position although it is not strictly required, the taxpayer could help to pre-empt any queries before submitting the VAT reclaim by providing information to Revenue explaining the background to the VAT reclaim. This may speed up the processing of the refund owed to the taxpayer. Supporting VAT documentation and retention of VAT records date of invoice, Taxpayers should actively monitor and check whether purchase invoices received and any sales invoices required to be raised meet all of the legislative requirements of a valid VAT invoice. The main requirements are summarised below. supplier s name, address and VAT registration number, customer s full name and address, sequential number this must uniquely identify the VAT invoice, VAT rate(s) being charged on supply, quantity and nature of goods supplied, a schedule supporting the figures recorded in the VAT return and supporting documentation to the VAT return (typically, copies of the largest sales and purchases invoices) The taxpayer should revert to Revenue as quickly as possible in addressing the queries raised. The supporting schedule should be presented to Revenue in a format that is easy to follow and clearly shows how the figures included in the VAT return are derived. Revenue will generally pay close attention to this schedule and the copy invoices to ensure that the calculations in the schedule are mathematically correct, that VAT has not been recovered on non-deductible items, that the invoices are valid and correctly addressed to the taxpayer, and that VAT is not being recovered on non-business item expenses. If it were likely that Revenue were to raise further queries on a VAT return in particular in situations where the taxpayer steps out description of goods/services being supplied, if the supplier is making a reverse-charge supply where the foreign customer is obliged to account for any local VAT, the invoice must quote the customer s non-irish VAT number and state on its face that a reverse-charge applies (no specific wording is required in VAT law), the amount of VAT being charged must be stated in Euro. Where any one of these requirements is missing from the invoice, Revenue is entitled to assess penalties on the supplier and to disallow VAT recovery on this invoice for the customer. Accordingly, where a taxpayer receives an invoice that is not a valid VAT invoice, the taxpayer should request that the supplier reissue that invoice to include the relevant details. 8 See
6 2011 Number 3 67 VAT group members are generally not required to raise VAT invoices to each other. Where a business is part of a VAT group, the business s own VAT number should be stated on any sales VAT invoices to customers outside the VAT group (i.e. not that of the VAT group remitter). Retention and storage of records Taxpayers are required by VAT law to keep full and true records of all transactions that may affect those taxpayers liability to tax or entitlement to deductibility. This would normally include all documents issued or received by the taxpayer in the course of its business, such as books, invoices, credit notes, receipts, bank statements and other documentation that relate to purchases or the supply of goods and services in the course of its business. Such documentation should be kept on file for a period of six years from the date of the latest transaction to which the records relate and should be updated regularly so that, if a Revenue officer makes an unofficial visit to taxpayer s premises, the taxpayer could demonstrate that the records are kept up to date (also, a factor that may be taken into account in mitigating penalties is whether the taxpayer has co-operated, and being able to show VAT records to Revenue may play a part in this). There are also specific requirements set out in VAT legislation with regard to keeping VAT records in relation to property. A taxpayer is required to retain these records for its taxable interest in the property for a further period of six years. This means that if a business grants a lease, the documentation should be retained for the duration of the lease plus an additional six years. Since 1 July 2008, taxpayers have an additional obligation to maintain a Capital Good Scheme record in relation to any property (capital good) it owns, detailing, among other things, how much VAT was recovered on the acquisition and development of the property. It is important to keep an accurate record, as if the property is sold, the taxpayer may need to provide the Capital Goods Scheme record to the purchaser. There is a 4,000 penalty for failure to comply with record-keeping requirements. In recent times, with the development of technology, it has become increasingly common for taxpayers to wish to issue electronic invoices and to store invoices electronically. Detailed rules are set out in VAT legislation with regard to electronic invoicing, and at EU level there are initiatives to seek to treat paper and electronic invoices equally. 9 Where a taxpayer decides to replace its current paper system with an electronic one, it should be careful that the system implemented meets the specifications set out in VAT legislation and regulations. Filing of statistical VAT returns and other tax returns with Revenue As well as filing periodic VAT returns, there are a number of statistical returns that taxpayers may be required to complete. These include Intrastat statements (for goods), VIES returns/ec Sales Lists 10 (for goods and services) and the Annual Return of Trading Details, which reflects all transactions carried out during the year. In the course of a Revenue VAT audit, Revenue generally does not take a favourable view where these returns are outstanding, and penalties may arise for failure to file them. Accordingly, even though these returns do not provide for any VAT liability and are purely statistical in nature, the taxpayer should ensure that they are filed in line with statutory requirements. Revenue may also delay the payment of VAT refunds to a taxpayer where the taxpayer has other tax returns outstanding or unpaid liabilities under other tax heads. Accordingly, taxpayers should ensure that compliance in these other matters is up to date so that it does not interfere with VAT compliance and the VAT cash-flow of the business. Other, special authorisations Certain taxpayers are allowed by Revenue to apply a special VAT treatment to their goods and services where they satisfy certain conditions set out in the VAT legislation. One such authorisation is a VAT 13B 11 (which is often colloquially referred to by holders as a VAT exemption ). This is an authorisation issued by Revenue allowing certain taxpayers who derive at least 75% of their turnover from exports of goods to receive most goods and services from suppliers at the 0% VAT rate. Where a taxpayer obtains this authorisation, it should ensure that this is renewed periodically with Revenue, as it usually expires after two years. If the situation arises that the taxpayer is no longer entitled to the authorisation (e.g. where the ratio of exports to total sales falls), the taxpayer must notify Revenue, as failure to do so can result in a penalty of 4,000 for each bi-monthly period that the taxpayer fails to notify Revenue. If a supplier receives a copy of a VAT 13B authorisation from a customer, the supplier should, before applying the zero rate of VAT, ensure that the authorisation is still valid (based on the date stated 9 Directive 10858/10 amending Directive 2006/112/EC. 10 With effect from 1 January 2010, VIES returns/ec Sales Lists are also required to be completed for the supply of reverse-charge services. 11 See s56 VAT Consolidation Act 2010.
7 68 on the certificate) and must quote the authorisation number on the sales invoice. If the authorisation has expired or if the supply relates to specifically disallowed items (e.g. food and drink), the supplier is obliged to charge VAT on the supply as normal. Cancellation of a taxpayer s VAT registration Where a VAT-registered taxpayer no longer exceeds the registration thresholds, it can apply to Revenue to cancel its VAT registration. This is normally done by way of a form called TRCN1, Tax Registration Cancellation Notification. Revenue normally requests information such as the date of cessation, whether all assets and equipment were disposed of, details on how they were disposed of, and the status of the business premises. This is because Revenue will normally want comfort that there is a clean bill of health from a VAT perspective, and it will require that all of the company s VAT returns and statistical returns are filed before it processes the de-registration. Businesses should also take care when de-registering to check whether any costs are expected to come in after the de-registration, as clearly this would delay any reclaim of such VAT. Interest and Penalties Revenue is entitled to impose interest and penalties on a taxpayer where a historical VAT liability of the taxpayer is discovered. From 1 July 2010 the rate of interest that Revenue is entitled to impose is % per day, or part of a day, until the VAT is paid (the rate of interest was % before 1 July 2010), and the interest period generally runs from the 19th day, instead of the 23rd, following the VAT period in question, even if the return was filed electronically. Interest on an underpaid VAT liability cannot be mitigated. In addition, Revenue can impose penalties on the taxpayer for failure to comply with the VAT legislation. These penalties are normally a percentage of the underpaid VAT and can range from 3% to 100%, depending on the category of default, the number of prior disclosures made by the taxpayer in the last five years and the level of taxpayer co-operation with Revenue investigations of the VAT liability. If isolated VAT errors are made, taxpayers are allowed under the Revenue Code of Practice to self-correct by making an adjustment in the next possible VAT return if the VAT error was less than 6,000 in the particular bi-monthly period. The time limits applicable and further details are set out in the Revenue code. 12 a fixed penalty of 4,000. To date, Revenue has been rather lenient and practical when it comes to imposing fixed penalties. However, as pressures increase to raise revenue for the Irish Exchequer, Revenue may resort to imposing these penalties. Examples of fixed penalties that Revenue is entitled to pursue are for failure to register for VAT on time, failure to submit VAT returns to Revenue on time, failure to keep proper books and records, failure to comply with invoicing requirements, failure to charge the VAT correctly or to pay the VAT over to Revenue, failure to furnish VIES returns or assisting in making incorrect returns, failure to raise correct invoices, credit notes etc., to name but a few. If a taxpayer s IT system has not been set up to issue correct VAT invoices and an invoicing error is duplicated in a widespread manner, there has strictly been a breach of VAT legislation in relation to each VAT invoice, which could be very costly for the taxpayer if Revenue were to impose a number of penalties for the breaches. Conclusion In these economically tough times, Revenue is becoming even more compliance-driven to maximise its VAT revenue receipts. As a result, the volume of ad hoc VAT queries raised on taxpayers has increased significantly. In an environment where cash is king, any delays (let alone denials) of VAT refunds by Revenue can have a serious impact on the cash-flow of a business and consequential knock-on effects for businesses in general. Taxpayers should ensure that they seek VAT recovery only on costs permitted by legislation and have proper supporting documentation (i.e. valid VAT invoices addressed to the taxpayer) on file. Revenue is entitled to impose a wide range of penalties under Irish VAT legislation, so businesses must ensure that they are as compliant as possible. Listed above are a number of straightforward steps that taxpayers should remember when dealing with VAT compliance, as well as some of the common VAT compliance downfalls that arise. Queries from Revenue are inevitable; however, by going back to basics on VAT, and demonstrating to the tax inspector that the taxpayer has procedures in place to deal with VAT compliance correctly and is being co-operative in answering Revenue queries, the taxpayer can help Revenue to build a profile of that taxpayer on its systems that may help to reduce recurring VAT queries. In addition to tax-geared penalties, there are a wide range of situations under VAT legislation whereby Revenue is entitled to impose 12 Para. 2.2 of the Code of Practice for Revenue Audit.
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