Should you be accounting for VAT on a reverse charge basis?

Ireland’s position amongst the European Community with our ease of access to European markets and networks is changing our approach to conducting business activities on a daily basis. The traditional business model of sourcing goods and services domestically may no longer be a viable option due to limited resource availability within the State or due to other factors linked to operational efficiency and cost effectiveness. Whilst these developments may have had a positive effect on your business, have you considered the potential VAT compliance obligations arising out of such transactions?

Acquisition of goods from an EU Member State/importation from outside EU

The acquisition of goods by a business from another EU country or importation from outside the EU triggers an Irish VAT liability in the form of a reverse charge for the purchaser of the goods, assuming VAT has not been paid upon importation in respect of goods received from outside the EU.

It is important to note that the definition of being a ‘business’ is quite broad and includes all economic activities regardless of the purpose or results of that activity. Whether your principal activity is chargeable to VAT or not is irrelevant, as being in business itself brings you within the scope of VAT for the acquisition of goods or services from abroad.

A reverse charge essentially means that the purchaser is liable to self-account for VAT on the cost of these goods at the VAT rate applicable to the goods in the purchaser’s country. A simultaneous input VAT deduction may be available in respect of the purchase VAT rendering the transaction VAT neutral, however this is generally based on the assumption that the business acquiring the goods is engaged in selling activities which are fully liable to VAT. If the business only has partial VAT recovery or indeed no recovery the VAT liability on the reverse charge or part thereof will be an irrecoverable cost for the business. Please see example 1 below for more details.

There is an obligation for any business which acquires goods from another EU country with a value in excess of €41,000 in any calendar year to register for Irish VAT and to account for Irish VAT on the reverse charge basis as a result of the purchase of goods even if its sales level would not otherwise require it to register for VAT.

Buying in of a service from a business located outside of Ireland

In relation to the acquisition of services by a business from abroad, there is a nil value threshold for triggering a reverse charge liability on the purchase of services which effectively means that if any business in Ireland acquires a service from an overseas supplier they will automatically trigger a VAT liability on the value of the services bought regardless of the amounts involved. This VAT amount will equally have to be accounted for through the reverse charge mechanism.

Again we would emphasise the broad scope of the definition of a business for VAT purposes and the issues related to entitlement to deduction of the VAT on services mirrors that for goods.

VAT exempt businesses- How can this still be an issue for us?

There is a frequent misconception that once a business is engaging in VAT exempt activity, VAT is not an area of concern for the business. Whilst your business may not be registered for VAT currently, the fact that you are in ‘business’ makes you potentially liable to account for VAT using the reverse charge procedure. As previously mentioned, all businesses (including VAT exempt ones) will have an obligation to self-account for VAT on the intra-community acquisition of goods and the receipt of services from abroad. However, unlike businesses charging VAT on their sales, VAT exempt businesses will have to pay VAT over to the tax authorities on the value of goods and services bought outside Ireland.

Example 1

VAT returns

The business including VAT exempt businesses will be obliged to submit VAT returns and associated payments if necessary for both the acquisition of goods and services within the necessary time limits (for example,  in the case of a bi-monthly VAT return for January/February, the return and payment must be submitted no later than the 23rd of March).

Implications of non-compliance

The non-payment or under payment of VAT is a significant issue and should be addressed as a matter of urgency. By not disclosing and paying your VAT liabilities within the necessary time limits, interest and penalties will apply.

The present interest rate is 0.0274% per day (approx. 10% per annum) with effect 1 July 2009 (prior to 1 July 2009, the interest rate was 0.0322% per day, approx. 12% per annum) and will apply from the date on which the return was due in relation to the purchase made until the date the outstanding liability is paid. A flat penalty between 3% and 100% can also be imposed on the tax which was not paid on time. The level of the penalty will depend on the specific circumstances of the case.

Summary

It is vital that you review your supply chains, both past and present, regardless of business size. The mere fact that you engage in business and purchase goods or services abroad may trigger a VAT liability through the reverse charge mechanism. Equally, VAT exempt or non-VAT registered persons are not beyond the scope of this procedure and in reality these businesses run a real risk of significant tax underpayment on purchased goods or services because the supplier will not charge VAT and the business responsible for accounting for VAT will be unfamiliar with the tax. The end cost for any business will ultimately depend on the type of activities engaged in and the corresponding VAT recoverability of the business. In a situation where a business has no entitlement to VAT recovery, it will have to absorb the entire VAT charge on the value of the goods or services. VAT exempt businesses and businesses which are partially exempt from VAT should therefore be particularly mindful of these provisions.

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