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Are you confident about your VAT Compliance?

VAT is a complex tax.

Irish VAT legislation is written in such a manner that it can cause confusion. For example, a supply which does not qualify as ‘goods’ is automatically a ‘service’, the place of supply for VAT purposes can depend on a number of different factors such as, what is being supplied – goods or services and whether the particular supply is subject to one of the exceptions from the general rules?  Just some of the things to consider when determining the place of supply are: where is the activity physically taking place; if the supply is a service is it linked to immoveable property (land/buildings)?: Do goods cross a border?; Is the customer a private individual or a business customer?

Once satisfied where tax is due you need to consider who the accountable person for the supply is – is it the supplier or the recipient? Following that the starting point for determining the applicable rate is that everything is subject to the standard VAT rate, unless of course it qualifies under one of the many exemptions or exclusions (or perhaps it is a supply which is excluded from the exclusions). If not at the standard rate (currently 23%) it is either chargeable at one of the reduced rates (currently 13.5%, 9%, 5.4% or 4.8%) or it could be a zero rated, an exempt supply or perhaps it is actually outside the scope of VAT.

The above is to illustrate just some of the intricacies and pitfalls when it comes to being VAT compliant. VAT has always been a focus area for the Revenue Commissioners with VAT compliance, in particular, coming under increased scrutiny with businesses encountering more ‘interventions’ by Revenue. Civil penalties of €420,000 were imposed in 2018 for failure by taxpayers in 105 cases to submit VAT returns. However, these pale in comparison to the total of 580,757 interventions carried out by Revenue in 2018 which yielded €572.1 million. This is an increase in the yield from 2017 which was €491.9 million but there were 650,337 interventions. With approx. 70,000 less interventions Revenue generated a €80m increase in yield. These ‘interventions’ can include assurance checks, aspect queries, profile interviews and single/multi tax audits.

VAT is a tax on transactions rather than on profits and businesses effectively act as unpaid tax collectors in respect of VAT. As the tax is applied to turnover rather than profit, failure to operate VAT correctly can have huge ramifications for businesses.

VAT Compliance

Generally, Irish VAT returns are filed on a bi-monthly basis and must be filed online on or before the 23rd day of the month following the end of the VAT accounting period. For example, the January/February VAT return is required to be filed with Irish Revenue on or before 23 March. If a VAT return gives rise to a net VAT payable position, that liability should be discharged by the same deadline.  Depending on a business’s annual VAT liability Revenue also has discretion to allow annual, bi-annual or tri-annual returns. If a business is in a constant VAT refundable position it possible to file monthly VAT returns. Every VAT registered trader should also file an ‘ARTD’, the Annual Return of Trading Details. The ARTD is intended to be a detailed summary of all supplies which a business has made and received during its accounting year. It is essentially an audit tool to assist Irish Revenue in verifying the accuracy of a taxpayer’s VAT returns.

Where a business dispatches goods from Ireland to another EU country or brings goods into Ireland from another EU country, there is a requirement to file an Intrastat return once certain thresholds are breached. Where the value of arrivals of goods into Ireland from other EU Member States exceeds €500,000 annually, Intrastat arrivals returns are required to be filed. Intrastat arrivals returns are filed on a monthly basis. Intrastat dispatches returns are required where a business dispatches goods to other EU countries and breaches the applicable threshold (currently €635,000 on an annual basis).

Where a business supplies goods or services to business customers that are registered for VAT in another EU Member State, the Irish supplier is required to complete a statistical return known as a VIES Return. This is Ireland’s version of the EC Sales Listing / ESL.

Unlike Intrastat returns, there is no threshold for the requirement to register for VIES and file periodic returns. VIES returns are generally filed on a quarterly basis. However, monthly returns can be required in certain cases where supplies of goods are being made.

Most businesses will file a minimum of 7 VAT returns per annum (6 x bi-monthly and the ARTD). However, consider a business which trades goods with businesses with the EU and breaches the Intrastat thresholds. VAT should not be a cost to this business, because it is engaged in a VATable activity and has full recovery, however it is a heavy compliance burden. This business would file the 7 VAT returns and potentially also have to file 12 VIES returns, 12 Intrastat Arrivals and 12 Intrastat Dispatch returns, a total of 43 returns per annum.

Top 10 tips for VAT compliance

1. Document the VAT return process/procedures, include a compliance calendar, details of who is responsible for preparing, reviewing, sign out, filing, how to deal with Revenue correspondence, internal procedures for dealing with unusual transaction, what issues should be escalated and when, etc. This reduces the risk of errors and also demonstrates good governance.

2. Ensure more than one person has access to filing and payment rights on ROS.

3. Ensure appropriate registrations are in place bearing in mind thresholds for VIES and Intrastat and that all returns are actually filed and paid on time. Where returns are being filed/paid late the business’s risk profile on the Revenue’s systems will increase leading to a heightened probability of a Revenue ‘intervention’ which potentially results in additional tax being due with interest and penalties being imposed by Revenue.

4. Check supporting documentation – are purchase documents valid VAT invoices? Where any one of the legislative requirements of a valid VAT invoice is missing, Revenue is entitled to impose penalties on the supplier and to disallow VAT recovery on the invoice. For sales invoices, has the correct VAT rate been charged on the supply? Particular attention should be paid to invoices relating to EU cross-border supplies as the VAT number of the customer as well as a reference to the application of the ‘reverse charge’ may be required.

5. VAT on non-deductible items should not be processed through the VAT returns. Where an ERP system is being used most will have functionality to code certain costs as non-deductible. VAT legislation sets out a list of expenses where recovery is generally blocked including VAT incurred on food / drink, cars, petrol, accommodation, entertainment, and personal services for directors/employees.  There are some exceptions within these categories of expense on which VAT can be recovered, however, these categories should serve as a good indication of the risk areas which should be checked before VAT input is claimed.

6. Businesses acquiring goods or services in Ireland from abroad, and for some domestic Irish supplies, must self-account for Irish VAT as appropriate on the reverse-charge basis. Where this is not done the VAT 3 returns for the relevant periods have been completed incorrectly and this can result in queries from Revenue.

7. Is an adjustment of input VAT claimed required where a supplier has not been paid within six months of the taxable period? Revenue can impose interest on over claimed VAT refunds.

8. Statistical VAT returns, Intrastat and VIES – do the returns reconcile with the details contained in the periodic VAT returns? Although no VAT liability arises in respect of these returns, Revenue can seek to have penalties imposed of €1,265 per return for failure to file them. Revenue can also delay the payment of VAT refunds where there are other tax returns outstanding or unpaid liabilities under other tax heads.

9. Non filing of the VAT ARTD can trigger Revenue audits and delays in VAT refunds issuing as well as Tax Clearance certificates being revoked. If registered for Relevant Contracts Tax as a Sub-Contractor it can also lead to a zero rated status being amended to either 20% or 35%. Where a repayment/refund of any tax is due and there is an outstanding VAT ARTD with a due date within the previous 12 months, that repayment/refund will be automatically withheld.

10. Schedule periodic internal/external VAT reviews

Revenue is entitled to impose a wide range of penalties under Irish VAT legislation, and although in the past these were rarely imposed in practice, there has been a recent increase in their imposition. In addition to having to pay over any VAT undercharged or over recovered along with interest and penalties, the legislation also provides for a penalty of €4,000 per incorrect VAT 3 return filed and penalties of €1,265 per outstanding Intrastat return.

Set out above are a number of the common difficulties that businesses encounter in dealing with VAT compliance. By being aware of these pitfalls, keeping up to date with changes in VAT legislation, training staff on a regular basis, and putting in place a comprehensive VAT compliance manual – which clearly details each step of the compliance process and return preparation procedure specific to the business – the risk of errors can be significantly reduced.

Reducing the risk, time to get comfortable.

Regardless of the nature and extent of an error, timing is absolutely key when it comes to correcting it. There are obvious advantages associated with taking prompt action, normally in the form of mitigating interest and penalties. That being so, there is a clear advantage to taxpayers who regularly review their tax affairs.

Taxpayers who discover historic VAT errors generally regularise their position with Revenue by way of self-correction or by making a qualifying disclosure. It is likely that most businesses will discover a historic VAT error at some point in their lifecycle, although the significance of the error will vary considerably between taxpayers. Timely action, full disclosure and co-operation with Revenue is always advisable when regularising tax affairs.

Given the increased yields and focus of Revenue Assurance Checks, Aspect Queries and Profile Interviews, it is highly recommend that a third party VAT review is carried out. The VAT team at Deloitte has extensive experience in VAT Compliance health checks, VAT Smart Review where we help to identify any potential risks, provide assistance mitigating these whilst also checking for any opportunities to improve processes or recover additional VAT.

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