Indirect Tax actions for Life Sciences and Health Care Businesses

As we enter the final quarter of 2023 many businesses, from a tax perspective, may have been predominantly focusing their recent energies on finalising their corporation tax position for 2022. Depending on the sector and activities engaged in this could have included significant R&D, capital allowance, IP, or other valuable claims. This is particularly relevant for businesses involved in the life sciences and health care space as companies operating in the biotechnology, pharmaceuticals and medical devices sector often have substantial ongoing annual spends on the likes of R&D, IP as well as on capital projects.

Are you keen to improve your Indirect Tax function?

There is, however, also the potential for considerable value to be added to the overall tax profile and daily running of a business where consideration is given to Indirect Tax (VAT, Customs & Excise and Relevant Contracts Tax “RCT”). Businesses are always looking for innovative ways to increase their bottom line whilst improving their management of day-to-day operational costs. For example, there are several mechanisms provided for in VAT law, and generally accepted Indirect Tax practice, which can be used by any business (once relevant) to gain short term cash flow improvements, which could provide a significant much needed boost. There are also other low hanging fruits and opportunities that should be borne in mind by life sciences and health care businesses when assessing their Indirect Taxes position, irrespective of the stage of their lifecycle that they are in.

The below represents a very brief, non-exhaustive, overview of some topical Indirect Tax matters worth considering by businesses in the life sciences sector (or any sector for that matter). We would however always encourage businesses to talk to us directly about their specific circumstances and needs so that we can identify the most suitable opportunities, assist with implementation, and ultimately ensure best value along with meaningful impact. Our Life Sciences and Health Care industry group are happy to support clients in addressing the challenges that impact today’s industry.

How is your supply chain management?

Considerable focus was placed by many on supply chain management, conducting detailed reviews, and re-arranging historic flows in advance of Brexit. This area remains high on the priority list for ongoing consideration, especially when there are high value products being moved between jurisdictions. Even in the early non-commercialised stages where goods may be moving “free of charge” and products are in development and research phase, it is essential that the impact of movements of goods between countries is properly assessed from an Indirect Tax perspective.

Do all commercial agreements for supplies of goods clearly assign the VAT and customs obligations?

VAT and customs outcomes in commercial supply chains, once addressed early, can really assist a business when it comes to their commercial launches and planning for flexibility and driving cost efficiencies in the future. Mapping the physical, legal, and financial flows from start to finish allows companies identify opportunities to rationalise VAT registrations, reduce customs costs and realise potential benefits, reliefs, and ultimately cash savings. From an indirect tax perspective, incoterms attaching to movements, along with where goods are located when title transfers, should be clearly called out in contracts and any related agreements. This is to ensure that import, export and associated VAT and customs obligations can be clearly assigned. Whilst optimisation and rationalisation are fore to the mind, it is also imperative to assess the arrangements, commercial realities and actual practicalities of any movements and flows of goods bearing in mind the impact of the 2020 quick fixes and chain transactions. Upfront, proactive involvement of VAT and customs professionals from the outset, and on an ongoing basis, is essential for the smooth running of an efficient supply chain model.

Does the business qualify for a VAT 56B zero-rating authorisation?

Many jurisdictions have regimes that allow for the deferment of the payment and reporting of VAT due of importations of goods. Ireland only recently introduced a Postponed Accounting for VAT regime in 2021 in readiness for Brexit. However, Irish VAT legislation also provides for a zero-rating regime which proves to be very beneficial for qualifying life sciences businesses involved in moving goods out of Ireland. The VAT 56B authorisation allows qualifying businesses shipping 75% or more of their goods outside of Ireland (via export or intra-Community supply) or, making supplies of certain contract work, to purchase the majority of goods and/or services at the zero-rate of VAT. Whilst the introduction of Postponed Accounting for VAT may have diminished the benefit of availing of the Section 56 Authorisation for some businesses, it remains to be a very valuable cashflow saver where there are considerable local purchases/spend. See “Obtaining goods/services with Zero rate of VAT - Section 56 Authorisation - 2023” for further details on this relief.

Have the VAT rates of supplies been validated recently?

It is always worth regularly considering if the appropriate VAT rate is being applied to the mix of products and supplies being made by life science businesses. This is particularly relevant in this sector given the potential for high value goods to qualify for the zero-rate of Irish VAT. However, if inappropriate rates are assigned from the outset, errors in terms of under declaration of VAT and incorrect reporting can be significant with considerable Revenue sanctions potentially applying depending on, if, when and by whom, any misdemeanours are identified. We can assist from the point of view of providing high-level analyses of any new or potential offerings. We can also conduct more detailed product listing reviews and if necessary, assist with making a submission to Revenue for a determination as to the appropriate VAT rate applying.

Would there be merit in carrying out an Indirect Tax review?

Given the increase in Indirect Tax audit activity by Revenue we would strongly encourage businesses to conduct regular reviews of their VAT and customs compliance. There should be an emphasis on the control environment given the greater focus on the accurate and timely filing of Indirect Tax obligations along with settlement of any liabilities due as well as ensuring all obligations within scope are appropriately met. In readiness for any potential approaches by Revenue, and with a view to being in a position to submit a disclosure in advance of any such approach should any matters warranting a disclosure have been identified, it is worth considering if there would be merit in carrying out an Indirect Tax review, which can focus on targeted areas or be conducted on a broader more all-encompassing basis. For example, from a Customs & Excise perspective it is vital that appropriate valuations are placed on own goods moving between jurisdictions or when goods are non-commercialised – this important requirement is often overlooked and can prove costly. The likes of Inward Processing, Customs Warehousing, or the availability of any other potentially reliefs could also be identified further to carrying out a health check.

Is your ERP ready for VAT in the Digital Age?

Whilst the proposals are still in the negotiation and agreement phase, the impending “VAT in the Digital Age” (“ViDA”) changes represent one of the most significant changes in VAT practice for some time. Notwithstanding the fact that the ViDA plans are still in a state of flux, and Ireland, unlike many other jurisdictions, has not yet rolled out any changes yet, it is never too soon to start planning in readiness for e-invoicing and digital real-time reporting. Businesses should make themselves aware of what their ERP’s current VAT functionalities and capabilities are with all stakeholders being involved. Considerable overhauls and investment may be required but ViDA should be used as an opportunity for businesses to completely overhaul their VAT reporting, improve their processes, rectify legacy issues, and also embrace the possibilities that technology bring with it terms of improving data collection, retention, and quality.

Any unclaimed foreign VAT?

Foreign VAT often remains unclaimed notwithstanding the fact that there are now efficient procedures in place to reclaim non-Irish VAT incurred. A refund of foreign VAT incurred by Irish and EU traders can be made through the Electronic VAT Refund (EVR) procedure, by submitting a claim via Revenue Online Services (ROS) (or the businesses relevant Tax Authority portal) within the relevant time limits. Reclaiming foreign VAT via an EVR submission is more restrictive than reclaiming VAT through your local Irish VAT return. For example, you do not have the usual 4 years within which to make the reclaim, instead an EVR application must be lodged by 30 September in the calendar year following the refund period i.e., VAT incurred in 2022 must be claimed by 30 September 2023. Additionally, there are restrictions on minimum amounts that can be reclaimed via the EVR, and local recovery rules need to also be borne in mind.

Talk to us!

The above represents but a brief overview of some potential areas for consideration by companies operating in the life sciences and health care sector. Should you wish to have a more detailed conversation and explore any Indirect Tax issues as they relate specifically to your business further, please contact Ciara McMullin, Lorraine Morrison,  or any member of the Deloitte Indirect Tax team. If you have any tax related queries outside of Indirect Tax, please reach out directly to Geraldine McCann, Deloitte Ireland’s LSHC Tax Industry lead.