Obtaining goods/services with Zero rate of VAT - Section 56 Authorisation - 2023

Many manufacturers based in Ireland utilise a relief known as a 56B authorisation to obtain goods and services at a VAT rate of 0%. Sometimes still referred to as a ‘13B’ in reference to the 1972 VAT Act, 56B authorisations are a very beneficial relief for companies whose main income derives from the sale of goods that move away from Ireland when sold.

In this article, we work through some of the technical issues and practical implications of 56B authorisations focusing on the benefits and common pitfalls for companies that hold the authorisation.

What is a 56B authorisation?

Irish Revenue allows certain Irish taxpayers to avail of the 0% rate of VAT in respect of the majority of their purchases. This means that whenever the holder of a 56B authorisation acquires goods or services, the supplier can charge VAT at 0%.

To evidence the relief, Revenue issue a Section 56B authorisation to companies that qualify, for a period of one to three years, which is typically renewable on 31st October of a given year. The holder then provides a copy of the authorisation to its suppliers, who should then charge VAT at the 0% rate for the duration of the authorisation. The authorisation number should be quoted on all invoices and other documents issued in relation to any supplies made to the authorisation holder.
 

So what is the criteria?

In order to qualify, the taxpayer must be VAT registered and for the period of 12 months immediately preceding the date on which an application is made, at least 75% of the applicant’s turnover must derive from:

• The supply of goods to a VAT registered business in another EU country;
• The export of goods to countries outside of the EU; or
• The supply of certain contract work where the place of supply of the service is outside the Republic of Ireland. For example services such as toll manufacturing.

Revenue guidance now confirms that the audited financial statements from an accounting period ending within the 12 months preceding the renewal application may be used to evidence that the 75% test is met. These figures must be certified by an accountant as part of the application process.

When determining whether the 75% threshold is met, taxpayers by concession can exclude turnover from the supply of certain services and the sales of goods located outside the State at all times. The sale and subsequent lease back of assets should also be excluded from the calculations.

There are nuances to the criteria and companies should take care when applying for the authorisation and check whether they continue to meet the criteria on an on-going basis. Revenue may cancel an authorisation held by an accountable person in instances where the person now longer qualifies, the application included incorrect or misleading information, or the person authorised is not complying with record keeping or other tax obligations.

Revenue guidance in respect of start-up businesses confirms that an accountable person not fulfilling the required 12-month trading requirement may apply for an authorisation where each of the following conditions are fulfilled:

• The person can demonstrate that the turnover from zero-rated intra-Community supplies of goods, exports and certain supplies of contract work will exceed 75% of the start-up’s total turnover in the first year of trading;
• The start-up entity is a subsidiary of or is otherwise connected for tax purposes with a company that is in possession of a current section 56 authorisation; and
• The start-up entity satisfies all the other qualifying criteria as set out under Section 56 of the Irish VAT Act.

VAT groups can apply for the authorisation, once the group as a whole fulfils the turnover requirements (as outlined above).
 

Benefits

The primary benefit of the authorisation is that it allows taxpayers to receive most goods/services at a 0% rate of Irish VAT (this includes most Intra Community Acquisitions, importation of goods into Ireland from non-EU countries, receipt of services from non-Irish established companies). The relief avoids a constant VAT refund position.

This zero rating procedure applies to all goods/services supplied to an authorisation holder, with the exception of:

• The supply/hire of any passenger motor vehicle;
• The supply of petrol;
• The provision of food/drink/accommodation (other than qualifying accommodation in connection with a qualifying conference), entertainment or other personal services;
• By concession, for ease of administration, the authorisation does not have to be applied to supplies under €40.

Where VAT is charged in respect of the above, it would be necessary to consider whether the authorisation holder has an entitlement to deduct the VAT in its periodical VAT return or not. VAT incorrectly charged to the holder of a 56B authorisation cannot be deducted via the VAT return.

Where qualifying goods are imported from outside the EU by authorised persons, the authorised person should declare on the relevant customs declaration (SAD) that they are an authorised person under Section 56 of the Value Added Tax Consolidation Act 2010 and quote their authorisation number. The goods are then imported at the zero rate of VAT and postponed accounting for imports is not to be used.

The authorisation can result in a significant cash flow saving and administrative ease for most businesses as it removes the need to wait until the VAT return is to be filed to recover VAT that would usually be charged. Of course, the alternative can arise for some taxpayers, as it is possible that the authorisation could result in a negative cash flow where favourable credit terms have been agreed with suppliers (i.e. in circumstances where the VAT can be recovered in a taxpayers’ VAT return in advance of actually paying the supplier within the credit terms provided).
 

Common Pitfalls

VAT is rarely at the forefront of the minds of companies who hold 56B authorisations; however, there are areas where VAT liabilities can arise.

It might be stating the obvious, but the authorisation does not have any impact on the VAT treatment of supplies made by the holder – i.e. sales to Irish customers are still subject to Irish VAT. It is quite normal to see T1 (Sales) figures in the Irish VAT returns of companies with a 56B authorisation. VIES/Intrastat/ARTD and VAT returns must also still be filed by holders of the authorisation.

Another area that can cause issues to holders of 56B authorisations is the area of self-supplies. Where a business acquires goods/services and puts them to a VAT exempt or a non-VATable use, then there is a deemed supply for VAT purposes, and VAT should be accounted for to Revenue. For example, if a company that produces toys gives away €1,000 worth of toys to a charity, then there would be a deemed self-supply and VAT should be paid over on the €1,000. While self-supplies can cause issues for all businesses, we find that it is more likely holders of 56B authorisations will omit to account for VAT on self-supplies as they receive their goods and services at the 0% VAT rate.

Additionally, supplies of canteen services to an authorisation holder are considered supplies of food/drink and hence do not fall within the parameters of the relief. Irish VAT should be charged to the 56B authorisation holder as normal. However, it is possible for the taxpayer to recover this VAT in its VAT return in certain circumstances. This is a complex area and worth considering in detail if relevant to your business.

Overall, an authorisation holder needs to take due regard for the end use of the purchases being acquired under the procedure to ensure that the correct treatment is adopted in every case.
 

Potential Penalties for incorrect operation of the authorisation

It is important that authorisation holders continuously monitor the requirement to avail of the 56B authorisation, as taxpayers are obliged to tell Revenue when they no longer qualify. Failure to notify Revenue can result in VAT penalties for the authorisation holder.
 

Conclusion

The above should serve as a useful overview of the practical requirements and implications of holding a VAT56 authorisation.

Additionally, it serves as a timely reminder for current holders to consider whether their authorisations are due to expire on 31 October 2023 and whether they are in a position to reapply for same.

The Deloitte Indirect Tax team is happy to assist businesses who qualify for a Section 56 authorisation with either renewing their application or applying for the authorisation for the first time. Should you have any queries or would like our assistance with same, please contact any of our team members outlined below and we would be happy to help.