8 hints, tips and pitfalls for VAT compliance
We have highlighted below some of the common VAT pitfalls as well as some tips for dealing with your compliance obligations.
1. Compliance calendar
With businesses faced with increasing levels of reporting obligations, it can be a challenge to keep up! A simple but effective tool for allowing your team to track your VAT obligations is a ‘Compliance Calendar’. Use this calendar to identify your Indirect Tax reporting obligations throughout the year, highlighting the statutory due dates for filing and payment so that sufficient lead-in time is available and deadlines are tracked and met.
It is important to ensure that sales and purchases invoices meet the legislative requirements for a valid VAT invoice. Revenue may block the recovery of VAT where the supporting invoice does not meet the criteria of a valid VAT invoice. Where invoices are received with missing data, these should be returned to the supplier with a request to reissue the invoice with all required criteria. 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.
3. Non-deductible VAT
When completing Box T2 (VAT on Purchases) of the VAT return, special care must be given to ensuring non-deductible VAT is excluded. Only VAT on costs incurred for business purposes may be reclaimed, any required apportionment of recovery should be applied, and statutory blocks on recovery must be adhered to. These blocks generally include 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.
4. Reverse charge VAT
Businesses acquiring goods or services from outside Ireland must self-account for Irish VAT as appropriate on the reverse charge basis. This requires an entry in both Box T1 (VAT on Sales) and Box T2 (VAT on Purchases) on the VAT3 return. The amount to be included in the T1 box will be VAT at the appropriate rate calculated on the net euro value of the invoice received. Where the taxpayer is engaged in fully VAT-able activity, the Box T2 entry will be the same as the amount in the Box T1 and the reverse charge accounting will be cash flow neutral. If full input deduction is not available a payment will be due to Revenue. Be aware that the net euro values of goods and services supplied to, or received from, businesses in other EU Member States must also be recorded in the statistical boxes of the VAT return (Boxes E1, E2, ES1 and ES2). Businesses often fail to complete these boxes which can lead to queries from Revenue, albeit there is no attached VAT liability. Heed should be paid to potential requirements to file VIES and Intrastat returns also.
5. Six month+ supplier rule
There is now a requirement for a taxpayer to pay back input VAT reclaimed on purchases where a supplier has not been paid within six months of the taxable period. This VAT may be recovered again upon payment of the supplier invoice. This is an area which should be monitored on an ongoing basis.
6. Annual return of trading details (RTDs)
Following the end of a taxpayer’s accounting year, a statistical return referred to as the Annual Return of Trading Details (RTD) is required to be submitted. This return consists of a breakdown of the VAT-exclusive value of the supply of goods and services, imports/exports and deductible inputs at the various VAT rates undertaken during the year. This return should reconcile to the six VAT returns filed during that period. While there is no payment associated with this return, failure to file may result in Revenue withholding tax repayments due to the taxpayer, trigger Revenue audits and delay the issue of tax clearance certificates. The RTD should be included in the Compliance Calendar.
7. Revenue verification checks:
It is common practice for Revenue to issue standard verification checks where taxpayers are in a regular repayment position or where the repayment is relatively significant. Having said that we have seen them raised for repayments as low as €100 so it would seem there are no hard and fast rules as to the criteria triggering these letters! The information sought is standard and should be addressed in a timely manner providing the appropriate level of detail to ensure efficient processing of outstanding repayments and avoid any unnecessary red flags for non-compliance with Revenue requests.
8. Compliance process manual
A practical recommendation for any business would be to put in place a Compliance Process Manual for VAT purposes. This manual should document procedures and processes that are agreed upon for the preparation and review of Indirect Tax returns, dealing with Revenue correspondence, online access codes for tax authority filings and communication on unusual transactions which may have VAT consequences.
We hope this quick snapshot of VAT proves useful for you and your business.