Maximise cash flow through VAT opportunities | Indirect Tax Matters May 2020
It is a truth universally acknowledged that cash is the lifeblood of business. Given the challenging times we are currently operating in, many companies are looking for innovative ways to increase their bottom line whilst improving their management of day-to-day operational costs.
While maintaining cash flow is always vital to the success of any business, it is all the more relevant during periods of unprecedented uncertainty. In response to the COVID-19 crisis Irish Revenue have introduced certain limited VAT measures targeted at Small and Medium Enterprises (being businesses with a turnover of less than €3 million that are not dealt with by Revenue’s Large Cases or Medium Enterprises Divisions). Businesses not within SME’s can contact Revenue directly to discuss their current position.
There are however, several mechanisms already 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. If these simple strategies are appropriately implemented the impact on cash flow could offer a significant boost to businesses during these times of need.
Whilst the below represents a brief overview of some VAT saving ideas, we would encourage businesses to talk to us about their specific situation so that we can identify the most suitable opportunities, assist with implementation and ensure best value along with meaningful impact.
The VAT strategies to reduce working capital tied up in VAT balances and lead to VAT savings that ease the burden of VAT on companies can be broadly broken down into two categories – namely VAT cost reduction and VAT cash flow. While many of the strategies may be viewed as data-intensive for limited reward, Indirect Tax technology tools can generally assist, along with leveraging the extensive knowledge of our VAT and tax technology data specialists. For businesses with cash flow issues, the working capital released as a result of focusing attention on this area can be considerable.
VAT Cost Reduction
Input VAT recovery methodology
All companies should review their key business areas with a view to improving input VAT recovery in general. However, businesses operating in a partially VAT exempt and outside the scope of VAT environment may have experienced a dramatic shift in activity as a result of COVID-19 which could warrant revisiting their current VAT recovery methodology and determining whether it is still fit for purpose.
Ultimately all businesses with restricted input VAT recovery need to ensure that the method in place for recovering VAT on dual-use inputs, being the percentage of VAT deductible on costs used both for VATable and non-deductible activities, correctly reflects the use to which the underlying costs are put. As a result of such a review, additional costs may be identified as being attributable to VATable supplies which coupled with an overall change in the basis for calculating the input VAT blockage could lead to significant improvements.
Accounts Payable review
A review of Accounts Payable to consider if all input VAT incurred has been recovered, where permitted, can prove fruitful. In our experience many businesses under recover VAT either on categories of expenses, or through mis-postings or failure to identify foreign VAT eligible for recovery. Not only can this lead to future cost reductions but there may also be the opportunity to submit historic reclaims to tax authorities for any identified under claimed VAT on such costs.
Overseas input tax recovery
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. A reclaim for input VAT recovery on costs incurred in other EU Member States in 2019 must be submitted by an Irish trader to Revenue via ROS by 30 September 2020. The claim being made is still however subject to the VAT deductibility rules in the jurisdiction in which the VAT was incurred.
Bad debt relief (BDR)
If a debt has been written off as an irrecoverable debt the business should be able to obtain relief for all or part of the VAT paid on the original supply to the customer in default. Many business fail to recognise this opportunity to reclaim VAT previously accounted for. Where large debts are written off, significant savings can be made. See here for more information on BDR.
Input Tax accrual
Operating an input tax accrual with a view to recovering VAT on invoices received but unposted to the accounting records in the earliest possible VAT return is another cash flow optimisation strategy worth considering at this time. If implemented correctly substantial cash flow benefits can arise.
Where there are considerable VATable costs between related entities the cash flow benefits of forming a VAT group are also worth bearing in mind. Once VAT grouped, the VAT group remitter, files a single VAT return per period for the entire group and accounts for any VAT due to Revenue. VAT does not need to be charged nor VAT invoices raised on supplies between VAT grouped entities, with the exception of property transactions. Accordingly, a significant positive cash flow impact can be availed of by forming a VAT group.
A qualifying business that holds a valid Section 56 authorisation is entitled to receive certain goods and services from Irish suppliers with a zero-rate of VAT applying as well as importing goods free from VAT.
Eligibility to participate in this scheme can be a significant cash-flow benefit to authorised businesses as it removes the requirement for suppliers to charge VAT on qualifying supplies in the first instance and eliminates the necessity for a subsequent reclaim of this VAT on the business’s periodic VAT return.
A business may avail of this relief if 75% of total annual turnover is derived from supplying goods to other EU countries (intra-community supplies), exporting goods to countries outside the EU or making supplies of certain contract work.
Consider tax point of invoices
Businesses could also consider the VAT tax points of their supplies and explore the timing of when VAT is due for payment. Consideration should also be given to when reverse charge obligations are triggered from supplies bought in from overseas.
Other opportunities worth considering at this time are the offsetting of tax liabilities e.g. using a VAT repayment to fund Employment Taxes or Corporation Tax or (re)negotiating customer and supplier payment terms (accounts payable seek longer payment terms; accounts receivable seek shorter payment terms).
Our Indirect Tax Team has extensive experience assisting clients in identifying VAT opportunities and assisting businesses with implementing best practice solutions, in particular during challenging trading environments. We would be delighted to assist you in exploring any of the above measures to determine whether an opportunity might exist for your business. Should you have any queries or would like to further discuss VAT opportunities which may assist with navigating these uncharted waters please contact Ciara McMullin or any member of the Deloitte Indirect Tax team.