VAT for start-ups SME’s has been saved
VAT for start-ups SME’s
Indirect Tax Matters September 2021
A whopping 99% of companies in Ireland fall into the SME sector, employ about 2/3rds of our workforce and account for almost 50% of turnover for businesses in Ireland. Inevitably, this pattern will continue with the constant flow of rapidly growing start-ups and SMEs, at the head of a strong readily available funding landscape globally. With the evolution of the digital economy and remote workforces, companies within all sectors have found themselves rethinking how they do business.
Whether it is initial entry into Ireland, expansion abroad or merger/acquisition deals, experience shows that the commercial decisions move first, with the regulatory and compliance obligations often bringing up the rear! Daily we see start-ups and expanding SMEs incurring unnecessary VAT costs, inefficient VAT cash flows and burdensome tax authority interactions avoidable with a little more upfront, flexible and monitored VAT governance and strategic planning.
While the VAT issues faced are often sector specific and continue to change as business models and VAT laws progress, we set out below our own one-stop-shop of VAT considerations for start ups - a general road-map for doing it right from the start!
How you do business in Ireland
Businesses use a variety of operational models, transitioning from one model to another as the business expands and grows. We often see Irish holding company structures, regional headquarters, local trading companies, marketing and customer support branches, SPVs for distribution / property / once-off infrastructure projects, payment processing entities or no physical presence at all, just an Irish customer base.
Each of these will impact the initial Irish VAT regulatory and compliance obligations of the business. Therefore, as soon as the business model is agreed, VAT needs to be considered.
Top 10 VAT regulatory and compliance considerations for businesses launching in Ireland
1. Does the business have an Irish establishment from / to which supplies of services will be made?
- An entity, a branch, or sufficient human and technical resources on the ground in Ireland.
2. What is the VAT status of customers?
- VAT registered businesses, unregistered corporate/public bodies, private individuals, domestic or foreign resident, etc.
3. Will the business supply or acquire goods which will physically be in Ireland?
- Imports of goods from outside the EU, intra-Community acquisitions of goods from other EU Member States or purchases/sales of goods in Ireland; on-going purchases, once-off, for internal use or for resale.
4. What is the VAT treatment of each of the business’ transactions?
- Early VAT transaction mapping is critical in order to determine place of taxation, VAT treatment and who is accountable for the VAT; including transactions with other corporate group entities which may or may not be supported by contracts, invoicing or actual payments.
5. If required to register, is a VAT registration threshold available?
- This could be:
o the services or goods threshold of €37,500 or €75,000, respectively,
o the intra-Community acquisitions threshold of €41,000 or
o the telecoms, broadcasting and electronically supplied services / distance sales thresholds of €10,000.
o no threshold applicable
- The business must choose whether to “activate” its Irish VAT number for EU trade
6. Is it beneficial to register early as an intending trader to reclaim VAT on start-up costs?
- A commercial decision based on ability to meet compliance obligations versus the VAT amount lost on start-up costs incurred prior to VAT registration.
7. What is the impact of late registration?
- This could be a combination of:
o fixed penalties (such as €4,000 for late registration),
o interest at 0.0274% per day for late payment of VAT liability due, and / or
o Tax geared penalties ranging from 3% - 100% of the VAT liability due (possible publication).
8. Is VAT grouping an option and what are the benefits?
- Irish establishments, closely bound by financial, economic, and organisational links; at least one person is Irish VAT registered; holding companies and entities with wholly exempt activities may join.
- Joint and several liability for all members; deductibility of purchases VAT applied at a group level; no VAT charge or tax invoicing for intra-group transactions, except for certain property and transfer of business transaction
9. What VAT compliance obligations will the business have once registered?
- Registration for Revenue’s On-Line System (“ROS”) – to file returns and correspond with Revenue digitally.
- Periodic VAT Returns and annual statistical Return of Trading Details (“RTD”)
- VIES & Intrastat Returns – statistical returns; value of services and/or goods sold to or acquired from other EU Member States; valid VAT numbers must be obtained for suppliers/customers; validation checks can be performed via https://ec.europa.eu/taxation_customs/vies/.
- One-Stop-Shop (“OSS”) Returns – optional VAT compliance schemes used in order to simplify VAT reporting obligations, either for Irish VAT due (imports) or VAT due across a range of EU Member States (union and non-union schemes for services sold to non-VAT registered customers, distance sales of goods and certain market place supplies).
- Note: the above returns generally are not all for the same period length (e.g. some are monthly, bi-monthly, quarterly, annually); if registered for OSS purchases VAT cannot be recovered on these returns and therefore a local Irish VAT registration is generally required in parallel; cash receipts basis of accounting is available for certain businesses.
10. What documentation requirements will the business have once registered?
- Domestic transactions - Irish VAT invoicing and credit note requirements, including content, timing, and method of issuance; e-invoicing is available subject to ensuring integrity of content, authenticity of origin and legibility.
- Cross-border transactions - identify which jurisdiction’s invoicing rules apply; for business trading across many jurisdictions one standard approach to invoicing can be efficient.
- Sales invoice considerations - the need to “issue” the invoice (if using digital portals), obtaining and validating the EU customer’s VAT registration numbers and displaying Euro VAT values for non-Euro dominated invoices.
- Invoicing optimisation - simplified invoicing for supplies < €100, self-billing by the customer and outsourced invoicing functions.
- Retention - all books, records, and documents for a period of 4 years, with longer retention periods for records relating to property transactions, Revenue interactions and disputes.
Giving the time to these considerations up front should ensure that the business has a transparent understanding of its regulatory and compliance obligations and options for optimisation, allowing for educated decision-making and risk mitigation.
Unregistered business incurring Irish VAT
If the business is not required to be registered for Irish VAT, any Irish VAT incurred may be recovered by an EU business on an Electronic VAT Refund (“EVR”) Claim to the tax authority in its country of establishment or by a non-EU business on a 13th Directive reclaim directly to the Irish Revenue. It is critical that:
- the Irish VAT has been correctly charged,
- the foreign business holds valid supporting documentation (VAT invoice or import document),
- the VAT is incurred for a taxable business and
- the VAT refund claim is submitted on time and in the required manner.
These claims can be quite time consuming and so the business should provide for the cash flow burden and the possibility of not recovering the VAT in the short-medium term
Strategic VAT Considerations
While the big-ticket VAT issues faced by start-ups and SMEs can often be sector specific, we have highlighted below some of the challenges we have seen frequently in supporting our clients.
Corporate Group Supplies
Businesses often use holding company structures, which introduce complexities in the group’s ability to fully recover VAT on overhead costs due to the “passive” nature of holding shares and exempt share transactions. While generally outside the scope of VAT, head office and branch supplies may also require analysis where they are multi-jurisdictional and involve VAT grouping. Inter-company financing arrangements and payment processing services can also introduce possible exemptions and restricted deduction of purchases VAT.
All charges between corporate group entities, including management or shared services, profit/cost sharing, IP rights or other licencing/royalty fees, should be supported by contracting and tax invoicing, even where balances are netted in the accounts.
This is a key area of attention for Revenue as inter-group transactions are often overlooked by businesses. While there is sometimes a no loss to Revenue argument, this will not be the case where there is partly exempt activities within the group.
VAT Deductibility & Deemed Supplies
VAT is intended to be a neutral tax, borne by the end consumer, where a business is engaged in fully taxable activities, meets all conditions for recovering purchases VAT and does not incur any non-deductible purchases. Unfortunately, ensuring VAT neutrality in day-to-day operations is not always easy, and the larger the business grows the more difficult it can be to ensure VAT optimisation – key deduction considerations include:
- Sufficient evidence –receipt of valid supporting documentation; vendor invoice acceptance/rejection process is key; obtaining import documents; correct entity name and VAT numbers quoted.
- Entitlement to deduct
o Direct attribution – directly attributing costs to taxable or exempt supplies in order to determine deduction entitlement; important for any businesses engaged in mixed transactions.
o Qualifying activities – identifying any special categories of supplies which give deduction entitlement, for example supplies outside Ireland liable to VAT if supplied here, certain exempt financial services supplied outside the EU, etc.
o Apportionment – overhead costs of a partially exempt business are deductible based on an apportionment rate; the standard method is “turnover”; alternative methods can be used if more appropriate with annual reviews and adjustments required; undue regard for the apportionment process easily creates risk within a business which accumulates rapidly over time.
o Standard non-deductibles – recovery of VAT on such costs is restricted for all business; includes food, drink, accommodation and personal services for employees, entertainment expenses, motor vehicles and petrol (other than as stock in trade), etc. General, non-business or personal costs are also irrecoverable.
Generally, where goods/services are given to employees or business stakeholders free of charge, a supply would not occur for VAT purposes as there is no consideration upon which to levy the VAT. However, as VAT may often be deducted on such items this would create a disadvantage for the Irish Revenue. Therefore, deeming provisions trigger a VAT liability for a business, based on costs, for the supply of the following free of charge:
- All goods, with the exception of:
1. Gifts made to any person in the course of business which have a purchase value of </= €20
2. Advertising goods or industrial samples, not in a form ordinarily available for sale, given to customers
- Catering services for employees
Specifically, for start-ups and SMEs, it is common to give branded swag items to employees/stakeholders in the supply chain, to provide a free canteen on-site for employees or to give out sample products/credit/loyalty points to potential customers. The decision to partake in these marketing initiatives should consider the VAT consequences.
Digital platform or other intermediaries
In modern supply chains, we often see entities acting in a variety of roles between other parties to a transaction, whether as a disclosed or undisclosed agent, an intermediary, a provider of a marketplace or platform for suppliers/customers to come together, etc.
While entities acting in these intermediary roles may not always be a legal party to the main underlying supply, the extent of their role can often trigger a deemed buy-sell for VAT purposes only of the main good/service being supplied. It is critical to identify as part of the set-up of any new supply chain whether you or another party will be acting as an intermediary, the extent of that role (i.e. acting in their own name or someone else’s name, facilitating or taking part in the supply, etc.) and the VAT impact on the entire supply chain.
With the rise of the digital economy and the lengthening of historically simply supply chains, this is a risky area of VAT and one which is monitored closely by the authorities.
Businesses new to the Irish market or expanding here need to understand the full details surrounding any importing of goods into Ireland; specifically, who will legally own the goods at the time of import, has an EORI and VAT registration been obtained, will the VAT deferment scheme be used or will postponed accounting be operated so that import VAT is accounted for on the periodic VAT return.
The involvement of more than one party in the import transaction such as a supplier, purchaser, agent or logistics company can create complexities such as clearing goods in the incorrect entity’s name, not holding the relevant import documents, etc. Clear contracting, incoterms and discussions on the VAT obligations associated with the import are of key importance here to mitigate VAT risk.
We have supported many start-ups and SMEs importing goods into Ireland who have suffered significant irrecoverable import VAT costs due to bad supply chain and contracting management.
Transactions in real estate in Ireland can be of high value and, if dealt with incorrectly, can trigger significant VAT liabilities for businesses. The Irish VAT regime continues to have old, transitional and new VAT on property rules all of which may be applicable depending on the property and transaction in question. Inevitably, the history of the property and the current transaction (e.g. sale, freehold equivalent, lease surrender/assignment, grant of a lease, letting, etc.) will drive the VAT treatment.
The risk is created by the fact that certain transactions in property are exempt from VAT (e.g. letting of immovable goods) and the entitlement to recover VAT on the construction/acquisition of a property is monitored throughout the life of the property. This results VAT adjustments being required over a 20 year period (or 10 years for refurbishments) if the use of the property is changed from a taxable use to an exempt use, or vice versa (e.g. opting to tax a letting). These adjustments are generally what can create risk and liabilities for businesses, and so the VAT history of the property, its intended use and any changes in use need to be proactively identified and planned for in commercial decisions, especially where an old property is being handed over as you may be stepping into the shoes of the supplier for VAT capital goods record purposes.
Note: businesses can also experience Relevant Contract Tax (“RCT”) obligations where fit out works are contracted for within a property.
Each commercial contract or T&C entered into by the business should be assessed and future proofed from a VAT perspective with intentional use of VAT exclusive/inclusive clauses (as appropriate), contract terms allowing for changes in VAT law and rates, requirement for VAT invoicing, collecting of any VAT due within same payment terms as base consideration, liability clause for any interest/penalties incurred associated with the contract and transaction specific clauses (e.g. option to tax leases).
Similar to the EVR and 13th Directive reclaims referenced above, for foreign businesses reclaiming Irish VAT, Irish businesses may submit EVR claims to obtain refunds of VAT incurred in other EU Member States. For VAT incurred in jurisdictions outside of the EU (incl. UK), businesses need to follow the local procedures (if any) for reclaiming local VAT/GST incurred.
Most business who trade internationally have a balance of foreign VAT incurred annually and face the year end dilemma of whether to seek a refund. In practice, businesses often forego the VAT as the amount does not justify the resources required to obtain the refund or the potential exposure to a foreign taxing authority. Smarter planning can sometimes avoid these VAT costs by ensuring no foreign VAT is incorrectly charged, local to local billing is availed of wherever possible, etc.
VAT Governance Model
Setting up an outline of a VAT governance model at the start can significantly support a business in better managing VAT as the business grows. It should be viewed as a fluid and progressive document and, at a minimum, should include:
- Roles and responsibilities with regards to VAT within the business
- VAT management model – e.g. in-sourcing, out-sourcing or co-sourcing; finding the right mix of internal and external resources is key for optimum VAT compliance/mitigation of risk; the approach should be flexible enough to change with the business as it grows.
- Tax Automation – optimum levels of automation within the VAT function and compliance cycle and plan for improvements; cost versus benefits analysis; consider the ability to easily share data with the Revenue and the possible transition to VAT real-time reporting.
- Compliance Process Map – a “101 compliance manual” including ERP data extraction (or manual data entry), data/document validation, restriction of non-deductible VAT or apportionment calculations, VAT return preparation and filing, deadlines, etc; it should include details of tax codes, VAT treatment mapping of standard transactions and steps specific to the company’s systems and procedures.
- VAT Law changes – how to monitor, process for transition to new rules/rates, roles for stakeholder management, etc.
While it’s ideal to say that every start-up and SME should be fully VAT compliant from the get-go, it is inevitable that errors will occur. Accepting this, knowing and availing of the mechanisms for correction (while mitigating interest/penalties) and being prepared for any potential Revenue aspect queries or audits is the most prudent approach. Seeking a Revenue Technical Opinion on high value ambiguous items can also lower risk. The statute of limitations for standard assessments of tax, not falling within the remit of fraud or neglect, is 4 years.