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VAT deductions: what could go wrong?

Apr 23, 2018

VAT deductions might seem simple but there is a lot that can go wrong. Conor Walsh explains possible issues and how businesses can correct them.

VAT law only grants one fundamental right on people who are VAT registered: the entitlement to input deduction. In contrast, as VAT is a self-assessment tax, legislation, regulations and case-law impose extensive obligations on taxpayers, including the responsibility to correctly account for, collect and pay over VAT to taxation authorities.

With an ever-changing tax landscape, increasing complexity of transactions on a global scale, technological advances and legislative changes coupled with staff turnover within businesses, it should come as no surprise that taxpayers sometimes make mistakes. Regardless of the nature and extent of an error, timing is absolutely key when it comes to correcting it. 

What goes wrong?

  • Failure to register for Irish VAT when obliged to do so: a business may exceed the Irish VAT registration threshold contained in law, say in relation to domestic supplies here in Ireland, the Intra-Community Acquisition of goods into Ireland or making distance sales from another EU Member State to Irish consumers causing issues down the road.
  • Incorrect VAT rates are applied: a taxpayer should ensure that they are charging the appropriate VAT rate(s) on their supplies. As VAT is a transactional tax, the business needs to consider the appropriate rate for each and every transaction. Given that businesses normally make repeated supplies of identical goods or services, it is crucial that the correct VAT rate is applied to each transaction.
  • Failure to account for VAT on the reverse charge basis: taxpayers acquiring taxable goods or services in Ireland from abroad within the EU generally must ensure that VAT is being accounted for on the reverse charge basis (this is where a business ‘self-accounts’ for the VAT due). This obligation is particularly important where the business receiving the supply has limited or no VAT recovery entitlement, as an absolute VAT cost then arises.   
  • Incorrectly recovering VAT on non-deductible expenditure: where there are some important exceptions, VAT is typically not recoverable on expenditure incurred on food, drink, accommodation, entertainment, petrol and certain other motor related costs. 
  • Failure to make an adjustment for unpaid purchases: legislation introduced in recent years provides that where a taxpayer deducts VAT in a return but has not paid the supplier for the goods or services within six months of the end of that VAT accounting period, then the amount of VAT originally claimed as a deduction should be adjusted. The adjustment equals the proportion of VAT which relates to any unpaid supplier invoices, or part thereof.

    A re-adjustment can be made to reclaim the VAT incurred once the supplier is paid.
  • Property transactions: It is well-recognised that VAT on immovable property is an inherently complex area of Irish VAT law. Given that such transactions are often high in value, it is imperative to ensure the correct VAT treatment is applied. Failure to charge VAT (where correctly applicable) or incorrectly charging VAT (where it is not applicable) can lead to significant issues for the parties involved. 

    It’s also important to keep in mind that there can be significant hidden VAT liabilities that may unexpectedly arise under capital goods scheme adjustments which claw back VAT deduction claimed by previous owners on inflated property values before the property crash.
  • Mergers, acquisitions and company reorganisations: similar to VAT on property transactions, these types of transactions frequently gives rise to VAT issues.

    Depending on the fact pattern of the transaction(s) involved, transfer of business relief (i.e. Ireland’s version of transfer of a going concern (TOGC) relief which applies in many other European jurisdictions) may be applicable.

    While the EU and Irish law underpinning this relief – which automatically applies once the necessary conditions are satisfied – spans no more than a few lines, it is an area which has given rise to countless disputes and a body of case-law across Europe. One could certainly be forgiven for holding the view that this ‘simplification’ measure is not so simple.

Correcting the error

There is a fundamental difference between an error and a difference in technical interpretation held by a taxpayer and Revenue. The right of appeal is available to Irish taxpayers against Revenue determinations in the area of VAT.

Regardless of the nature and extent of an error, timing is absolutely key when it comes to making a correction. There are obvious advantages associated with taking prompt action, normally in the form of mitigating interest and penalties. That being said, there is a clear advantage to taxpayers who regularly review their tax affairs. Taxpayers who discover historic VAT errors generally regularise their position with Revenue by way of self-correction or by making a qualifying disclosure.

Self-correction without penalty

As documented in the Revenue Code of Practice for Revenue Audit and other Compliance Interventions, Revenue permit taxpayers to self-correct for errors by including an adjustment in a subsequent VAT return. The adjustment is typically the quantum of under-declared VAT.

While there are a number of conditions attached to self-correction without penalty, taxpayers can generally avail of it provided the net underpayment of VAT for the period being corrected is less than €6,000.

Self-correction must take place before the due date for filing the taxpayer’s income tax or corporation tax return (as appropriate) for the chargeable period (normally a one-year period) within which the relevant VAT accounting period ends. Once this time limit has lapsed, taxpayers will normally be required to make a qualifying disclosure in order to correct an error.

It happens…

It is likely that most businesses will discover a historic VAT error at some point in their life cycle, although the significance of the error will vary considerably between taxpayers. Timely action, full disclosure and co-operation with Revenue is always advisable when regularising tax affairs.

Conor Walsh ACA is a Tax Manager in Deloitte.