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How can you increase your bottom line during the challenging times we are currently operating in? Ciara McMullin outlines where VAT law can help businesses to gain short-term cash flow improvements. 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 while improving their management of day-to-day operational costs. While maintaining cash flow is always vital to the success of any business, it is even 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 (SMEs). 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. VAT Cost Reduction Input VAT recovery methodology 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, 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 even though 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. Where large debts are written off, significant savings can be made.  VAT Cashflow 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. VAT grouping 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. VAT56B authorisation 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 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). Ciara McMullin is an Indirect Tax Senior Manager with Deloitte.

Jun 05, 2020
Tax

Peter Vale considers the items that could become long-term features of Ireland’s tax regime under the new government. In the April issue of Accountancy Ireland, I wrote about the expected impact of COVID-19 on Exchequer receipts for 2020 and beyond. We have now seen the evidence with both VAT and excise down roughly 50% on similar months last year. While some of the drop in VAT receipts might be down to timing with companies deferring payments, a large chunk is an unquestionably permanent loss in VAT revenue due to lower spending. The income tax figures for May are also expected to show a significant drop, due to vastly lower numbers in employment. The Department’s view is that corporation tax figures will hold up better. I hope this forecast is right, but I fear that the hit to corporate profits will be higher than anticipated, with refunds for prior years and losses carried forward likely to feature. What is next? So, what does this mean for future taxes? Will the relatively healthy state of our public finances entering the crisis make for a less painful exit? The Minister for Finance, Paschal Donohoe T.D., has stated that he will not raise taxes this year as doing so would stifle the ability of the economy to recover. This makes sense, assuming we can afford to do it. You also cannot simply raise taxes and expect to collect more tax revenue; you reach a tipping point, after which further hikes result in less tax collected. And many of our taxes are already high. Tax reliefs Of course, ruling out impending tax increases does not mean that there will not be a focus on tax reliefs. While many tax reliefs have been abolished over the last decade or so, certain targeted reliefs remain available to taxpayers. It is unlikely that tax reliefs incentivising environmentally friendly behaviour will be targeted. Furthermore, the research and development (R&D) tax credit is also unlikely to be affected as it encourages more sustainable jobs. Reliefs that allow business assets to be passed (typically) to the next generation are more likely to be in scope. Generous reliefs exist for both the disponer and the recipient. These reliefs escaped the guillotine in the past as they continued to make economic sense; a large tax bill was avoided on a potentially illiquid event, allowing the business to be driven forward by the next generation. Capital taxes Capital taxes are likely to be targeted by the Minister, perhaps initially by way of curtailment of reliefs and in the medium-term via an increase in rates. That said, capital tax rates are already high with our 33% rate one of the highest in the EU. In contrast, the UK capital gains tax rate is 20%. We know that when the capital gains tax rate was halved from 40% to 20% some years back, the tax-take doubled. An increase in capital gains tax rates could see the opposite effect, with fewer transactions and potentially more tax planning resulting in a lower tax yield. Broadening the tax base One thing the Minister may look at in the future is broadening the income tax base. It is questionable as to whether this would be regarded as an increase in taxes, but it would generate more tax revenue. Broadening the tax base would mean more people paying tax, albeit many would pay very little. Adjusting the current exemption limits and credits would facilitate this. Broadening the tax base was a recommendation of the Commission of Taxation over a decade ago, but we have not seen it followed by governments since. While the notion of everybody contributing something may resonate more in the current environment, it may still prove politically unpalatable. Property tax In the medium-term, depending on the state of the public finances, other tax-raising measures may be considered. The options aren’t exactly limitless. Our VAT rate is already comparatively high, as are our income taxes. Our corporation tax rate is low but effectively untouchable. One tax rate that is low in a European context is property tax, in particular for residential property. Many economists see property taxes as the least distortive, so an increase in property taxes might be the ‘least bad’ way to raise taxes. Tackling property taxes would be a brave move for a new government, but potentially something that could be done in year one or year two of a new term. Conclusion In summary, tax increases later this year are unlikely – although we may see certain reliefs targetedand the ‘old reliables’ such as cigarettes and alcohol are unlikely to escape. In the medium-term, COVID-19 will mean that tax-raising measures are likely to feature. In my view, a broadening of the tax base and an increase in property taxes are the most likely outcomes. Both of the above could be long-term features of our tax regime, although much will depend on future government priorities.   Peter Vale FCA is Tax Partner at Grant Thornton.

Jun 02, 2020
Tax

Geraldine Browne provides food for thought as employers prepare to report end-of-year expenses and benefits. At the time of writing, I am adjusting to working from home and seeking the best working station in the house (I lost). Much of my time is spent assisting clients with queries on the UK Government interventions introduced to help businesses survive in this challenging time. The most common questions relate to furloughed workers as companies struggle to maintain productivity. It is difficult to choose a topic for this article amid the human tragedy unfolding before us on a global scale. As this article will publish in June, employers will be gathering the necessary information to complete Forms P11D and share scheme reporting for the year ended 5 April 2020. For this reason, I will focus on P11D reporting and consider the changes employers face in benefit-in-kind (BIK) reporting in light of the coronavirus emergency. The due date for P11D reporting is 6 July 2020 for BIK provided for the year ended 5 April 2020. While this may have been delayed in line with other announcements from HMRC, the preparation process will nevertheless be the same. What do I need to file? If the employer paid any benefits and/or non-exempt expenses, or if they payrolled any BIKs, a P11D (B) form must be filed. The employer must include the total benefits liable to Class 1A, even if some of the benefits have been taxed through payroll. Employers are also required to give employees a letter informing them of the benefits that were payrolled and the amount of the benefit. What do you need to include on the P11D form? Taxable benefits typically include private medical and dental insurance, company cars, and gym membership, for example. HMRC has published a useful guide for P11D completion, which is a good starting point. Company cars and vans Employers are required to disclose the company car BIK for the full tax year where it is made available for the entire period. The question has been asked as to whether an employer can reduce the BIK value since employees have been asked to remain indoors and business travel in a company car ceased temporarily from March 2020. If an employee is furloughed and the vehicle remains at the employee’s home, the car is seen as being available under the current rules. At the time of writing, HMRC has not yet issued formal guidance on this matter. There have been suggestions that HMRC may accept that company cars will not be deemed available for BIK tax purposes where they are ‘virtually’ handed back by returning keys and fobs. It is worth reminding ourselves of the rules regarding the cessation of the car benefit. The benefit may cease, but remember: The car must be unavailable for at least 30 days to pause or cease a company car benefit; and HMRC will accept that the car is unavailable to the employee if it is broken down and has not been repaired or if the employee does not have the keys. If you have not already considered the company car policy, it is worth seeking advice in this area. Taxable expenses when working from home If employers provide a mobile phone without restriction on private use, limited to one employee, this is non-taxable. If the employee already pays for broadband, no additional expenses can be claimed. If broadband was not previously available in the employee’s home, the broadband fee paid for by the employer may be provided tax-free although in this case, private use must be restricted. Laptops, tablets, computers, and office supplies will not result in a taxable benefit if mainly used for business. If the employee purchases a desk and chair and seeks reimbursement from the employer, this will be viewed as taxable, and you may wish to include this in a Pay-as-you-earn Settlement Agreement (PSA). Some employers may provide employees with an allowance for additional expenses incurred in connection with working from home. This was increased to £6 per week from 6 April 2020 and can either be paid to the employee or reimbursed to them. Businesses and the economy are facing unprecedented financial pressure. It is worth reviewing your current benefits and expenses to identify ways in which you can reduce the cost to your business and reduce the taxable benefit to the employee. With many employees now furloughed and under severe financial pressure, any assistance an employer can provide to increase net pay will be welcome.   Geraldine Browne is Tax Director at BDO Northern Ireland.

Jun 02, 2020
Tax

David Duffy discusses recent Irish and EU VAT developments. Irish VAT updates VAT payment deferrals  In response to the economic impact of COVID-19, Revenue announced that interest would not apply to late payments by SMEs of their January/February 2020, March/April 2020 and May/June 2020 VAT liabilities. SMEs in this context are defined as businesses with a turnover of less than €3 million and which are not dealt with by either Revenue’s Large Cases Division or Medium Enterprises Division. Businesses that do not meet the definition of an SME but are experiencing VAT payment difficulties are advised to contact Revenue and these issues will be dealt with on a case-by-case basis. Revenue also advised that all taxpayers should continue to file VAT returns within the normal deadlines. Where key personnel are unavailable to prepare the VAT returns due to COVID-19, businesses should file on a ‘best estimates’ basis and any subsequent amendments can be completed on a self-correction basis without penalty.  Furthermore, on 2 May 2020, a scheme was announced to allow businesses that have availed of VAT and PAYE deferrals during the COVID-19 crisis to defer or “warehouse” the payment of those outstanding liabilities for a period of 12 months without accruing any interest. A lower than normal interest rate on late payment of tax (3% per annum instead of 10% per annum) will then apply until the warehoused tax liability has been repaid. Further details of this scheme are available on the Revenue website and legislation will be enacted in due course. Temporary relief from VAT and duty on PPE On 8 April 2020, Revenue announced that the 0% rate of Irish VAT and customs duties would apply to Irish imports (from outside the EU) of personal protective equipment (PPE) and other goods used to combat COVID-19. This relief applies to imports in the period from 30 January 2020 to 31 July 2020. Revenue also confirmed in eBrief 63/20, issued on 17 April, that the 0% rate of Irish VAT concessionally applies to domestic and intra-EU acquisitions of similar goods in the period from 9 April 2020 to 31 July 2020. These reliefs are subject to certain conditions, which are summarised below. For imports from outside the EU, the goods must be imported by, or on behalf of, State organisations, disaster relief agencies, or other organisations (including private operators) approved by Revenue. The goods must be intended for free-of-charge distribution or be made available free-of-charge to those affected by, at risk from, or involved in combating COVID-19. Furthermore, the importer must have both an EORI number and be pre-authorised by Revenue for the relief. In addition, import declarations must include the relevant customs codes in the appropriate SAD boxes. Where VAT and customs duties have already been paid but the relevant conditions for relief are met, a refund of such amounts can be claimed. Application forms to avail of the relief and to seek a refund of VAT or customs duty previously paid are available on Revenue’s website. For domestic supplies and intra-EU acquisitions, the 0% VAT rate temporarily applies to PPE, thermometers, ventilators, hand sanitiser and oxygen supplied to the HSE, hospitals, nursing homes and other healthcare facilities for use in the delivery of COVID-19-related healthcare services to patients. The sale of these products in other circumstances will continue to attract the VAT rate that would typically apply. VAT grouping In eBrief 053/20, Revenue issued guidance in respect of VAT groups. The guidance primarily outlines the requirements and implications of VAT grouping and includes examples, which show how the rules apply in certain circumstances. Businesses that are considering forming or breaking a VAT group should review the guidelines to ensure that the appropriate procedures are followed. The guidance includes a section on the territorial scope of Irish VAT groups and confirms that, where an entity that is established or has a fixed establishment in Ireland joins an Irish VAT group, it is the entire entity, including any overseas branches, that is considered to join the Irish VAT group. Consequently, charges from a foreign establishment of an Irish VAT group member to other members of that Irish VAT group are disregarded for Irish VAT purposes. This has been the Revenue position for some time, but it is helpful to have it reconfirmed – particularly for the financial services and insurance sectors. ROS enhancements In eBrief 58/20, Revenue announced several VAT-related enhancements to Revenue’s Online Service (ROS). Taxpayers now have the option to add a second VAT agent. To add the second VAT agent, taxpayers will need to complete an Agent Link form in the usual manner. Also, the Revenue Record (Registration Details) on ROS now indicates the VAT basis of accounting (i.e. the cash receipts or invoice basis) adopted by a given taxpayer. EU VAT updates VAT treatment of staff secondments The Court of Justice of the EU (CJEU) concluded in the San Domenico Vetraria (SDV) case (C-94/19) that the secondment of staff by a parent company to its subsidiary in return for a payment equal to the parent company’s cost (but excluding any profit margin) is a supply of services within the scope of VAT. The case highlights that VAT can arise on cross-charges for staff time and this should be carefully considered, particularly in cases where there may be no or partial VAT recovery in the recipient entity. In analysing the case, the CJEU re-stated that VAT arises on a supply of goods or services effected for consideration within the territory of an EU member state by a taxable person. A supply effected for consideration requires a legal relationship between the supplier and recipient, and reciprocal performance, meaning that the payment received by the provider of the service is in return for the service supplied to the recipient. In the present case, the CJEU was satisfied that there was a legal relationship between the parent and subsidiary and that there was a payment in return for the service provided. Consequently, where the Italian court, which had referred the case to the CJEU, established based on the facts that the amounts invoiced by the parent company were a condition for the secondment and that the subsidiary paid those amounts only in return for the secondment, VAT would apply to the secondment. The CJEU confirmed that the fact that the payment did not include a profit margin did not impact the VAT analysis, as it has been previously held that a supply for VAT purposes can take place where services are supplied at or below cost.   David Duffy FCA, AITI Chartered Tax Advisor, is an Indirect Tax Partner at KPMG.

Jun 02, 2020
Tax

While COVID-19 will take a significant toll on 2020 tax receipts, Peter Vale suggests that the figures should return to current levels at some point next year. At the time of writing, the coronavirus pandemic looks likely to have a significant adverse bearing on global economic growth, in addition to the substantial societal impact we are all experiencing. We know from experience that an economic downturn can dramatically affect exchequer receipts – there was a 40% decline in corporate tax receipts alone between 2007 and 2009. So, what impact will COVID-19 have on tax receipts by year-end and what will that mean for our economy? Corporation tax Large companies make their first tax payment six months into their financial year, with a further payment one month before year-end. In Ireland, May and June tend to be the first key months in the year for corporation tax payments. A company has the option to base its first payment on either current year estimates or the prior year actual liability. Given the expected impact of the virus on the economic activity and profitability of most companies, you can expect that many will choose to base their first payments on current year estimates. It may not be possible to assess the full 2020 impact of the virus by May/June, however; some large companies may take a conservative view and make payments based on the prior year position. Assuming the virus continues to cause economic disruption through to the end of the year, there could be significantly smaller second instalment payments later in the year or large refunds due to companies in 2021. For many smaller companies, November is the critical month with the ability again to assess the liability based on the current year estimates. All of this means that we could see significantly smaller corporate tax payments this year, likely first evidenced in May/June with a further reduction in November returns, if the virus disrupts economic activity through to year-end. It is challenging to assess the scale of the potential reduction in corporate tax receipts. In this author’s view, it will be significant and could also impact on 2021 figures. But on the positive side, one would hope that the figures would return to current levels perhaps late next year. This would contrast with a more gradual increase in receipts following the economic crash. COVID-19 will also impact other tax heads. VAT Restrictions on travel and movement, plus enforced closures, will likely have a significant impact on consumer spending and a consequent downward impact on VAT receipts. While online spending could continue, supply chain issues are likely to mean even that option will be curtailed. Discretionary high street spending may be impacted most, with many shopping trips confined to the purchase of essential goods. Again, one would expect that any resultant downturn in VAT receipts would be temporary. Still, it could last for the rest of the year and trickle into early 2021 receipts if Christmas spending is impacted. Income tax and capital taxes Income tax receipts will also suffer, with seasonal and temporary roles likely to be hit hardest, and a reduction in profits generally for the self-employed seeing tax receipts fall. While not as significant, capital taxes will also suffer with deal volumes expected to fall across many asset classes, impacting both capital gains tax and stamp duty receipts.  Impact The impact of most of the above will be seen before the October Budget, leaving the Minister for Finance facing some difficult decisions, assuming there is no mini-Budget before then. There may be a need for some temporary tax-raising measures in addition to dipping into cash reserves and a considerable increase in borrowing. While significant on many fronts, COVID-19 is expected to be something we recover from, with many governments already launching initiatives to help individuals and businesses get through the crisis. The Republic of Ireland is lucky to be home to many large multinational companies that use Ireland as a hub for global activity. It is almost inevitable that COVID-19 will see the profits and tax receipts of these groups fall substantially, with a decrease in domestic economic activity generally also fuelling a significant dip in tax receipts. While I believe the decrease in 2020 tax receipts will be significant, the figures should return to current levels once the worst of the crisis is over. A best estimate of when this will be is likely at some point next year. Peter Vale FCA is Tax Partner at Grant Thornton.

Apr 01, 2020
Tax

Kim Doyle considers the best course of action for businesses that are strained financially as a result of the impact of COVID-19. COVID-19, a term that was not part of most members’ vocabulary a mere two months ago, is now the unwanted commandeer of conversations. Self-isolation, social distancing, WFH (working from home) and CC (conference call) have become part of our basic business language. But we must not forget to keep talking about the old reliable, tax. Continue to talk to Revenue, as early as possible, if you are now experiencing timely tax payment difficulties. This is one of their key messages. The other is to get tax returns in on time. At the time of writing, Revenue’s message to businesses strained financially as a result of the impact of COVID-19 is that they will work to resolve tax payment difficulties. Viable businesses that experience cash flow difficulties have long been encouraged by Revenue to engage with them as early as possible. Often, entering a phased payment arrangement is the appropriate practical step to deal with outstanding tax payments. In fact, at the end of 2019, over 6,300 business had such arrangements in place covering €73 million in tax debt, according to Revenue. Revenue will only agree to a phased payment arrangement provided the relevant tax returns are filed with them, the tax due is fully calculated, the business is viable and there is early and honest engagement. Applications for such an arrangement can be made via the Revenue Online Service (ROS). Supporting documents will be required; the volume of documentation depends on the level of outstanding tax payments. A down-payment must be made, which can range from 25-40% of the total tax payment, which may include interest. Agents can apply on behalf of their clients via ROS. Applications are typically responded to within two weeks; in many cases, arrangements are up and running in a matter of days. Responding to the difficulties arising from the impacts of COVID-19, Revenue has implemented specific measures for small- and medium-sized enterprises (SMEs) experiencing trading difficulties. Perhaps the most important being that interest will not be applied to late tax payments of VAT for the January/February period (due by 23 March) or employer PAYE liabilities for the months of February and March. Any future similar suspension will be considered at the relevant time, Revenue say. For other businesses experiencing temporary cash flow or trading difficulties, the advice from Revenue is to contact the Collector-General’s office directly or the appropriate Revenue division. Revenue has also suspended all debt enforcement activity, for now. Current tax clearance status is expected to remain in place for all businesses over the coming months.  And in an effort to ease the burden on households, Revenue also announced the deferral of certain local tax payments (annual Debit Instruction/Single Debit Authority) to 21 May from 21 March. As of now, there is no statement from Revenue on dealing with other taxes such as corporation tax. In this unprecedented turbulent environment, protecting the tax receipts must be one of the priorities for Government. It is hoped that any dip in tax receipts will be confined to 2020. However, as long as we continue to talk about COVID-19 and suffer the impacts, we must also continue to talk to Revenue. Kim Doyle FCA, AITI-CTA, is Tax Manager at Chartered Accountants Ireland.

Apr 01, 2020