Jane O’Hanlon explains the common tax-related issues facing members in business and how to deal with them before Revenue comes knocking.
As a tax advisor working in a specialised tax practice, I encounter similar tax issues in various businesses. This article will focus on the most critical issues and help ensure that your business is tax compliant.
What should I do when Revenue knocks on my door?
The answer to this depends on the nature of the knock! Any correspondence issued by Revenue must be looked at carefully to understand the purpose of the query. A letter might issue from Revenue with queries due to an incorrect entry on a tax return (referred to as an ‘Aspect Query’ letter). Where a business files a VAT return and is in a VAT recovery position, standard VAT verification letters are often issued by Revenue seeking documentation to support the VAT refund due. This type of correspondence is routine and while it should be dealt with promptly, it should not result in undue concern. If an error is discovered as you prepare your response, it is usually possible to make a ‘qualifying disclosure’ to Revenue. By making a qualifying disclosure, you can reduce the penalties payable, avoid prosecution, and avoid publication in the list of tax defaulters. A disclosure is unprompted if it is made before notification of a Revenue audit is received. Any disclosures in relation to items covered by the audit made after the audit notice is received is prompted, and the penalty reductions for unprompted disclosures are higher than for prompted disclosures. However, Revenue recently indicated that it intends to move disclosures made by a business under an ‘Aspect Query’ to the ‘Prompted Disclosure’ category. Although publication can still be avoided, higher rates will be applicable if penalties apply.
When a Revenue audit letter issues, depending on the tax head and the period covered, the taxpayer should conduct a full review of all tax matters. Common problems include businesses making cash payments to casual staff without PAYE, incorrect claiming of VAT input credits, incorrect operation of benefit-in-kind (BIK), and incorrectly claiming a tax deduction for income or corporation tax purposes.
When that audit letter is received, it is essential to at once consider whether the business will need to make a prompted qualifying disclosure. If it does, it can write to the Revenue auditor requesting time to prepare the disclosure. In my experience, the time spent at this stage is well worth it as it often results in the audit running more smoothly and concluding promptly. It is not in the interest of any business to have an audit process continue any longer than it needs to. Therefore, it is crucial to ensure that a full disclosure, if needed, is made and that all supporting documentation is gathered and available to the auditor. Cooperation is the best policy.
* Review your tax compliance position on VAT and PAYE. Cooperation is the best policy when dealing with Revenue and, if necessary, make a voluntary disclosure.
What VAT can I recover?
At a high level, VAT can only be recovered by a business providing VATable products or services. This means that the business charges VAT on sales to customers. You may think that a business providing only products or services subject to VAT can recover all VAT charged by its suppliers. However, that is not the case.
It is never possible to recover VAT on the purchase of food and drink items for use in an office kitchen. I frequently encounter cases where VAT is being reclaimed on bottled water purchased by the business, for example. Similarly, if a business owner purchases items for personal use, VAT should not be recovered as that purchase has not been made to provide taxable (i.e. VATable) supplies. Furthermore, if a company carries on a trade and owns several rental properties, you must determine if the expense relates to the trade or the rental properties. For example, if repairs are carried out on the business premises and all supplies by the business are liable to VAT, the VAT charged can be recovered. However, if repairs are carried out on a rented residential apartment owned by the business, the VAT cannot be recovered as the rental income from the residential apartment is not liable to VAT. In summary, consideration must be given to each invoice to determine if the business can recover the VAT charged.
In addition, businesses can recover 20% of the VAT incurred on the acquisition or leasing of a car, provided it is used for business purposes at least 60% of the time.
Businesses must also be aware that, in most cases, the supplier will not have charged VAT when the business purchases goods or services from outside Ireland. The business must self-account for Irish VAT at the appropriate rate and claim an input credit if it is entitled to do so. If foreign VAT has been charged, the business should satisfy itself that this is correct before payment is made to the supplier. A business cannot include an input credit in an Irish VAT return for foreign VAT charged.
A business can only include a claim for a VAT input credit where a valid VAT invoice has been received. Accounts payable staff should be trained to ensure that all invoices are valid VAT invoices before settling them. It is easier to seek a proper invoice from a supplier when the invoice has not yet been paid.
* Check that you are correctly claiming VAT input credit on cars and foreign purchases.
How long do I need to keep documentation for?
In general, documents must be kept for six years after the tax year in question. However, that is not as straightforward as it may sound. For example, I know of one situation where an individual claimed capital allowances on a building, with the capital allowances available over seven years. The tax return covering the sixth year in which the allowances were available was selected for verification three years after the return was filed, and Revenue sought copies of documentation to confirm the nature and the availability of the allowances. In this case, the taxpayer needed to provide documentation from nine years earlier.
The key point from a tax perspective is that the burden of proof rests with the taxpayer. Therefore, you need to ensure that you can prove your entitlement to a deduction for any expenses or any capital allowance claimed in your tax return. Many recent tax appeals decisions have referred to this point. An Appeals Commissioner cannot decide a case in favour of a taxpayer where the taxpayer cannot discharge the burden of proof.
Regarding an asset that is a capital asset, it will be necessary to keep documentation for six years after the property is disposed of. If a property was bought in 2000 and sold in 2021, for example, documentation regarding the purchase of that asset must be retained until 2027. Doing so enables you to prove your entitlement to a deduction for the costs of acquisition incurred in 2000 in determining the capital gains tax payable (or indeed the capital loss) on the disposal of the asset.
The retention of documentation is also important in the context of VAT and the Capital Goods Scheme. When an asset is disposed of, the vendor is often obliged to complete Pre-Contract VAT Enquiries (PCVE) as part of the sales process. The PCVE contain full details of the purchase/development of the property, how it has been used since it was acquired, and how it is currently being used. To determine the correct VAT treatment of the sale, there can be no gaps in terms of how the property has been used. It is easier to maintain this information on a contemporaneous basis rather than pulling together information on all prior years as you prepare to sell the property.
* Review your document retention policy as in some cases, you may need to keep certain records for more than six years.
How do I ensure compliance with BIK rules on the provision of company cars?
Employers who provide employees with company cars are obliged to keep contemporaneous records of business mileage. BIK operates by applying a percentage rate to the original market value of the car provided to the employee (other than electric cars, where different rules apply). The applicable percentage depends on the annual business mileage driven by the employee and ranges from 30% down to 6%. If any rate other than 30% is used, the employer must be able to prove the business mileage. Where an employee is provided with a car, they must complete a monthly log of the business journeys for their employers. While the tax is payable by the employee, the obligation is on the employer to operate the tax correctly.
In addition, if the vehicle provided is a commercial vehicle or a van, the appropriate BIK rate is 5% regardless of the business mileage.
* Review how you are calculating PAYE on the BIK on company cars and keep appropriate contemporaneous records of staff business mileage.
What information does my tax advisor need to prepare my tax return?
Where your accountant prepares your business’s financial statements, they will generally have sufficient information to prepare an accurate tax return. Where the financial statements are prepared by the business and provided to the tax advisor, however, they will generally need answers to the following questions:
- Are all expenses incurred wholly and exclusively for the purpose of the trade? For example, consider business entertainment, charitable and political donations, personal expenditure, and expenses paid for by the business that may not relate to that business.
- Was the employer’s pension contribution paid during the year, or is there an accrual in the profit and loss account? A tax deduction is only available on a paid basis.
- Can you provide an analysis of professional and legal fees? Fees that relate to capital transactions (e.g. asset purchases/sales) are not deductible in calculating
trading profits.
- Can you provide a schedule of fixed asset additions to include the date of acquisition, the cost of acquisition, and the nature of the asset? Also, can you provide a schedule of fixed asset disposals so that accurate capital allowances claims and balancing charges/allowances can be prepared?
- Can you provide a reconciliation of any finance lease creditors from the opening position to the closing position?
- Can you provide a schedule of directors’ remuneration split by director?
- Can you provide details of any dividends or distributions paid during the year?
- Can you provide details of any non-trading income?
- Where medical insurance is paid on behalf of the staff, can you provide details of the tax relief at source (TRS) amount and confirm whether the gross or net amount has been included in the profit and loss account?
* Save time and fees by completing the checklist your tax advisor will need to prepare your tax return.
These issues occur in a wide range of businesses. You should aim to ensure that your business is compliant with tax legislation on an ongoing basis. Careful consideration should be given to amending any errors you discover – before you get that knock on the door.
Jane O’Hanlon is a Director at Purcell McQuillan and a Fellow of Chartered Accountants Ireland.
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