VAT would be considered a high risk tax as it applies to transactions rather than profits. Due to the complexity of VAT, businesses may be incorrectly accounting for VAT which can result in higher VAT liabilities together with potential interest and penalties being accrued.
The following would appear to be the most common VAT errors that arise during the course of a Revenue Audit:
1. VAT Rates
It is important for a business to ensure the correct VAT rate is being charged on its supplies of goods/services.
The Budget can increase or decrease VAT rates or introduce new rates so it is important to ensure the correct VAT rate is being charged when issuing an invoice.
It is also important to ensure that when issuing a credit note that the VAT rate applied is that in force at the time the original invoice was issued.
Composite and multiple supplies can be a complex area and due care should be taken when invoicing for such supplies.
A composite supply comprises of a principal element to which other elements are ancillary. A single VAT rate applies to the entire supply at the rate applicable to the principal supply.
A multiple supply on the other hand is where two or more supplies are combined as one for a total consideration, and each supply can exist independently of each other. VAT is applied to each independent supply at the appropriate VAT rate.
Where uncertainty exists regarding the appropriate VAT rate to be applied, third party advice should be obtained or a determination sought from the Revenue.
2. Time of Supply
For traders operating on the invoice basis of accounting VAT must be accounted for (paid to Revenue) based on the date of issue of the invoice and not the date the customer pays for the supply.
However, under the invoice basis of accounting for VAT, if a customer pays for services/goods in advance e.g. a deposit, the supplier must raise an invoice and account for VAT based on the date the funds were received.
For traders on the cash/receipts basis VAT must be accounted for when the
payment is received.
In order to account for VAT on the cash/receipts basis a trader must fulfil either of the following criteria:
Annual turnover does not exceed €1,000,000 (€1,250,000 with effect from 1st May 2013), or
At least 90% of supplies are to customers who are not registered for VAT, or are not entitled to claim a full deduction of the VAT.
Where a trader does not meet the criteria above he must move to the invoice basis of accounting. Failure to do so will result in a potential liability based on debtors outstanding at the time of the audit.
3. Record Keeping/Invoicing
Tax Payers are obliged to retain records for a period of 6 years from the date of the latest transaction to which the record relates or in the case of property transactions records must be retained for the duration that the taxable interest is held in such goods plus a further 6 years.
It is important that input VAT is only reclaimed on receipt of a valid VAT invoice. A valid VAT invoice must include the date of issue, a sequential number, the suppliers VAT number, details of the service provided, the name and address of the supplier and customer, invoice amount in euro and the VAT rate applicable. Failure to produce a valid VAT invoice will lead to the disallowance of an input credit.
4. International Supplies of Goods & Services
goods
When supplying goods to customers in other EU Member States the supply can be zero rated where the supplier obtains the customers VAT number and retains proof that the goods were transported outside the State. The invoice should denote that the recipient is required to self- account for VAT.
Where a customer receives goods from a supplier in another EU Member State there is an obligation on the recipient of those goods to account for the VAT on the reverse charge basis. This can sometimes be overlooked as the invoice itself does not show any VAT and unless proper checks and controls are put in place the reverse charge procedure may not be exercised giving rise to under declared VAT in instances where the recipient is not entitled to a full VAT deduction together with incorrect VAT returns being filed.
Intrastat returns are required to be filed in instances where the total value of goods supplied to customers in other EU Member States during the calendar year exceeds €635,000 (Dispatches Intrastat) and similarly, when the value of goods received from suppliers in other Member States exceeds €191,000 during the calendar year a monthly Arrivals Intrastat Returns must be filed with Revenue.
On occasion, the obligation to file Intrastat returns is missed where the figures relating to dispatches and arrivals are not entered into the appropriate E1 and E2 boxes on the VAT return.
Services
New VAT rules relating to the place of supply of services were introduced from 1 January 2010. Care must be taken when providing services to customers in other EU countries to establish if supplying to a business customer or a private customer.
If supplying to a business customer the supply is generally zero rated and the customer is obliged to self-account for VAT on the reverse charge basis. In order to zero rate the supply you must ensure that the customer is in business and this can be substantiated by obtaining the VAT registration number of the customer, where possible. The invoice must include a narrative clearly stating that the customer may be obliged to account for the VAT arising.
Supplies to private individuals in other EU countries are generally liable to Irish VAT, the supply is considered to have taken place in Ireland.
All supplies (goods & services) made to EU VAT registered customers must be reported in the quarterly/monthly VIES return regardless of the value of the supplies made.
5. Bad Debt Relief
Bad debt relief may be claimed where a debt is considered bad and will not be recovered.
In order to claim bad debt relief the following criteria must be met:
– The trader has taken all reasonable steps to recover the bad debt.
– The bad debt is allowable as a deduction in calculating the tax adjusted profit.
– The bad debt has been written off in the trader’s accounts.
– The obligation to keep records relating to the bad debt has been fulfilled.
– The trader is not connected to the person owing the bad debt.
An issue can arise during a Revenue Audit where VAT bad debt relief is claimed too early. In addition where VAT bad debt relief is claimed and some/all of the bad debt is subsequently recovered there is an obligation to make an adjustment in the related VAT return in respect of the recovered debt.
6. Non-deductible items
There are certain items that are specifically provided for in VAT legislation where VAT recovery is prohibited. Such items include food, drink, petrol, accommodation, and entertainment. Therefore the VAT incurred on expenditure in relation to non-deductible items is a cost to the business.
During the course of an audit the Revenue will examine the business records to ensure that VAT has not been recovered on such items. Where VAT has been reclaimed the Revenue will seek a refund of this VAT together with potential interest and penalties.
7. VAT Accruals
During the course of an audit the Revenue may request a copy of the company’s end of year accounts.
The accounts may include an accrual for VAT which should equate to the current VAT liability. For example if the company’s accounting year end is the 31st December and VAT returns are filed on a bi-monthly basis then the VAT accrual should tie in with the VAT liability in the November/ December VAT return. Where the VAT accrual is in excess of the VAT liability this would indicate that there is an outstanding VAT liability due to the Revenue.
For details about our taxation services in relation to Revenue Audits please visit www.bjdennehy.ie/taxation/revenue-audits-investigations