From 1 January 2014, businesses which have not paid for supplies (either in full or in part) within a six month period will be required to repay to Revenue the VAT previously reclaimed on these supplies. This is mainly an anti-fraud measure, however it is hoped that it will encourage prompt payments, thus increasing cash flow for suppliers, as we all know that cash is king!! Where the supplier is subsequently paid, the amount of deductible VAT can be reclaimed by the customer again. This is measured on a pro rata basis.
For example, Customer A receives an invoice for €10,000 plus VAT from Supplier B in May and immediately reclaims 23% VAT (€2,300) on it. If A pays €7,000 of this debt in the first six months (e.g. July/August VAT period) and they still owe the remaining €3,000 after the November/December VAT period, they must pay back 30% of the VAT claimed initially (€690). If the outstanding €3,000 is subsequently paid at a later date, January onwards for example, they can still reclaim the 30% of VAT in relation to this, meaning the right to deductibility is not entirely lost.
While Ireland has always allowed suppliers to reduce VAT payments through Bad Debt Relief, this has never been linked to the customers’ VAT reclaim to date. However, this new measure will protect The Exchequer as customers will also have to reduce VAT reclaims on purchases unpaid after 6 months have passed. This new measure by Revenue is valid under the EU VAT directive.
There is an equivalent measure in place in the UK (since 1997) however, in reality many customers do not make such adjustment unless required to do as a result of a tax audit. Non-paying customers are often audited by HMRC following the audit of Bad Debt Relief claims by their suppliers. UK Revenue have used this practical approach to prevent circumstances whereby the supplier has claimed Bad Debt Relief and the debtor has claimed the input VAT meaning that the UK Exchequer itself suffers the loss.
As this measure takes effect from 1 January 2014, the first six month payment period will have passed at the beginning of July, suggesting that potential claw-backs of VAT could arise from the July/August VAT period onwards with the first possible VAT adjustments for customers being made by 23 September 2014. An exception to the repayment of such VAT is where Revenue is satisfied that there are reasonable circumstances for a customer not paying a supplier. It is likely that genuine commercial reasons and normal credit terms will fall under this exception.
Revenue has stated that this new measure will also apply to reverse charge scenarios. A customer who accounts for VAT through their VAT return only on cross border purchases may now have to handover a cash payment to Revenue and wait to get a subsequent refund, following full payment to the supplier. The impact of this has been questioned as it could lead to a taxpayer having to make VAT payments that have never previously been required. Revenue have stated that they are taking this issue under consideration but have not yet issued any formal guidance on same.
Revenue can make further regulations in relation to the implementation of this measure but no further details have yet been published. As mentioned above, this measure takes effect in respect of VAT claimed from January 1 2014.
In addition, to assist with the implementation of this measure, a provision allowing Revenue to acquire specific information and explanation from suppliers regarding their outstanding debtors has been made. These new powers will apply where there are reasonable grounds for believing that such information can help to identify VAT fraud. Failure to comply with this request for information can lead to a penalty of €4,000. In the committee stage debate on VAT measures, it was noted that this measure will be used to tackle shadow economy activity. An example given was where an unusually high level of cash sales takes place in a business, albeit that supplies are made mainly to trade customers.
Other Anti Fraud Measures:
• The Finance Bill also introduced a quick reaction (short notice) mechanism allowing Revenue to apply emergency, temporary reverse charges to certain goods or services in order to prevent “sudden and massive VAT fraud”. This sees Ireland fall in line with other EU countries. EU leaders had called on national finance ministers to introduce such measures to crack down on tax avoidance which can cost countries billions in uncollected taxes. In the UK for example such a measure has been used in relation to mobile phones, laptops and high level electronics. It has been described as a temporary last resort to eradicate VAT fraud.
Other Budget 2014 Issues:
• The Cash Receipts Basis turnover threshold will be increased from1.25m to 2m with effect from 1 May 2014. This basis applies to traders who remit VAT to Revenue in line with when they receive payment from their customers rather than when they issue invoices to their customers. Traders must formally elect with Revenue to use this Cash Receipts Basis. This delay in VAT payments should help cash flow. This threshold increase seeks to widen the audience availing of this cash flow benefit.
• Retention of reduced rate of 9% for goods and services mainly applicable to the tourism and hospitality sector. This has been retained on an indefinite basis due to the success this reduced rate has played in both job creation and retention.
• The unregistered Farmers Flat Rate Addition increases from 4.8% to 5% with effect from 1 January 2014. This seeks to ensure that such farmers are adequately compensated for unrecoverable VAT incurred on their day to day farming expenses.
• No changes to the Standard and Reduced rates of VAT
Future EU issue - European Commission Recommends Standardised EU VAT Return
• A Standard EU VAT return has been proposed. This standardised format intends to simplify the process of VAT returns throughout the EU. It is hoped that this can be agreed upon for implementation across the EU by January 2016. The European Commission aims to cut costs for EU business, slash red-tape and make tax compliance and administration throughout the EU more efficient. It is hoped that this will help to eliminate VAT fraud which costs countries billions of Euro every year. The proposal states that businesses will file their returns on a monthly basis.
Minister Noonan commented “The Commission sees this as a business friendly initiative and generally we are supportive of such measures. However, we will need to be vigilant regarding the outcome of the discussion as it might necessitate changes to our simple VAT return”. Currently the amount of information sought on an Irish VAT return is much less than what is required in some other EU Member States. However, the new standard form could lead to an increase in the amount of compulsory information required, though it is expected that Ireland would only seek the minimum required information.
KPMG, Odeon House, Eyre Square, Galway. Tel 091 534600