While most businesses in the west of Ireland have full VAT recovery and therefore often say that VAT is not a “real” cost to them, many traders have VAT tied up in stock, debtors, and costs within their company. These areas could be better managed in order to keep the cash flow cost of VAT to a minimum.
Where a business provides continual services to clients and raises invoices in respect of month end or stage payments, VAT is due to Revenue according to the date of the invoice. Such businesses should consider issuing pro-forma invoices to customers in order to receive payment. Once payment is received and the VAT point triggered with Revenue, valid VAT invoices would be issued to customers. Traders would no longer be out of pocket for VAT on debtors.
Cash receipts basis
Traders with not more than €1m turnover on a rolling 12-month basis or larger traders who derive not less than 90 per cent of turnover from non-VAT registered customers or customers without full VAT recovery such as private individuals or partially exempt persons such as banks, insurance companies, educational bodies, and the health sector, can apply to Revenue to account for VAT on the cash receipts basis. Following Revenue approval, the trader will remit VAT to Revenue on sales or services following payment received from customers rather than the date on which invoices were issued. This will be especially advantageous from a cash flow point of view where debtors take a long time to pay. A word of caution, care is needed in transitioning from one VAT basis to another.
Where a trader derives 75 per cent of its turnover from exports of goods to other EU counties or outside the EU, it may apply to Revenue for a VAT 13B status. Qualifying for 13B status entitles the trader to receive Irish goods and services at the zero rate of Irish VAT rather than the normal rate applicable. This provides significant cash flow advantages as the submission of VAT reclaims to Revenue are minimal.
Principal contractors and reverse charge
The VAT treatment of services provided by subcontractors to principal contractors has changed with effect from September 1 2008. Rather than the subcontractor invoicing the principal contractor with VAT, the principal contractor is required to self account for VAT on the value of services received. This will provide a cashflow advantage for the principal contractor as it is no longer required to pay VAT to the subcontractor and wait for a refund from Revenue.
Traders should consider VAT grouping connected companies which carry out transfers of goods and services. This would avoid a VAT charge and related VAT input claim. Under VAT grouping, many of these supplies can be ignored for VAT purposes making all VAT cash flow implications disappear.
From January 1 2009 a trader can receive a reclaim of 20 per cent of the VAT input credit on company cars purchased where the car is intended for 60 per cent business use for the next two years. Certain eco requirements are necessary, with a clawback of the refund where the conditions are not met. It should be noted that the ultimate sale of the vehicle will remain VAT free.
Bad debt relief
Unfortunately, due to the economic downturn, many traders have bad debts. In many cases VAT has been previously remitted to Revenue in relation to sales. There may now be opportunities to reclaim all or part of the debtor’s balance where it is now considered a write-off. While there are certain conditions to such a reclaim, there is no time limit so claims for VAT refunds relating to bad debts can be made at any time.
Deposits and cancellation charges
Revenue have revised the VAT treatment of forfeited deposits and cancellation charges. Until recently traders were required to account for VAT on deposits or cancellation charges received. However, following a ruling from the European Court of Justice, traders are no longer required to account for VAT on deposits or cancellation charges not refunded to customers following the cancellation of goods or services previously ordered. Businesses may now reclaim VAT previously accounted for on deposit or cancellation charges retained.
Monthly VAT returns
Revenue may concessionally allow traders to submit VAT returns on a monthly basis where they are continuously in a VAT refund position. This can speed up VAT reclaims for traders and release cash back into the business.
Payments by direct debit
Where monthly VAT payments are made by direct debit, traders should re-examine the amount of direct debit required due to changes in VAT rates and perhaps reduced sales in the economic downturn.
It should be noted that all traders will be required to file VAT returns via ROS with effect from 1 January 2010. However, where traders choose to submit VAT returns on line during 2009, they have an extended filing deadline of the 23rd of the month following each bi-monthly period compared to the 19th for those who file VAT returns manually.
Timeliness of VAT reclaims
A trader is only required to be in receipt of a valid VAT invoice in order to make a reclaim of VAT. It is not necessary that the trader has paid the supplier for the goods or services received. With this in mind and timely cut-off procedures for financial systems at month end, traders can maximise reclaims at the end of each bi-monthly period.
Traders should review all aspects of VAT procedures including VAT recovery, VAT rates on sales or services, management of VAT returns, VAT payment schedules and more importantly resolve any continual issues or questionable VAT accounting procedures by carrying out a full VAT review. Traders who take a proactive view rather than a reactive view will be viewed more favourably by Revenue. It should be noted that VAT audits are on the increase.
Dorothy Gallagher is VAT manager in KPMG Galway and has extensive experience in all areas of VAT, including cross border matters and property VAT.
Ms Gallagher can be contacted
by e-mail on [email protected]
or by telephone on (091 ) 534600.