Most companies only ever look at the VAT treatment of supplies. Often companies forget to look at the potential to recover more VAT on costs and almost never consider whether they have recovered too much VAT on costs.
The VAT recovery potential of a company is dependant on what it supplies. In short, where a company only makes supplies which are not subject to VAT such as insurance, banking, healthcare or education, it generally has no potential to recover VAT on costs. It is not likely to have registered for VAT or ever filed VAT returns to account for VAT on turnover or reclaim VAT on costs.
Where a company only supplies VATable items such as most goods, construction or professional consultancy services, it can fully recover VAT on costs in its VAT return as soon as it receives each invoice.
However, a company could provide a mix of goods and services which are treated differently for VAT purposes e.g. making loans/providing insurance which are both exempt from VAT while also being involved in the taxable lease of a premises/equipment or providing some taxable consultancy services. Another example would be an exempt educational body carrying out taxable R&D activities. In these circumstances, a company must look at the level of VAT it reclaims each year. This will only apply to VAT on general overheads that cannot be directly attributed to a particular activity including VAT on annual rent expenses, ESB, compliance costs, plant and machinery costs. For instance, where a company’s expected taxable supplies equate to 75 pr cent of turnover in the year 2010 and therefore the company recovered 75 per cent of VAT incurred on general cost invoices throughout 2010, it will have to review the business activities of 2010 after the year end has passed to confirm the actual level of VATable turnover for the year. On reflection, where the actual VATable turnover for the year past was 77 per cent, the company will be entitled to recover another 2 per cent of VAT on all general overheads. Where the actual VATable turnover was only 70 per cent, the company will be required to repay 5 per cent of VAT previously claimed to Revenue. The company will then use either the 77 per cent or 70 per cent VAT recovery rate throughout 2011 as an estimate of VATable turnover for the next year in order to reclaim VAT on overhead invoices as they are received. Following the end of the next year’s accounting period in 2011, the company will have to compare its estimated VAT recovery entitlement to its actual VAT recovery entitlement again. As you can see, estimating the VAT recovery rate and adjusting it at year end is a continual process.
While most companies use the level of turnover generated from VATable supplies over total supplies to make up a general VAT recovery rate, it is acceptable to use any basis that “correctly reflects” the use to which general costs are put e.g. floor space for each activity, number of transactions in each activity, number of personnel or proportion of time spent working on each activity. It is important that a company uses the same basis of VAT recovery year on year unless there is a material change in the business profile. Expansion of business activities outside of Ireland or outside the EU can also increase VAT recovery where such activities are “qualifying activities”. In general, these are activities which are still non VATable in nature such as passenger transport or financial services, however, an input VAT credit is allowable.
The annual VAT recovery rate adjustment on general costs is always required six months after the accounting year end of the company. Therefore, a company which has a year end of 31 December 2010 will be required to carry out the annual review by 30 June 2011 and have any VAT adjustment included in its May/June 2011 VAT return due for submission on 19 July 2011 or 23 July 2011 for ROS users.
Revenue can impose penalties for failure to carry out the annual VAT recovery rate review.
Dorothy Gallagher is VAT Director in KPMG Galway and has extensive experience in all areas of VAT, including cross border matters and property VAT. Dorothy can be contacted by email on [email protected] or by telephone on 091 534600.
KPMG is over 30 years in Galway and employs over 50 staff at Odeon House, Eyre Square, Galway, Telephone 091 534600