As a fiduciary tax, VAT continues to be a popular focus of Revenue audits. ‘Fiduciary’ means that Revenue does not collect the taxes directly but relies on the business person as collection agent on Revenue’s behalf. This places serious responsibilities upon the business to correctly charge and collect VAT – and they can face series penalties if they do not carry out these duties correctly.
As VAT is a transactional tax any mistakes made may be inadvertently repeated on similar transactions by the business. Even minor mistakes can become costly when they are made on a regular basis over a period of time. Revenue can impose interest and penalties for failure to comply with the VAT regulations. Interest is currently charged at c. 10% per annum on underpaid tax and penalties range from 3% to 100% of the tax underpaid, depending on the deemed category of tax default, the type and number of similar disclosures to Revenue, and the level of co-operation by the taxpayer in addressing the matter. A scheme of fixed rate penalties is also provided for a number of tax defaults, such as failure to keep adequate records, filing of incorrect returns and failure to implement the VAT system.
It is therefore advisable that a business would regularly carry out a VAT health check to ensure that the VAT processes within the business are implemented correctly and are compliant with VAT regulations. A VAT review provides the opportunity to identify areas within the VAT process that may need to be addressed while minimising the risk of an unforeseen VAT cost for the business. It also provides an opportunity to identify areas of potential VAT savings that may otherwise go undetected. Revenue promotes such self-review by allowing for ‘self-correction without penalty’ under the Revenue Code of Practice. Certain conditions and time limits apply.
Areas of review in carrying out a VAT Health Check:
► Is the correct VAT rate being applied to the goods and/or services being supplied by the business?
► Are sales invoices being issued in the correct format and in a timely manner?
► Is VAT being accounted for on the cash receipts basis or invoice basis as appropriate? Businesses may account for VAT on the cash receipts basis where annual turnover is less than €2m, or at least 90% of annual turnover will be generated from supplies to persons not registered for VAT or persons who are not entitled to reclaim a full VAT deduction e.g. general public, hospitals, schools etc.
► Is VAT being reclaimed on valid VAT invoices? Is the business entitled to reclaim the VAT arising thereon?
► Are intra-EU acquisitions and despatches being treated correctly for VAT purposes?
► Are documents being maintained for the required holding period? Revenue requires that all relevant documentation is maintained on file for a period of 6 years. Such documentation in relation to a property transaction must be maintained for 6 years after the disposal of the relevant interest in the property.
How to ensure compliance with the required regulations:
► Obtain professional VAT advice in all matters of concern. Better to be safe than sorry!
► Invest in relevant software which can reduce or eliminate the potential for VAT calculation errors.
► Carry out regular reviews of the business’ VAT process and appoint a responsible person internally for this purpose.
VAT is a complex tax and professional advice should be sought in all matters of concern. VAT on property and international transactions can be particularly complex. At HLB McKeogh Gallagher Ryan we have garnered a specialism in both areas and would be delighted to assist with any questions you might have.