As a fiduciary tax, VAT continues to be a popular focus of Revenue audits. ‘Fiduciary’ means that the Revenue does not collect the taxes directly but relies on the business to collect on the Revenue’s behalf. This places serious responsibilities upon businesses to correctly charge and collect VAT. Companies 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 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. Penalties depend 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 everything is implemented correctly and is compliant with VAT regulations. A VAT review provides the opportunity to identify areas 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 accounted for on a 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:
- Better to be safe than sorry! Obtain professional VAT advice in all matters of concern.
- Invest in 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. 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 many years of experience in both areas and would be delighted to assist with any questions you might have.
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