Practical VAT Issues for Small and Medium Enterprises

Practical VAT Issues for Small and Medium Enterprises

Accounting for VAT on a Cash Receipts Basis

The annual turnover threshold for the cash receipts basis of accounting for VAT to apply is to be increased from €1.25m to €2m from 1 May 2014.

What is the cash receipts basis of accounting for VAT?

Normally a business is required to include in its VAT return VAT charged on invoices issued during the period covered by the return. When a business is authorised to use the cash receipts basis of accounting for VAT, VAT charged on invoices issued does not have to be included in a VAT return until payment is received.

Who can account for VAT on the cash receipts basis?

A VAT registered person is entitled to apply to Revenue for permission to account for VAT on a cash receipts basis where either of the following two conditions is satisfied:

  1. At least 90% of the business’s supplies are to persons who are not registered for VAT or who are not entitled to claim a full deduction for any VAT charged; o
  2. The annual turnover for the business does not exceed a prescribed threshold.

At the moment the prescribed threshold referred to in 2 is €1.25m however with effect from 1 May 2014 the threshold is to be increased to €2m.
It should be emphasised that even if a business satisfies one of the two conditions set out above, the business may not account for VAT on a cash receipts basis until it is authorised by Revenue to do so.
Even though a business may be authorised to account for VAT on a cash receipts basis it is still obliged to issue VAT invoices in the same manner as any other VAT registered business. In certain circumstances a supplier and customer may agree not to issue a credit note where subsequent to the issue of an invoice a discount is agreed. Where a supplier accounts for VAT on a cash receipts basis a credit note must always be issued in respect of discounts agreed.

Does the cash receipts basis apply to all supplies?

No. Even when a business is authorised to account for VAT on a cash receipts basis it does not apply to the following:

3. Transactions between connected parties. For this purpose an individual would be regarded as being connected to any company of which he, or he and person’s connected to him, control. The cash receipts basis could not therefore apply, for example, to the letting of a property by an individual to a company he owns.
4. Construction services supplied by a subcontractor to a principal where the principal is required to account for the subcontractor’s VAT on a reverse charge basis.
5. Supplies under HP agreements
6. Supplies for non-cash consideration

What happens if a business switches from an invoice basis of accounting for VAT to a cash receipts basis?

A business may apply to Revenue for authorisation to switch from an invoice basis to a cash receipts basis of accounting for VAT. Once authorisation has been issued the business may commence to account for VAT on all payments received on or after that date except where the payment relates to an invoice which was issued when the business was accounting for VAT on an invoice basis.

What happens if a business switches from a cash receipts basis of accounting for VAT to an invoice basis?

A business may apply to Revenue for authorisation to switch from a cash receipts to an invoice basis of accounting for VAT. Once authorisation has been issued the business may commence to account for VAT on all invoices issued after that date. However when the change is made the business must include in its VAT return for the period in which they cease to apply the cash receipts basis any VAT due in respect of debtors outstanding at the time of the change. For example, a business which has been accounting for VAT on a cash receipts basis for five years is authorised to switch to the invoice basis from 1 November 2013. At 1 November 2013 the business had debtors of €123,000. The business charges VAT at 23 per cent on all its supplies. The VAT payable by the business for the period November/December 2013 must be increased by €23,000, being the VAT portion of the amount due from debtors. No additional VAT is payable in respect of any debtors which are attributable to sales made during the period before the business commenced accounting for VAT on a cash receipts basis.

Where a business no longer satisfies the criteria to qualify to operate VAT on a cash receipts basis it is required to apply to Revenue for its authorisation to operate the cash receipts basis to be cancelled. The business must then cease to operate the cash receipts basis from the start of the VAT bi-monthly period during which it is notified that the authorisation has been cancelled.

What are the benefits of using the cash receipts basis of accounting for VAT?

The main benefit of using the cash receipts basis is the impact on cash flow. VAT on sales does not have to be paid until the cash is received accordingly the business is not required to fund the VAT element of debtors. In addition, relief is automatically given for bad debts as if no payment is due, no VAT is payable.
It should be noted that the VAT is payable at the rate which applies when the sale is made and not when the cash is received so if the rate changes between the date of issue of the invoice and when the cash is received no adjustment is required. Also it is important to note that while VAT on sales may be accounted for on a cash receipts basis, VAT incurred on purchases may continue to be claimed on an invoice basis (subject to the possible requirement to repay VAT if payment is not made) (see below).

Requirement to File VIES Return

Businesses which supply goods and services to VAT registered customers in other EU countries are required to file a quarterly VIES return. VIES stands for VAT Information Exchange System. A VIES return will include details of the supplier’s VAT number, the customer’s VAT number and the total value of supplies made to the customer. While businesses which supply goods to other EU countries were always required to file VIES returns, it is only in recent years that businesses which supply services to other EU countries are also required to file VIES returns. Thus it is something that is often overlooked by businesses, particularly businesses who do not supply services to customers in other EU countries on a regular basis.
VIES returns must be filed online using Revenue’s online system, ROS. Businesses must register to file VIES returns online and must file a return even if in a particular quarter no supplies are made.
Businesses who are required to and do not file VIES returns are potentially liable to a penalty of €4,000. Revenue has stated that it has an ‘active prosecution policy’ in this regard. Thus, if during the course of a VAT audit it comes to light that a VIES return was not filed when it should have been, it is likely that the business would face an additional penalty for this omission.

VAT Anti-Fraud Measures

The Minister announced in his Budget speech last October that a number of VAT ‘anti-fraud’ measures were to be put in place, aimed at tackling the shadow economy as follows:

Disallowance of Input VAT

Businesses which have not paid for supplies (in full or in part) within a six-month period are now required to repay any VAT claimed in respect of such supplies. The Finance (No 2) Act has legislated for this. With effect from 1 January 2014 where a business has not paid for supplies in full or in part within six months it is required to repay the VAT input credit claimed on those supplies. The repayment is made by adjusting the VAT payable in the VAT return in the next bi-monthly VAT period following the end of the six-month period. If the business subsequently pays the invoice it can reclaim the VAT input credit. There is an exception which applies where the business claims it has ‘reasonable grounds’ for not having paid the invoice and this is agreed with Revenue . What is regarded as ‘reasonable grounds’ is not defined. Revenue are empowered to make regulations dealing with this adjustment.

Emergency Reverse Charge

In July 2013 the European Commission adopted a directive which enables EU members to take rapid measures to tackle VAT fraud. The directive deals with the ‘Quick Response Mechanism’ (QRM). The QRM allows Member States to implement on short notice a temporary reverse charge mechanism in circumstances where large-scale fraud is suspected. In his Budget speech in October, the Minister announced that legislation would be enacted to empower Revenue to implement the QRM. Where a reverse charge basis of accounting for VAT applies the purchaser is required to include any VAT due in respect of purchase as a sale and a purchase in its VAT return. In a case where the purchaser is fully entitled to reclaim any VAT due, the net effect is that no VAT is payable by or refundable to the purchaser in respect of the VAT. Where the reverse charge arises the purchaser pays the supplier the net of VAT amount. By imposing a reverse charge basis Revenue ensures that a claim for VAT will not be made by a purchaser in a situation where the supplier has not paid the VAT due. To date the necessary legislation has not been implemented.

Requirement to Provide Information

In October, the Minister announced that Revenue would be given the power to issue a notice to businesses requiring the business to provide specific information in circumstances where Revenue have reasonable grounds for believing the information would assist in identifying VAT fraud. Finance (No 2) Act 2013 has introduced the necessary legislation. It is now provided that for the purpose of preventing and detecting tax evasion, Revenue may serve a written notice on a VAT registered person requiring the person to provide any information, explanations or particulars as Revenue may ‘reasonably’ require to assist them in identifying supplies made in respect of which VAT may or may not be chargeable. Revenue must have ‘reasonable grounds’ for believing the person is likely to have information which they need. A person who does not provide the information requested within the period of time set out in the notice may be liable to a penalty of €4,000.

VAT on Green Fees

Under Irish VAT law, member-only golf clubs are obliged to charge VAT on green fee income received. A golf club in the UK, Bridport and West Dorset Golf Club, challenged HMRC on the equivalent legislation arguing that it was contrary to EU Law. EU legislation provides inter alia for a VAT exemption for the supply of sporting services by non-profit making organisations to persons taking part in sporting activities. The golf club argued that this VAT exemption should apply to green fee income received by them. In December 2013, the CJEU (Court of Justice of the European Union) agreed that the VAT exemption should apply in these circumstances (Case C-495/12).

Therefore, as it currently stands, Irish VAT law contravenes EU VAT law and the member-owned golf club can choose whether to adopt EU VAT law or continue with Irish VAT law going forward. Member-owned golf clubs may also claim a refund for the last four years of green fee income. However, in calculating the refund there would be a clawback of any VAT credit previously claimed on expenditure relating to the green fees. Typically the golf club would have claimed a proportion of VAT credit based on the ratio of green fee income as a percentage of green fee income and annual subscriptions. Given that the VAT rate on course expenditure would typically be at 23 per cent and the VAT rate on green fee income is at 9 per cent the refund is not likely to be significant for most clubs. ‘Pay and play’ facilities are not covered by the ruling and could feel threatened commercially going forward. Each member-owned club should consider its position and take factors such as the previous green fee rate of 13.5 per cent and any recent extensive course improvements undertaken, into account in determining whether a refund claim should be made.

Revenue has issued eBrief 09/14 acknowledging the CJEU decision. It states that legislation will be introduced (presumably in Finance Act 2014) to comply with the CJEU decision. If any club wishes to claim a refund for earlier years, Revenue will consider the concept of unjust enrichment and also undertake a review of VAT compliance before authorising any refund. The first point is reasonable but the golf club may be assisted in that there were falling green fees during the year. The second point could be construed as an implied threat that the Revenue will use whatever means available to them to refuse a refund.

Please do not hesitate to speak with your PMQ contact if you would like to discuss any aspect of the commentary.

The commentary is intended as a general guide. No action should be taken on the basis of the above without obtaining professional taxation advice.