A key feature of value added tax, is that it is charged on the ultimate consumer or user. Generally, while goods and services are in the chain of supply, prior to their ultimate provision to the consumer/end-user, VAT suffered may be recovered. Each supplier is liable for VAT, in effect, on its net value added.
A VAT registered trader must charge VAT on its turnover / sales. It may recover VAT which has been charged to it on its inputs / purchases. Traders / persons in business persons may recover VAT on their inputs. In broad terms, this is their purchases or cost of sales. Their VAT liability is effectively their net position in a given period.
In order to recover VAT, a proper VAT invoice must be received. VAT is recoverable on imports. Where the VAT on purchasers exceed VAT payable on sales, a repayment of VAT may be claimed from the Revenue Commissioners.
Where inputs/acquisitions are clearly attributable to exempt business, then there is no recovery of input. Where they are for dual exempt and Vatable purposes, they must be apportioned between taxable and non-taxable uses. The proportion is to be calculated on a basis which fairly apportions the extent of the dual use of inputs. The method of apportionment must be appropriate
In many cases, it will be appropriate to use a proportion derived from the ratio of exempt and non-exempt supplies. Turnover from exempt activities which are occasional and not part of the core activity, may be permitted to be excluded in the calculation. Revenue may not accept the apportionment made by the taxpayer and may impose its own basis.
VAT is recoverable on purchases which are used for the purpose of the supply of goods or services which themselves are Vatable. If the costs are not attributable to that business, then VAT may not be reclaimed. Expenses and purchases related to an exempt business may not be the subject of a VAT reclaim.
Import and Reverse Charge
There are several circumstances under the VAT Acts where VAT is charged to the person supplied under reverse charge rules. The principal instances are, the receipt of services abroad, certain property transaction and certain cases where a domestic-based business deals with a non-resident business.
In these instances, the entity supplied must account for VAT the reverse charge provisions. In effect, they self account for VAT. In these cases, The recovery and deduction is directly offset against the VAT on the deemed supply to themselves.
In the case of EU imports of goods, to a VAT registered business VAT is accounted for as intra-EU acquisitions of goods. The purchaser self accounts. The purchases is usually deductible / offsetable. See the separate chapters. on the subject.
Where goods are imported, VAT must be paid at the point of the importation. Certain reliefs are available by which the payment may be deferred until the next accounting date, with the potential for set off against VAT due by the business. Postponed VAT accounting i available generally since Brexit so that VAT registered buyers may postponed VAT until the VAT return and effectively self account for it.
Link between purchases and supplies
Not all VAT incurred by a business may be deducted. The VAT incurred must relate to inputs or purchases directly related to the supply / sale of Vatable goods or services. The purchases and expenses must be directly attributable to the Vatable business and supply. The link between what is purchased and what is supplied must be direct..
This is not to say that overheads and general unapportioned costs are not deductible. Provided they are exclusively or proportionately for the purpose of the supply of goods or services subject to VAT then the whole or portion of such costs are subject to VAT recovery.
Where supplies are wholly for a Vatable business, then they are wholly deductible. Where they are wholly for a non-Vatable / exempt business, they are not allowable. Where supplies relate both to a Vatable and non-Vatable businesses, an apportionment must be made.
The method by which the apportionment is made is not rigidly prescribed. It should reflect the proportionate use of the purchased goods and services in the vatable and non-vatable supplies (sales). For example, the apportionment may be deducted by reference to the respective turnovers of the VAT exempt and Vatable businesses. Where this does not fairly reflect the true position, a more sophisticated form of analysis and apportionment may be required. Most businesses have internal cost accounting systems which may assist in achieving a proper apportionment
Where a business undertakes both exempt and Vatable supplies, the input or purchases must be apportioned. If the inputs are exclusively referable to exempt supplies, then they may not be recovered. Where inputs are apportioned between exempt and non-exempt supplies, then (in broad terms) they are apportioned relative to the turnover for each category of supplies.
Finance Act 2016 amended the basis on which dual use inputs are treated for VAT purposes. Prior to that, the principal method required the trader to apportion VAT between costs which were VAT deductible and non-deductible supplies using a method that reflected the extent in which the inputs were used in VAT deductible activities, having regard to the range of their total supply and activities.
Expenses that are incurred that are directly attributable exclusively to an exempt or taxable activity and are not used in both activities are either deductible in full or not depending on whether or not they are put in use for a vatable activity.
The relevant period is the accounting year on which the VAT period expires as against the turnover for that accounting year. Total turnover for that accounting year being the calendar with such fixed date to which the taxable person customarily makes their accounts up to.
The turnover basis is now the default or primary basis for apportionment unless it does not correctly reflect the extent to which the inputs are used for Vatable and non-Vatable supplies or activities or does not have due regard to the range of activities and supplies by that person. In this case, an alternative basis may be used provided that more correctly reflects the use and the range of supplies and activities.
The legislation may effectively require apportionment to be done in respect of individual elements of the business. Management cost accounting type techniques may be appropriate to apportioned purchases or inputs to supplies/outputs.
There is provision for the adjustment of the deductible VAT if the proportion claimed does not reflect the use to which it was put in the relevant accounting year in which the VAT period ends.
Commencement of Trading
The Irish Revenue generally require that a business be VAT registered in order to reclaim VAT. However, in strict terms, EU VAT does legislation does not so require.
Apart from the above specific statutory provision the general principle is that a person who makes acquisitions (purchases) for the purpose of a business which he intends to carry on is entitled to VAT deduction. In some instances, a person may be entitled to claim VAT deduction even though trading may not commence for a period. This may occur in some businesses such as property development.
The courts have emphasised both in Europe and domestically that objective evidence of an intention to trade may suffice.
Under EU law, preparatory works and steps in the context of an intention to trade may be sufficient. Where costs have been incurred in connection with future supplies which will be taxable, then in principle VAT may be recovered. Where the actual taxable supply never occurs due to circumstances outside the trader’s control, the right to deduction remains in principle. Revenue may seek to recover VAT deducted in this situation.
A person must declare his intention to make taxable supplies. However, Irish legislation does not require that person register until he has commenced making Vatable supplies.
In practice where a person seeks registration on the basis of an intention to trade revenue will seek evidence declared intention. They will look at the entire circumstances to verify that there is sufficient objective evidence of the intention to trade.