Annual Conference 2019
11-13 April 2019
What is Happening in VAT?
Greg Lockhart, Matheson
1 VAT on Deal Costs
When considering expenses incurred in the process of acquiring or disposing of company shares (‘Deal Costs’), Revenue traditionally took a narrow approach in respect of the entitlement to recover VAT on such expenses. Revenue guidance material previously provided that as dealings in shares are VAT exempt, there would be no entitlement to recover VAT incurred in respect of Deal Costs, except where such transactions involved non-EU clients (which would constitute ‘qualifying activities’ within the meaning of section 59 of the Value-Added Tax Consolidation Act 2010).
However, following certain CJEU judgements, Revenue has updated its base position and now permits the recovery of VAT incurred on Deal Costs to the limits prescribed by relevant CJEU judgements as set out in further detail below.
1.1 Key Cases
Given the central importance of binding CJEU judgements on the recovery of VAT on Deal Costs, below is a non-exhaustive consideration of some of the key judgements in this area.
1.1.1 Cibo Participations SA (C-16/00)
This decision represents the first instance that the CJEU confirmed that VAT recovery on Deal Costs is possible in circumstances where a company acquires a subsidiary to which it supplies management services. It should be noted that in the ordinary course, holding companies which merely hold shares in subsidiaries are not entitled to recover VAT on the basis that the CJEU has ruled that the mere holding of shares is not an economic or taxable activity giving rise to a right of VAT deduction.
In Cibo, a holding company (Cibo) was purchasing shares in a trading company. Cibo was actively involved in the management of its various subsidiaries and charged management fees in this regard in respect of which VAT was chargeable. On this basis it was held that the costs incurred by Cibo in acquiring the shares of a new subsidiary had a direct and immediate link with Cibo’s taxable activity, (i.e., management services) and thus formed part of the general costs of Cibo. VAT input credit was therefore allowed based on its normal VAT recovery entitlement.
Revenue has accepted the principles of the Cibo case. However, in December Tax Briefing of 2003, it is suggested that the mere existence of a management charge structure will not be sufficient and there must be substance to that management role. In Cibo, the holding company supplied administrative, financial, commercial and technical services to its subsidiary, and this was held to be sufficient to constitute a taxable activity.
1.1.2 Ryanair Limited vs Revenue Commissioners (C-249/17)
This decision follows a referral of several questions from the Irish Supreme Court in respect of the recoverability of the VAT incurred on Deal Costs by Ryanair following their unsuccessful bid to acquire a majority share in Aer Lingus in 2006. Ryanair had intended, post-acquisition of the majority share, to provide management services to its new subsidiary, Aer Lingus. In contrast with Cibo, as the majority share was never acquired, the management services were never actually provided to Aer Lingus and thus when Ryanair sought to reclaim the input VAT associated with the Deal Costs forming part of the unsuccessful acquisition, no taxable supply had actually taken place and both the Irish Circuit and High Courts concluded that no right of recovery arose as a consequence. The decision was appealed to the Supreme Court which sought a reference from the CJEU. Essentially, the questions posed by the Supreme Court to the CJEU were as follows:
- Whether a future intention to provide management services to a takeover target is sufficient to establish that the potential acquirer is engaged in an economic activity so that VAT charged to the acquirer on Deal Costs associated with the acquisition can be attributable to the intended economic activity; and
- Whether there is a sufficient ‘direct and immediate link’ (a reference to the principles enunciated in Cibo) between professional services rendered in the context of the potential takeover and the output, being the potential provision of management services to the acquisition target if the takeover is successful, so as to permit a deduction in respect of the VAT payable on those professional services.
In answering these questions, the CJEU, considered whether Ryanair was a taxable person for the purposes of the VAT Directive, and if so, whether it acted as such when receiving the services provided such that the VAT incurred may be deductible.
The CJEU found, with reference to its previous case law, that:
- ‘any person with the intention, as confirmed by objective elements, of independently starting an economic activity, and who incurs the initial investment expenditure for those purposes must be regarded as a taxable person’; and
- ‘the expenditure incurred for the purpose of the acquisition of the shares of the target company must be regarded as being attributable to the performance of the economic activity which consisted in carrying out transactions giving rise to a right to deduct. On that basis, that expenditure has a direct and immediate link with that economic activity as a whole and, consequently, is part of its general costs. It follows that the corresponding VAT gives rise to the right to deduction in full’.
What this means in practice:
- Where a trader is able to demonstrate that it intends to provide management services post acquisition (this was established as a matter of fact by the Irish High Court in respect of Ryanair) it will be regarded as a taxable person for the purposes of the VAT Directive;
- The right to deduct is retained even where the economic activity in question is not ultimately carried out; and
- Initial expenditure must be regarded as being attributable (having a direct and immediate link) to the performance of that economic activity (provision of management services in the case of Ryanair) as a whole and is thus part of the general costs of a business and so the trader, who is a taxable person for the purposes of the Directive is entitled to full VAT recovery on the Deal Costs, even where the economic activity in question is never actually carried out.
- This case is to be welcomed though it should be noted that key to the decision was the finding of fact of the High Court. It will be necessary to ensure that acquisitions are structured appropriately to maximise the possibility of recovery.
1.1.3 Skatteverket v AB SKF (Case C-29/08)
Unlike the previous two cases which dealt with acquisitions, this case dealt with the sale of shares in a subsidiary company by its parent (a parent which was involved in the subsidiary’s management) and a number of questions were referred to the CJEU regarding the recoverability of VAT on the relevant Deal Costs associated with the sale of the shares.
The CJEU first considered whether or not the disposal of shares in a subsidiary is a transaction falling within the scope of the VAT Directive. The Court held that where the financial holding in another company is accompanied by direct/indirect involvement in the management of the company and such involvement entails carrying out taxable transactions e.g. administration services (such as were being provided to the subsidiary in this instance) this could constitute a taxable activity.
The Court then considered whether there is a right to a deduction for Deal Costs directly attributable to the disposal transaction. It reiterated the requirement to have a direct link (as originally considered in Cibo) between a particular input transaction (the Deal Costs associated with the sale) and a particular output transaction (the ongoing provision of services form the parent to the subsidiary) for an entitlement to input VAT recovery to arise.
The key distinguishing factor was held to be whether or not there is involvement in the management of the companies in which the shares are held. The right to deduct was held to exist if the capital acquired in respect of the share sale is used in connection with the economic activities of a person concerned. It was held that it is for the national referring court to determine if there is a link between the cost of the input services and the overall economic activities of the taxable person.
1.1.4 C&D Foods Acquisition ApS (Case C-502/17)
This more recent decision of the CJEU in respect of disposals of shares and the deductibility of VAT incurred on associated Deal Costs arguably establishes a further hurdle to the right of deduction which is concerned with the intended application of the proceeds of the sale of the shares in question. In this case, C&D foods was the holding company of a subsidiary and to satisfy a debt owed to its ultimate shareholder, C&D foods intended to sell and transfer the subsidiary company and incurred Deal Costs in that regard. Ultimately, the sale was unsuccessful as a buyer for the said subsidiary could not be identified. C&D foods sought to recover the VAT incurred on the Deal Costs associated with the failed sale and the CJEU, in commenting on the queries referred to it, restated and clarified several important points in respect of the recovery of Deal Costs, namely:
- the CJEU, in a restatement of its existing case law, provided that the disposal of shares in and of themselves, does not give rise to a right to recover VAT in respect of Deal Costs on the basis that such transactions are not taxable transactions within the meaning of the VAT Directive.
- the CJEU noted that exceptions to the aforementioned position arose where it can be demonstrated that a direct and exclusive reason for the disposal of shares lies in the taxable activities of the disposing holding company, or the disposal constitutes ‘the direct, permanent, and necessary extension of the VAT taxed activities of the parent company’ (such would arise where the funds raised by the disposal are to be applied directly to the VAT taxed activities of the holding company or another the group generally).
- the CJEU stated that the VAT incurred on relevant Deal Costs in respect of a share disposal envisaged but not carried out, will not be recoverable where it does not have as its direct and exclusive reason, the taxable activity of the taxable person in question.
- It is arguable that the above case has added an additional hurdle which must be overcome in order to satisfy tax authorities that the VAT incurred in respect of share disposals of subsidiaries is recoverable. Consideration should now be given to what the proceeds of any share sale will be put to in order to determine whether the VAT incurred may be deductible. It is a difficult case to reconcile with previous decisions as an alternative argument could be made that the repayment of a loan would free up capital which may be put to the taxable activities of a business. However, it does not appear that this point was considered by the CJEU.
1.1.5 Kretztechnik AG v Finanzamt Linz (C-465/03)
In Kretztechnik the CJEU held that VAT is recoverable on costs incurred in relation to the issuing of new shares in circumstances where the issue involved raising capital for the purpose of taxable activities.
2 Return of Trading Details (“RTD”)
Where a business is registered for VAT, it is obliged to file annually a ‘Return of Trading Details’ (‘RTD’). The RTD is essentially a statement of all of the supplies made and received during the accounting year. The RTD provides fields for the values of supplies of goods and services, imports and deductible inputs at the various rates of VAT, with such values being represented exclusive of VAT. The RTD is intended to capture on an aggregate basis all Irish, EU and overseas trade which took place in the relevant 12 month period and provides boxes for the differing rates of VAT which are applicable to the various goods and services recorded on the RTD. The amounts in the RTD should strictly also correspond to the relevant figures included in VAT3 returns. However, the RTD also requires certain information which is not reflected in the VAT returns, for example the value of VAT exempt purchases and sales. The RTD is simply a statistical return and does not require a business to account for any VAT.
The period to which an RTD relates corresponds to a trader’s accounting year. Mandatory e- filing requirements are in place for virtually all traders meaning the RTD is made available through and must be completed on the Revenue Online System (‘ROS’).
The now widespread use of ROS for e-filing of the RTD means that Revenue can utilise certain electronic measures to ensure traders are complying with their RTD obligations. In order to encourage compliance, Revenue frequently withhold VAT repayment amounts due where an RTD return remains unfiled. We would note that the relevant Revenue Manual concerning the RTD is currently unavailable on the Revenue website as it is being updated.
In our experience, where clients have failed to file RTDs, Revenue will require the filing of any outstanding RTDs through ROS and simply providing them with the relevant information (for example as part of a prompted or unprompted qualifying disclosure) will not be sufficient. Depending on the record keeping or maintenance systems of particular clients, it may be onerous to seek to collate the required information, in particular in the client has failed to file RTDs for several periods. As stated above, information other than that included in VAT3 returns will be required and when this is not to hand, it may be difficult to collate the required information. Failure to file a proper RTD could technically lead to administrative fines or could trigger an audit of the client’s wider compliance practices and accounts.
2.1 Practical tips for completing the RTD
Practitioners will be aware that, in the absence of detailed Revenue guidance, there can be confusion as to the correct manner to complete RTDs. A sample RTD is contained at Appendix 1 to this paper and we have set out below, a number of practical points to assist in the completion of the RTD which we have gleaned as the appropriate treatment based on our discussions with Revenue. However, the below should not be relied upon as a proper statement of the law:
- As a general rule it should be noted that supplies of goods and services received from outside of Ireland will require two entries on the RTD in order to correspond with the two entries on the VAT3. Where the goods / services constitute ‘stock for resale’ they should be included in Column 3 at the appropriate rate of VAT. Any other purchases should be included in column 4. A corresponding entry should be included in Column 1 where the goods / services are received from a non-EU supplier whereas an entry should be included in Column 2 for goods / services received from the EU.
- Supplies of goods and services made from Ireland to all entities based outside of Ireland should be included in the 0% export box in Column 1. We understand this is the case even though supplies to EU entities are not exports for VAT purposes. Equally, whilst it is correct to say that a supply of goods cross-border is subject to the 0% rate of VAT in Ireland, this is not correct in the context of supplies of services to non-Irish businesses which is outside of the scope of Irish VAT. Notwithstanding, we understand that the 0% export category is appropriate from Revenue’s perspective.
- Similar issues arise in the context of domestic reverse charge supplies such as those supplies which are subject to the operation of RCT. Although it is not correct to say that supplies subject to RCT are provided at the 0% rate of VAT, we understand that Revenue require such supplies to be included in the 0% home category in Column 1 to reflect the fact that VAT is not charged by the supplier. As regards the recipient of reverse charge supplies, where for example, the supplies are construction services, our understanding is the recipient should record the net of VAT amount in the 13.5% category in both Column 1 and Column 4 to reflect the double entry on the VAT return.
- In respect of the above commentary and indeed, the completion of the RTD in general, it should be noted that all entries are made on a net of VAT basis.
3 VAT on Property (Reversionary Interests & Transfer of Business)
3.1 Background to Legacy Leases and Reversionary Interests
Section 95 VATCA 2010 contains the ‘transitional measures’, a number of instruments designed to bridge the gap between the rules and legislation in place in respect of VAT on property prior to changes introduced on 1 July 2008 and those which replaced them. These measures prescribe the rules in respect of the VAT treatment which apply to the disposal of certain interests acquired prior to 1 July 2008. One such circumstance where the transitional measures apply is in respect of legacy leases and reversionary interests created as a consequence of such leases. Legacy leases are those which were:
- created by a taxable person prior to 1 July 2008;
- the lease when first granted was for a period of 10 years or more; and
- VAT was charged on the grant based on the capitalised value of the lease.
The reversion held on a legacy lease is the interest retained by the landlord after he grants the legacy lease and s95(1)(b) VATCA 2010 specifically confirms that the transitional measures apply to the disposal of a reversionary interest (until the legacy lease is surrendered). Most significantly in respect of the transitional measures applying to the sale of a reversionary interest is that such sale is not subject to VAT, as confirmed by s93(2) VATCA 2010.
While dealings in legacy leases and associated reversionary interests are not uncommon, the area can prove problematic for practitioners. Below is a consideration of several issues which we have come across in practice, specifically in respect of the impact that the subsequent development of a property subject to a legacy lease can have.
3.2 Surrenders and assignments of legacy leases
The transfer of legacy leases either by way of assignment to third parties or by surrender to the landlord are required to be dealt with in a manner that is akin to the transfer of capital goods under the capital goods scheme. Legacy leases have a 20 period ‘VAT life’ (approximately 20 years) commencing with the grant of the lease. Where a legacy lease is surrendered or assigned prior to the exhaustion of the VAT life, VAT will be chargeable on such surrender. The VAT amount will be a percentage of the VAT which was chargeable at the time of the grant of the lease, reduced by 5 percent for each period of the VAT life which has passed prior to surrender/assignment.
By default, it is the liability of the tenant to account for such VAT to the Revenue Commissioners. However, where the landlord/assignee is registered for VAT purposes or where the landlord is a government body, the liability to account for the VAT will become that of the landlord/assignee on a reverse charge basis.
The tenant is required to issue a ‘VAT document’ to the landlord/assignee at the time of the surrender/assignment detailing the number of periods remaining in the VAT life of the lease and the amount of VAT due on the surrender. The VAT life remaining in the lease is calculated based on the landlord’s accounting year end and the number of intervals which have elapsed since the date of grant. The amount of VAT payable on the surrender is calculated using the formula in s95(8) VATCA 2010.
In the absence of documentation to evidence the amount of VAT which would have arisen on the grant of the lease, it is sometimes necessary to carry out the calculation and choose a capitalised value upon which VAT would likely have been due. In practice, the capitalised value was often determined by way of a third party valuation. However, the formula method or multiplier method can also be used as a means to calculate the capitalised value on a ‘best estimates’ basis.
Where a surrender premium is payable by a tenant to a landlord in respect of the surrender of a legacy lease, Revenue Commissioners guidance has confirmed that this is outside of the scope of VAT. However, any premium payable for the assignment of a legacy lease should be subject to the standard rate of VAT.
We would note that there may be costs arising as a result of any “capital goods” which a tenant has created since the grant of a legacy lease which were completed within 10 years of the surrender/assignment and remain on the property subsequent to the surrender/assignment. It will be necessary for the parties to agree in writing that responsibility for such tenant capital goods transfers to the landlord/assignee in order to avoid a clawback of previously recovered VAT for the tenant. It is also necessary for the tenant to provide a capital goods record in such circumstances (s64(7) VATCA 2010).
3.3 Development post creation of a legacy lease and the impact on reversionary interests
An important limitation to the exception contained in s93(2) VATCA 2010 (which provides that the sale of a reversionary interest is not subject to VAT) is that after the creation of the legacy lease, the property must not have been developed by, on behalf of or to the benefit of the landlord. Given the broad phrasing of this limitation, the phrase would not only include, for example, improvements or other works instigated by the landlord, but would include, for example, certain fit-outs which a tenant has carried out (even where such fit-outs are carried out at the tenant’s behest) on the basis that any improvements are likely to be, even if indirectly, to the benefit of the landlord. While Revenue have confirmed there are certain exceptions to development being considered ‘to the benefit of the landlord’, in many cases, development of a property post-creation of a legacy lease will mean that the sale of a reversionary interest can be taken back into the VAT net such that the ordinary VAT on property rules will apply. In this case, practitioners should consider whether the development is such that the sale of the property will be automatically subject to VAT.
3.4 Post-letting expenses
As a legacy lease does not give rise to ongoing supplies strictly, any ongoing costs of the landlord should not be recoverable.
However, s93(3) VATCA 2010 allows for the landlord to recover VAT in respect of certain post-letting expenses where certain conditions are met. These are expenses incurred by a landlord on a property he has let under a legacy lease and include VAT on services he is obliged to carry out under the terms of the lease, VAT on rent collection costs, rent review costs, VAT on costs which relate to the exercise of a break clause or of an option to extend the lease and VAT on the landlord’s general overheads in the proportion that the rent from vatable leases bears to total rent.
3.5 VAT registration
Similarly, as the landlord under a legacy lease is not undertaking a taxable activity on an ongoing basis, there is an argument that it should not be possible to register for VAT. However, s93 of the VAT Act specifically provides that a landlord shall be an ‘accountable person’ in respect of post-letting expenses such that a VAT registration is possible.
3.6 Transfer of Business - Overview
Transfer of Business relief (“TOB”) can apply to the transfer to an accountable person of a totality of the assets or part thereof of a business, even if that business or part thereof had ceased trading, where those transferred assets constitute an undertaking or part of an undertaking capable of being operated on an independent basis. The effect of TOB relief is that the transfer is deemed not to be a supply for VAT purposes.
The relief can apply even where a business has ceased trading. There are limitations to when TOB is applicable, the CJEU ruling in Zita Modes that the relief “does not cover the simple transfer of assets”, only applying where the assets transferred “constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity”.
Updated Revenue guidance in respect of transfer of business (‘TOB’) published on 31 July 2018 provides welcome clarification on a number of issues in respect of TOB and specifically its operation in respect of property transactions.
3.6.1 Legislative basis
Transfer of business relief (‘TOB’) is set out in sections 20(2)(c) and 26 VATCA 2010. The intention behind these provisions is to remove from the transferee the requirement to pay VAT on the acquisition of assets to which the relief applies. This is achieved by the legislation deeming that, where TOB is applicable, no supply has taken place for VAT purposes. It should be noted that where the circumstances, as provided for in the legislation for TOB are satisfied, its application is mandatory and where VAT is paid by the purchaser in error, it will not be deductible as the transfer is deemed not to be a supply for VAT purposes.
3.6.2 TOB and property transactions
Broadly speaking, where TOB applies to a commercial property sale, the purchaser is treated as if they acquired it when the vendor did. Revenue’s position, for TOB to apply, is that the purchaser must be an accountable person for VAT purposes, although, not necessarily in respect of the asset being acquired.
For VAT purposes, where ‘old’ property is being transferred under TOB, the sale of which would otherwise be exempt from VAT, the purchaser effectively ‘steps into the shoes’ of the vendor in respect of the capital goods scheme. The purchaser in such circumstances will receive a capital goods record from the vendor in respect of each capital good (including, any relevant property) and to avoid triggering a clawback must continue to use the property for a vatable purpose for the remainder of the property’s capital goods scheme adjustment period.
Where a property is transferring under TOB, the sale of which would otherwise be subject to VAT as the sale of ‘new’ property (when applying normal VAT disposal rules), no capital goods record should be provided to the purchaser by the vendor at the time of completion, as the purchaser is deemed to have to have incurred VAT on the purchase price and to have reclaimed such VAT in accordance with their entitlement to reclaim VAT on the said property. As a consequence of this, the purchaser is deemed to have acquired a new capital good with a 20 interval adjustment period from the date of completion of the sale, with the tax incurred being the VAT deemed to have been paid by the purchaser at completion. To the extent that the purchaser is not entitled to VAT deductibility in respect of its use of the property it should make a payment of all of the VAT which would have arisen on the sale to Revenue in the absence of TOB relief.
It should be noted however, that there will not always be a capital good to be transferred to the purchaser where TOB relief applies – for example where the capital good adjustment period has expired.
3.6.3 Updated Revenue guidance and property transactions
Revenue has provided welcome clarification on the application of the relief to the sale of let property and the main clarifications are detailed below.
- Previous guidance stated that TOB could apply to the sale of vacant property that was let or partially let in the past on a continuing basis. The new guidance provides that the transfer of property without additional assets such as a letting agreement, no longer qualifies for TOB, even if it had been used for a relevant commercial purpose in the past.
- Let property now only qualifies for TOB if it is transferred with the benefit of an existing letting agreement, agreement to lease, or licence that, together with the property, are capable of constituting an independent business or undertaking.
- Significantly, given the common nature of the transaction, the new guidance now indicates that TOB will not apply to the transfer of a property from a landlord to a tenant. This contrasts with the position in the previous iteration of the guidance which indicated that such transactions were within the scope of TOB.
4 Brexit Developments
4.1 Postponed Accounting
The Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 (Brexit Omnibus Bill) was introduced to deal with the effects for Irish businesses of UK leaving the European Union.
As part of the Brexit Omnibus Bill package, the VAT Consolidation Act 2010 (VAT Act) will be amended to incorporate a system of postponed accounting for VAT. This means that VAT- registered businesses importing goods from the UK will be able to account for import VAT on their VAT return rather than having to pay import VAT on arrival of the goods at the Irish border.
As post-Brexit intra-community supplies of goods and services will be treated as imports and exports between the UK and Ireland, this measure is intended to alleviate the cash-flow impact for businesses. Although there is currently an import VAT deferral procedure available, this only allows for deferral to the following month and therefore also entails a cash flow cost (and financial security is required to be obtained in this regard). Accordingly, the deferral of import VAT accounting to the time businesses file their bi-monthly VAT returns is to be welcomed in the context of Brexit.
Businesses will have to ensure that they file their VAT returns in a timely manner. Otherwise, Revenue may exclude the taxpayer from the postponed accounting scheme. A modification of the postponed accounting scheme will be introduced at a later date, which will ensure that authorisations for the inclusion on the scheme are issued subject to satisfying certain criteria and conditions.
4.2 Section 56 VAT Authorisations
The Brexit Omnibus Bill provides for an amendment of s56 VATCA 2010, which entitles authorised taxable persons to receive qualifying goods and services at the zero rate of VAT. Accountable persons, who qualify for an authorisation, are those primarily engaged in making intra-Community supplies of goods, exporting goods outside the European Union or in making supplies of certain contract work.
The amendment makes changes to the current s56 of the VATCA 2010 by introducing a list of conditions that have to be satisfied, including compliance with customs legislation and tax rules, in order to participate in the scheme. The amendment also gives the Revenue Commissioners an option to cancel an authorisation where there are reasonable grounds to do so, and to provide for a penalty for failure to adhere to the conditions of the scheme.
4.3 VAT Exempt Institutions
Certain activities of financial institutions such as banks and insurance companies are VAT exempt which means that VAT is not charged on their supplies and any VAT incurred in relation to making these supplies cannot be reclaimed. Examples of exempt supplies are acceptance of deposits, the provision of loans and operating of any current, savings or deposit account and the provision of insurance services.
Typically, VAT may only be recovered to the extent that it is incurred for the purposes of making ‘taxable’ supplies (i.e., supplies upon which VAT is chargeable). However, as an exception to this rule, where a business incurs VAT for the purposes of making supplies which are ‘qualifying activities’, such VAT may be recovered. ‘Qualifying activities’ include the supply of financial services to persons located outside of the EU.
Post-Brexit, the UK will become a third country for VAT purposes. Accordingly, where a financial institution (i.e., a bank) incurs VAT for the purposes of making supplies of financial services to customers located in the UK (i.e., making a loan to customers in the UK), such VAT should be recoverable.
5 EU Developments
5.1 VAT e-commerce package
On 11 December 2018, the Commission proposed a number of changes to the current VAT system, including new measures on the place of supply rules for telecommunications, broadcasting and electronically (TBE) supplied services as well as to the Mini One Stop Shop (MOSS), which can be used to declare and pay VAT in a single Member State on supplies of these services to non-taxable persons. These measures are designed to assist with a smooth transition to the new Value-Added Tax rules for e-commerce that will come into force from January 2021.
The proposals outlined in the VAT e-commerce package will be one of the first steps towards revamping the VAT system for intra-EU trade, which dates from 1993 and was intended to be transitional. It is argued that the current VAT system is complex, costly to operate and vulnerable to fraud. Further, the current VAT system does not adequately take into account technological developments, changes in business models or the globalisation of the economy.
5.2 Measures introduced from 1 January 2019
An annual threshold of €10,000 on the intra-EU TBE services was introduced. The new rules provide that TBE supplies of up to €10,000 remain subject to VAT in the Member State where the supplier is located (i.e. where the supplier is established, has his permanent address or usually resides). The application of this threshold is subject to the following conditions:
(a) the supplier is established, has his permanent address or usually resides in only one Member State;
(b) the supplier supplies TBE services to customers who are established, have their permanent address or usually reside in another Member State;
(c) the total value of TBE services supplied to customers in other Member States does not exceed €10,000 (exclusive of VAT) in the current and in the preceding calendar year.
In case the supplier wants to apply the general place of supply rule (i.e., taxing VAT in the Member State of the customer), he can do so and will be bound by this decision for two calendar years. As soon as the threshold of €10,000 is exceeded, the general rule applies without exception.
A taxable person who has already been using the MOSS system and whose total value of TBE services in other Member States is below or equal to the threshold can deregister from MOSS as of 1 January 2019.
5.2.2 Evidence of identity
A supplier established in one Member State supplying TBE services to a customer in another Member State must, for the majority of situations, keep two items of non-contradictory evidence to identify the Member State of the customer, which is the Member State where the VAT is accountable. This requirement is particularly onerous for small and medium-sized companies supplying TBE services to customers in other Member States.
From 1 January 2019, a threshold of €100,000 has been introduced and where the value of a business’ supplies does not exceed this threshold, one piece of evidence is sufficient to determine the place of supply. The application of this threshold is subject to the following conditions:
(a) the total value (exclusive of VAT) of TBE services provided by the supplier from his business establishment or a fixed establishment located in a Member State to customers who are established, have their permanent address or usually reside in another Member States does not exceed €100,000 in the current and in the preceding calendar year;
(b) the place of establishment of the customer is identified by the supplier on the basis of one item of evidence provided by a person involved in the supply of the services, other than the supplier or the customer;
(c) the item of evidence is listed in points (a) to (e) of Article 24f of the VAT Implementing Regulation which provides a non-exhaustive list of items of evidence which could be used by the supplier when identifying the place where a final customer is established, has a permanent address or usually resides (e.g. the billing address of the customer, bank details such as the location of the customer’s bank account).
As soon as the threshold is exceeded during a calendar year, the normal rules apply, meaning that two pieces of evidence are required.
5.2.3 Invoicing rules
From 1 January 2019, a supplier using the MOSS will only have to respect the invoicing rules of the Member State in which the supplier is established, irrespective of the rules applicable in the Member State of the customer.
5.2.4 Non-Union Scheme
As of 1 January 2019, a business which is not established in the EU, but which is obliged to be registered for VAT in the EU was unable to use the MOSS system (either Union or non-Union scheme). However, such businesses will now be allowed to use the non-Union scheme, which is the MOSS regime for taxable persons not established in the EU supplying TBE services to customers in the EU.
5.3 Future Reforms of the VAT System
5.3.1 Destination based VAT System
For the past number of years, the European Commission was working towards changing the current VAT system to a definitive VAT system based on the destination principle. In such a system, the supply of goods and services is taxed in accordance with the legislation of the country of destination. The destination principle is the regime normally used in the context of international trade. It is envisaged that under the revamped system, the supplier will be liable to account for VAT at the rate applicable in the destination Member State and remit the tax to his local tax administration via the One Stop Shop (OSS) system. If the customer of an intra- Union supply is a certified taxable person, the supplier will not have to charge VAT and the customer will account for VAT using a reverse charge mechanism. The change to a destination VAT system will come in two steps – the reform of intra-EU business to business supplies of goods and secondly the change in intra-EU business to business supplies of services.
The definitive VAT system will require a significant degree of trust and cooperation among tax administrators because the Member States where the goods arrive will have to rely on the Member State of departure to collect and remit the VAT due on the cross-border supply.
It is expected that a definitive VAT system will ensure that VAT fraud is reduced and the day- to-day functioning of the VAT system is improved. Finally, it is also proposed to modernise VAT for SMEs to make VAT compliance less costly.
Currently there is no system in place that distinguishes a reliable taxable person from a non- reliable one. As part of the VAT reform, the Commission is proposing a measure to permit taxable persons to apply within their own Member State for the Certified Taxable Person (CTP) status. In order to qualify as a Certified Taxable Person, the business must:
- not have committed serious infringement or repeated infringements of taxation rules and customs legislation;
- demonstrate a high level of control of business operations, the flow of goods and transport records;
- give evidence of financial solvency.
One of the main benefits of being a CTP is to enjoy the simplified processes for the declaration and payments of cross-border VAT. The CTP status will be identified and accepted mutually by all EU Member States.
The Commission is planning to introduce further measures in the form of an Implementing Regulation to address the practicalities of certified taxable person status and to ensure that the procedure for granting or withdrawing that status is sufficiently standardised throughout the EU.
5.3.3 Broader One Stop Shop System
An online portal will be put in place for all business-to-business EU traders to account for VAT on supplies of all types of services and goods to consumers (i.e., not just for TBE supplies). The online system will also be available to companies outside the EU that are doing business within the EU and would otherwise have to register for VAT in every Member State.
Once in force, these non-EU businesses will be obliged to appoint an intermediary in the EU to in order to partake in the scheme.
5.3.4 Import scheme
A new import scheme will be created covering distance sales of goods imported from third countries or territories to customers in the EU up to a value of €150. The seller will be able to charge and collect the VAT at the point of sale to EU customers and declare and pay that VAT globally to the Member State of identification in the OSS. These goods will then benefit from a VAT exemption upon importation, allowing a fast release at customs. The current scheme of VAT exemption of goods in small consignment of a value of up to €22 will be abolished. Where the OSS system is not used for imports, a second simple mechanism will be available as a way of accounting for VAT. Import VAT will be collected from customers by the customs declarant (i.e. courier firm), which will pay it to the customs authorities via a monthly payment.
Revenue Booklet ‘VAT and Financial Services’, 1999 (Note: The content is more than 5 years old. Where still relevant it has been incorporated into a Tax and Duty Manual or included on the Revenue website)
VAT Return of Trader Details – Introduction of Automated Compliance Measures (Note: The content is more than 5 years old. Where still relevant it has been incorporated into a Tax and Duty Manual or included on the Revenue website)
The VAT capital goods scheme is a mechanism for determining VAT recovery in respect of a property over its VAT life (20 years from the date of first completion or ten years in the case of development works carried out on a previously completed property). Where VAT is originally recovered on a property, but it is subsequently put to a VAT-exempt use, there is a clawback of a portion of the VAT originally recovered, which is essentially time apportioned.