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 for the purpose of the VATable trade. 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.
Reclaiming VAT on Purchases
Where inputs exceed outputs, VAT may be repaid. Because of the sensitivity of repayment of revenue, the Revenue may examine the entitlement. The Revenue may defer VAT repayments in certain circumstances. Revenue may require security in respect of VAT to be refunded, by way of bond or by guarantee.
A claim for repayment of VAT must be made during the normal claim period for making claims to Revenue, namely, four years from the end of the period to which it relates.
A deduction may be allowed for
- VAT on goods purchased by the trader for the purpose of the VATable business;
- on intra-Community (EU) acquisitions by the trader for the purpose of the VATable business; and
- on imports (from outside the EU) by the trader for the purpose of the VATable business.
A VAT deduction also arises in a number of other more unusual circumstances including the following:
- VAT on supplies that are postponed in respect of alcohol products under duty suspension arrangements;
- any unrelieved VAT liability arising from the transfer of goods from a business and one member state to the other;
- certain VATable costs associated with the transfer of an undertaking which are not subject to the general exemption.
Deductible and non-deductible inputs.
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. VAT must be incurred in purchases and expenses that are directly attributable to the VATable business and supply.
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.
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.
Reverse Charge / Buyer Accounts for VAT
There are several circumstances under the VAT Acts where VAT is charged to the person supplied under reverse charge rules. One of the the principal instances are the receipt of services abroad by 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, they will usually have a corresponding input credit. In these cases, there is no cash payment required and the matter is one of VAT accounting only.
Persons who elect to be accountable are entitled to reclaim VAT on stock and trade held before their first VATable period on the same basis as if he was VAT-registered at the date of supply.
A person who makes acquisitions (purchases) for the purpose of a business which he intends to carry on may be entitled to VAT deductibility under fundamental principles of VAT law. 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.
Unlike the case with exempt supplies (defined by the VAT Acts) , in the case of zero-rated and certain other supplies (defined by the VAT Acts), VAT recovery is allowed on inputs (purchases), notwithstanding that no VAT is, in fact, chargeable on sales. Exemption from VAT differs in that no VAT is chargeable and the supplies do not trigger registration. The general rule is that where supplies are exempt, there can be no deduction. Qualifying activities are those in respect of which a deduction is nonetheless available.
Qualifying activities include the following
- supplying goods and services outside the State which would be taxable if made in the State other than hiring motor vehicles for use in the State;
- services consisting of the issue of new stock, shares or debentures used for the purpose of raising capital for a taxable business;
- services supplied outside the European Union or directly in connection with the export of goods outside the EU
- supply of goods which are deemed to take place in another state, e.g., distance selling and transport of passengers and the baggage outside the State;.
Most of the above activities would be exempt in themselves (particularly exporting). Nonetheless, deductibility is allowed.
There are specific rules restricting deductibility in certain cases for policy reasons. They include the following:
- the purchase, hiring, intra-Community acquisition or importation of passenger motor vehicles other than certain qualifying motor vehicles used as outlined in paragraph 8 below (and other than motor vehicles held as stock-in-trade, or for the purposes of the sale of those motor vehicles by a financial institution in the context of a hire-purchase agreement, or for the purpose of a business of the hiring of motor vehicles, or for use in a driving school business)
- the purchase, intra-Community acquisition or importation of petrol otherwise than as stock-in-trade. VAT is deductible on diesel.
- contract work involving the handing over of goods when such goods are themselves not deductible
Traders may recover VAT suffered in other EU states, subject to certain procedures. The claim is made through the domestic Revenue authority, which remits the claim to the relevant EU states.
Traders who are established in the UK but are not registered, who make supplies overseas may be able to recover UK VAT incurred, where the recipient is the accountable person or where qualifying activities are undertaken, to customers outside the EU. See above in relation to qualifying activities.
There are special provisions in respect of farmers and fishermen which allow recovery of VAT in certain circumstances, notwithstanding that they are not registered or are registered only in respect of intra-EU and acquisitions.