Authorities Get Tough on Cross Border VAT

21 November 2016

BDO partner Ivor Feerick says Irish businesses must take appropriate steps to ensure they are fully aware of the bona fides of both the customers and the suppliers in their supply chain.

One of the main aims of a Single Market within the European Union is to facilitate ease of trading between businesses across the 28 member states. Perhaps the most relevant advantage provided under current VAT legislation is that goods can be supplied to businesses based in other EU states without local VAT being charged, as this helps businesses avoid significant negative VAT cash flows and unnecessary bureaucracy and administration.

However, as with many economic initiatives this concession is open to abuse. Indeed, the European Commission estimates that around €170 billion, or 15.2% of expected annual VAT revenues across the EU, is not collected each year, with over 80% of the estimated VAT shortfall considered to arise from fraud relating to cross border supplies of goods.

That’s a huge sum of money and it’s not surprising that the EU authorities are keen to clamp down on abuse of the VAT regime. In the circumstances, it is vital that Irish businesses should take appropriate steps to ensure they are fully aware of the bona fides of both the customers and the suppliers in their supply chain.

Under current VAT legislation, local VAT is not chargeable on goods suppled to businesses in other EU states, provided that evidence of the transport of the goods outside of Ireland is available and the customer’s VAT number is quoted on the face of the related invoices.

However, as part of the ongoing effort to tackle VAT fraud, the Court of Justice of the European Union has considered a number of cases in which EU tax authorities have argued that fraud was evident, and it has ruled that VAT credit can be denied to a supplier that knew, or ought to have known, that by purchasing goods they were party to a fraudulent transaction.

The CJEU also ruled that the non-charging i.e. zero-rating of VAT on supplies to businesses in other EU member states can be challenged under those circumstances.

Reasonable Steps

The outcome of these decisions is that EU member states can deny VAT credits claimed by traders who are part of a supply chain in which they knew, or ought to have known, that there was fraud being committed. The related irrecoverable VAT cost has led to a number of businesses having to cease trading.

For its part Revenue issued E-Brief 61-2016 earlier this year, reminding businesses of their obligations to take ‘reasonable steps’ in advance of conducting transactions with unknown parties. Ireland’s 23% VAT rate is one of the highest in the EU, so businesses here should familiarise themselves with the e-brief in question and discuss its content with their advisers.

Given our high VAT rate it is clear that being denied VAT credit or being assessed for VAT not charged on supplies would make many transactions commercially unviable and that’s before interest and fines are taken into account.

In order to avoid such a scenario, there are a few steps that can be taken to mitigate the risk of sanctions and penalties. Firstly, businesses must remember they are expected to know who their suppliers and customers are and to be aware of any non-conventional trading practices.

Businesses must also demonstrate to Revenue that they have taken the appropriate steps to ensure the bona fides of their trading partners. This can include, but certainly isn’t limited to, obtaining copy certificates of tax registration details, documenting site visits and meetings with large customers and obtaining bank or third party references.

While some of these checks may sound basic, if businesses don’t take cognizance of the rules they run the risk of being compromised by the Revenue’s new approach. Businesses have to be aware of the need to ensure the legitimacy of both their suppliers and customers, and appreciate that any transactions that don’t appear commercially viable should be treated with extreme caution.

Ivor Feerick has been chair of the BDO International VAT Centre of Excellence since 2012 and currently heads up BDO Ireland’s Indirect Tax Practice. Prior to joining BDO, he was a Tax Inspector with the Revenue Commissioners.

Article originally published by Business Plus.