VAT accounts for over 30% of the total tax take every year and it really is an ingenious tax. The man who first though of must have had a brilliant, albeit mean spirited, mind. The argument runs like this; if you have enough money to spend on things you want you must have enough money to pay more tax.

Not only this, but the VAT system turns businesses into tax collectors. When you start off you decide you’re going to be a mechanic, a solicitor, a musician, but after some success Revenue also insist on you being a tax collector, obliged to gather VAT from your customers and pay it over to the government. What’s more is that even though you didn’t want to be a tax collector in the first place and have had no training in the profession, if you do it wrong then stringent penalties are levied against you. From a tax legislation perspective it really is inspired. Unfortunately although it is great for Revenue it’s not so good for the rest of us.

The correct management of VAT is essential to all registered businesses. Here are some tips that might provide food for thought.

1. Consider changing the filing frequency of the VAT return. Merely filing late is not an option. You may qualify to file quarterly or bi-annually.
2. If filing on an annual return basis, consider changing the amount of the monthly direct debit payment. However, you must be careful that you don’t end up with an end-of-year shortfall.
3. You may be entitled to switch to accounting for VAT on the cash-receipts basis. This can be a significant advantage at a time when debtors may be slow to pay. Switching is subject to Revenue agreement and must be applied for.
4. If the business has both VAT-able and non VAT-able income, it is obliged to carry out a review of the apportionment rate at the end of each accounting period. A detailed review may uncover new possibilities for VAT recovery.
5. If a supply of services is on going but the business is entitled to receive a payment on account, it may be permissible to seek remittance by issuing a “payment document” instead of a VAT invoice, thus deferring the requirement to account for sales VAT.
6. Be attentive to the date on which VAT invoices are issued. It may be possible to raise some sales invoices on the first day of a new VAT period instead of the last day of the previous one without causing a further one-month delay in payment by the customer.
7. If it is necessary to write off a debt, be sure to claim bad debt relief in relation to the sales VAT on the original invoice. This may soften the blow of the write off somewhat but is subject to quite strict conditions. Bad debt relief can only apply when the business accounts for VAT on the invoice basis.
8. Consider deregistering for VAT if the turnover falls below the obligatory VAT registration threshold (currently €37,500 p.a. for services and €75,000 p.a. for goods).
9. If it becomes apparent that a VAT refund is due, apply for it on a timely basis. Apart from the importance in cashflow terms, the four-year cap has to be taken into account.
10. Ensure you are apprised of any potential advantages which changes in legislation or Revenue procedure may offer. There were significant changes in place of supply rules in relation to services from 1 January 2010. Some Irish businesses will be able to stop accounting for Irish VAT on supplies of services to non-Irish customers, while other Irish businesses will have to start accounting for VAT on the reverse-charge basis in relation to services received from outside of Ireland.
11. Reclaim sales VAT on deposits taken where the supply does not subsequently take place.
12. It is now possible to recover VAT in relation to expenditure on conference accommodation and the purchase of certain cars (both subject to conditions). Tour operators are also entitled to claim VAT in relation to certain overheads.
13. Recover input VAT incurred in other jurisdictions. The Eighth EU Directive procedure improved significantly from 1 January 2010.
14. If a business restructure involves a disposal of immovable property (even to a spouse) remember that there may be VAT implications even if there the transfer does not crystallise other taxes. Similarly renting out a property pending a sale may give rise to VAT issues, since renting is prima facie an exempt activity.
15. If a business does encounter difficulty in dealing with its obligations vis-à-vis Revenue, take a proactive rather than an ostrich approach. Revenue has indicated that it is “disposed to working with … businesses and tax payers to find a way through … difficulties, provided that there is a positive and honest engagement with Revenue and the fundamentals of the underlying business are sound”.

“The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin” – Mark Twain

The thought of dealing with a tax collector can be off-putting for anyone, but unfortunately taxes are unavoidable. As with all battles in life it pays to know your enemy. While Revenue don’t think of themselves as such, it is a rare taxpayer who would call them a friend. However, Revenue do provide a wealth of information and they do play by the rules, though it might not always seem that way. (Of course they also write the rules and on the rare occasion when they do lose the rules are changed to ensure it won’t happen again, but that’s another issue.)

Online Services

Interacting with Revenue is ultimately beneficial for all taxpayers and it is to be encouraged. As a starting point we would recommend that all businesses register for the Revenue Online System “ROS” where they have not already done so. ROS is a very useful tool and amongst other things it allows you to pay and file returns instantly, check outstanding balances, check your tax clearance status and review your return history. You can also download employees tax credits and cut-offs straight from the system. Furthermore, online filing has the advantage of providing you with extended deadlines for your VAT, PAYE, Corporation Tax and Income Tax returns. Okay, the extensions are only a few days, but every little helps.
other benefits of the system are:

• Reduction in paper handling, photocopying and compliance costs
• More effective and efficient use of time
• More accurate processing of returns
• 24 hour, 365 day access to Revenue
• Calculation facilities to assist customers
• Instant acknowledgement of returns
• Faster processing of returns and payments

Registering for ROS is a three step process, which starts with logging on to the Revenue website www.revenue.ie . From there you can apply for registration. Step 1 is to apply for a ROS access number. Once you receive this Step 2 is to use the access number to apply for your digital certificate. Finally you retrieve your digital certificate and you’re ready to go. The whole process takes less than a week.

Customer Charter

Revenue consider all taxpayers to be customers and have a Customer Charter on their website. The charter sets out the mutual expectations Revenue has with its customers. These expectations are set out under the following headings:

• Consistency, Equity and Confidentiality
• Courtesy and Consideration
• Information and Assistance
• Presumption of Honesty
• Compliance Costs
• Complaints, Review and Appeal.

The customer service section on their website also sets out the standards that Revenue have set themselves, such as processing 80% of claims for repayment within 10 working days and 100% within 20 working days.

Finally the section also outlines the complaints procedure. If you’re not satisfied with the customer service or Revenue decision you have a right to appeal in certain circumstances. For anything other than a customer service complaint it is advisable to seek professional assistance first.

Revenue Audit Code of Practice

Revenue Audits are a necessary part of a self-assessment tax system. Revenue have an audit code of practice, issued on 1st October 2010, which sets out a framework to which they must comply when conducting their audits. This new code of practice replaces the 2002 version. In the event that you are chosen for a Revenue Audit, and most business can expect at least one audit at some time in their life cycle, it is advisable to review the code.

The audit code provides information on the selection process for an audit. It outlines Revenue’s “Risk Evaluation Analysis and Profiling – REAP” system. This system gathers and analyses information from all the various tax and third party returns to identify cases where they believe there is risk that the correct tax has not been paid.

Importantly the code also sets out the penalties that can be imposed by Revenue in an audit and how those penalties can be mitigated by making qualifying disclosures, cooperating with the Revenue during the audit etc.

There have two improvements on the previous code that deserve mentioning. Firstly there is greater leniency in cases where there is “no loss of revenue” to the exchequer. Previously these claims were only allowed within VAT groups, but now are opened to a wider review.

The second improvement is with the concept of “unjust enrichment”. This might happen if you pay too much VAT to Revenue because you accounted for it at the standard rate when you should have used lower rate. If you went back to Revenue and said you’d like the difference between the standard rate and the lower rate on those sales back they would argue that the customers paid the VAT, you just collected it off of them. As such to give it back to you would be “unjust enrichment” as you would not be giving it back to your customers. The counter argument is that the higher rate resulted in an increased cost of the product, which reduced demand, but this was hard to prove. In the past it was up to the taxpayer to prove that the refund would no result in their “unjust enrichment”. The rule has now changed so the onus is now on Revenue to prove that unjust enrichment would occur in order for them not to issue the refund. This might seem like a minor change, but essentially it is similar to the idea that the taxpayer is now innocent until proven guilty and not guilty until proved innocent as used to be the case.

Difficulty in Paying Taxes

Almost all businesses run into cashflow problems from time to time and it might be the case that there isn’t the money in the bank to meet a tax liability. Unfortunately ignoring the problem won’t make it go away and Revenue have become increasingly tough in chasing outstanding debts. The best advice is to tackle the problem head on. You are in a much stronger position if you go to Revenue explaining that there has been a temporary problem that you need their help to resolve rather than waiting for them to come knocking at the door.

Final Though

“Know your enemy and know yourself and you can fight a hundred battles without disaster” – Sun Tzu: The Art of War

Well, maybe not a hundred with Revenue, but you should still do better than most.

“The avoidance of taxes is the only intellectual pursuit that carries any reward” – John Maynard Keynes

Possibly the most fundamental and generic piece of tax advice is to invest in a pension. The reason for this is there are three tax advantages to a pension.

1. You get tax relief on the initial contribution to the pension
2. The pension fund and invest and grow tax free
3. On retirement you can receive a tax free lump sum

However as the benefits of a pension are so obvious Revenue have taken steps to limit the tax relief on contributions. As well as a maximum fund that you can have in a pension Revenue impose the following restrictions on a person contributing to their pension:

Net Relevant Earnings is currently limited to a maximum of €115,000. So a 45 year old sole trader earning €1,000,000 a year can only get tax relief on a pension contribution up to €28,750 (25% of €115,000.)

However, if you are a director of a trading company the company can provide you with an executive pension, where much larger contributions can be made and a better pension fund generated for retirement.

From a pension funding perspective incorporation is an obvious answer. Unfortunately not all businesses can incorporate as they are prohibited by law. For example, solicitors, barristers, dentists and auditors cannot incorporate.

A service company is a solution to this problem. Essentially what happens is a company is created to provide all the services that these business use that are not restricted from incorporation. For example, in the case of a solicitors’ practice that employs legal secretaries and admin staff, these services can be put into a service company which then charges the solicitors’ practice for the provision of these services, with a reasonable mark up. The administration duties of the individual solicitors in their capacity as business managers are also executed through the service company. They solicitors will be Company Directors and shareholders, usually in line with their partnership agreement. As employees of the company they will be entitled to qualify for an executive pension.

Providing for retirement and maintaining your standard of living in your old age should be high on the list of everyone’s priorities. You do not want to spend 40 years working hard to struggle in retirement. The following shows how making a €150,000 pension contribution as a sole-trader compares to that of an executive pension contribution made in a service company.

“The question isn't at what age I want to retire, it's at what income” ~George Foreman

The sooner you start to plan for your retirement the sooner you will have the option to retire. Of course you may not want to have an early retirement and want to keep working as long as you are able, but nevertheless it’s good to have the option.

There is a tax relief known as “retirement relief”, which has a great benefit for those who like to keep working in that to qualify you don’t even have to retire! Retirement relief entitles you to capital gains tax relief on the disposal of “qualifying assets”. The conditions to qualify for the relief are as follows:

• The disposal must be made by an individual (and not for example by a company).
• The individual must be 55 or over.
• The disposal must be of qualifying assets (e.g. business assets or family company shares).
• The qualifying assets must have been held for a minimum period immediately prior to the disposal – normally 10 years.
• When the disposal is of family company shares the individual must have been a working director for a minimum of 10 years up to the date of disposal, 5 years of which were on a full time basis.

You will note that the relief is available when you’re 55 years old, but you must have held the assets for 10 years. That means planning for retirement relief begins at 45.

Passing a Business to the Next Generation

Although the relief is called Retirement Relief you can remain actively involved in the business. Amongst other things this is a very useful tool for succession planning.

If you are disposing of the business assets to a child then there will be no Capital Gains Tax if the conditions are met irrespective of the value of the assets. It is important to be aware that there is a clawback on the relief if the child disposes of the assets within 6 years. This is an anti-avoidance measure taken by Revenue to ensure the relief isn’t abused.

The definition of “child” includes the child of a deceased child and a niece/nephew who has worked on a full time basis in the business for 5 years ending on the date of disposal.

Disposals to Third Parties

You may want to retire and sell your business assets or crystallise the value you’ve created in your business and try your hand at something new. The disposal of business assets to a third party will qualify for full relief up to a value of €750,000.

Where the proceeds are greater than €750,000 you may be entitled to marginal relief, which will limit your capital gains tax exposure.

The €750,000 is an individual limit, so if you and your spouse are working together in a business and own the qualifying assets 50:50 you will both qualify for the relief, meaning you could receive up to €1.5m tax free.

Financial Planning

A successful entrepreneur should have a clear vision, involving short, medium and long term financial planning. Retirement might seem a long way away but it is important not to lose sight of why you got into business in the first place.

There are significant and beneficial tax reliefs out there. You should ensure that you maximise your entitlements and position yourself correctly to avail of these benefits. Planning for your retirement is a key long term goal for everyone. As part of your overall personal tax plan you should ensure the correct and most beneficial business structure for retirement relief is in place. Due to the 10 year holding requirement this planning should start at age 45.

Final Word

Every case needs to be assessed on its own merits, but long term planning and foresight should reap benefits down the line. If you don’t have a long term plan in place it is worth taking the time to assess what your needs will be and how you are going to meet them. As noted elsewhere in this brochure a pension plan is the starting point for retirement planning, but the good ideas don’t end there. Only by having a clear vision of your requirements will you be able plan effectively to achieve your goals. Once the long term plan is in place it will need only occasional review. The best time to start planning for the future is now.