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The VAT package - are you ready for 2010? Back  
You may not be aware of it but some big changes to the VAT regime are due to take effect on 1 January 2010. While you don’t need to know all of the technical details of the changes, it is important that you are aware of the impact of the changes on your business - what does your business need to do to be compliant and more importantly, what is the cost of getting it wrong?
The VAT package contains a mixture of rule changes, some of which will help simplify business and some which will increase significantly the administrative and compliance burden. Understanding how these changes impact your business and how you will implement them successfully is now critical, given the 1 January 2010 deadline.

A change to the VAT accounting obligations of your business
Under the current system, (subject to certain exceptions) services are supplied for VAT purposes where the supplier is located. From 1 January 2010, for business supplies, the general rule is that VAT will be paid by the purchaser under the reverse charge mechanism, based on the country where the purchaser is located. From a financial services perspective, examples of the type of services where the VAT treatment will change will include administration services and leasing of means of transport assets. In some cases, these changes will be very significant, for example where services are currently received by a VAT exempt entity from outside of the EU and no VAT is accounted for. The implication in these cases, apart from the new compliance obligations, is that a new irrecoverable VAT cost will arise.

Your business will need to consider what cross border services are currently supplied/received in order to determine the impact of these new rules such as whether changes will be required to the business’ IT systems, VAT returns and invoicing process. And of course, any resultant change in the VAT treatment of services will also have pricing ramifications both in relation to contracts currently in place and any contracts which are yet to be negotiated.

Additional reporting requirements
Under the current VAT system, an Irish supplier which is supplying goods to business customers in other EU member states is required to submit a periodic statement (known as a VAT Information Exchange System (or “VIES”) return) to the Irish Revenue showing details of the value of goods sold to each EU customer in that period. This information is shared between Member States in order to combat fraud and seek to prevent entities from incorrectly availing of the zero rate.

Under the VAT Package, the requirement to submit a VIES return is being extended to services. Therefore, Irish suppliers which supply services to business customers in other EU jurisdictions will be required to submit quarterly VIES return detailing the value of services provided, the name of the customer and their VAT registration number. The draft legislation also suggests that “other particulars” may be required. Revenue have not yet indicated what these other particulars may be
.
As it is currently designed, can your reporting system prepare a summary of all cross border services supplied by your business in a given period showing the type and value of the services supplied as well as the name, VAT number and address of the recipient? If not, this is a change that your business will need to implement before the roll out of the new rules next January.

The cost of non compliance
The cost of non compliance with these measures could be very significant. Breaching the VAT package rules will trigger exposure to additional interest and penalties. With this brings more Revenue scrutiny taking time and vital resources away from the business. Couple this with damage to the business reputation/ customer relationships and extend the problem across multiple jurisdictions. Finally, a breakdown in the VAT compliance process could cause commercial difficulties with suppliers and customers, including non payment of invoices. Is this a cost your business can afford to pay?

Consultation process
On 6 April 2009 Revenue commenced a public consultation process in relation to the VAT Package. Interested parties had until 15 May 2009 to review the draft legislation proposed by Revenue and to revert with comments. This consultation process wont change the fundamental rules introduced by the VAT package but provided taxpayers with the opportunity to seek clarification on certain practical points and implementation issues (such as the point at which a continuous supply should be recorded on the VIES return and the implications of a service having a different VAT treatment in the Member State of the supplier from Member State of the recipient).

And the good news? - Simplified refund procedures
You may be familiar with the current 8th Directive VAT refund procedure for claiming VAT incurred in other EU Member States. The VAT package introduces a new system under which businesses will no longer have to file VAT refund claims in each Member State where they incur VAT. Instead they will submit the VAT reclaim to their own Member State’s tax authority. Their home country will then forward the VAT refund claims electronically to the Member States concerned. Under the new procedure, Member States must respond to a VAT refund claim within strict time limits and the failure to meet these time limits will result in interest being paid to the tax payer. The new system should therefore make it easier for businesses to submit cross border VAT refunds and also speed up the time in which they receive the refund claims.

There are, however, a few stings in the tail, in particular the fact that additional information must be provided on the VAT reclaim forms and there will be more consistent application of partial VAT recovery rules.

What does this mean for your business?
With the significant costs of non compliance to be taken into account it is important that your business considers the impact of the VAT package rules now. In view of the length of time which it can take to implement relatively straightforward systems changes, starting your preparation now is essential to being ready for 2010.

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