VAT Snapshot Q1 2024

In this publication, we discuss the risks for businesses in relying solely on Revenue guidance in determining the VAT treatment applicable to supplies of goods and services following a recent Tax Appeal Commission Determination.

We outline the findings of the Court of Justice of the European Union (“CJEU”) in Global Ink Trade (C-537/22). This relates to VAT recovery on purchase invoices and the extent to which tax authorities can place reliance on taxpayers to carry out appropriate due diligence of counterparties.

We also provide an update on recent developments with Irish Revenue in relation to new and updated VAT e-Briefs and the reduction of interest on deferred tax payments under the Warehoused Debt Scheme. 

Finally, we briefly cover the key VAT considerations associated with the Deposit Return Scheme which was recently introduced in Ireland.

Please reach out to any of the contacts referenced or your usual EY contacts to discuss these items in more detail.

1. Tax Appeal Commission Determination - 12TAC2024 – VAT rate applicable

Issue

A recent Irish Tax Appeal Commission Determination (12TAC2024) highlighted the risks associated with placing significant reliance on non-statutory published guidance from Revenue on the VAT rate applicable to supplies of goods and services.

Relevance

The taxpayer’s business activities consisted primarily of the retail sale on a take-away basis of juices, milkshakes and frozen yoghurt-based products (smoothies). The taxpayer charged the standard rate of VAT on its juice based products and the zero rate of VAT on its milkshake and smoothie products.

In 2014, the taxpayer sought a refund of VAT from Irish Revenue. This VAT refund arose as the taxpayer was applying the zero rate of VAT to the sale of its milkshake and smoothie products. Revenue queried the taxpayer’s eligibility to apply the zero rate of VAT to those products.

The taxpayer’s then tax advisor explained that the VAT zero-rate applied to the sale of a dairy smoothie on the basis that it should be regarded as falling within the meaning of ‘Milk and preparations and extracts derived from milk’ as provided for in VAT legislation, and that this was supported by an entry in the VAT rates section on the Revenue website (Revenue’s VAT Rates Database) headed “Drink, Smoothies (Take-away)”, which included remarks that this was a “general term used to describe a range of blended fruit drinks. Standard rate normally applies. However, if it can verifiably demonstrate that more than 50% of the volume consists of milk or yoghurt, then zero rate applies.”.

Revenue disagreed with the tax advisor’s analysis and concluded that the sale of milkshake and smoothie products, which the taxpayer had been treating as VAT zero-rated supplies were more properly liable to VAT at the standard rate (currently 23%). The taxpayer lodged an appeal of Revenue’s decision regarding the applicable VAT rate, arguing that the milk derived content of the smoothies was 55%.

It was accepted by the parties that the “50% volume” test was a concession operated by Revenue and as such, did not have legislative force. In this regard, Revenue provided on overview of its VAT Rates Database which states: “the VAT treatment indicated in the VAT rates database is based on current practice. The information is updated regularly and may change, depending on revised practice. Do not view it as a statement of law or as a substitute for consulting the legislation. The Value-Added Tax Consolidation Act 2010 contains the legislation governing the VAT rating of goods and services.”

In this regard, it was established that the functions of an Appeal Commissioner are confined to those provided under the Taxation Acts, such that the Commissioner is unable to consider concessions in adjudicating upon an appeal (as those concessions are not set out under the Taxation Acts) and in place must base findings on the statutory provisions contained in the relevant Taxation Act.

Therefore, focusing solely on applicable VAT legislation and the VAT zero-rating available for ‘Milk and preparations and extracts derived from milk‘, the Commissioner concluded that the smoothie product should have been subject to standard rate Irish VAT as (1) it was evident that the taxpayer’s smoothie drink was not “milk”, and (2) while the taxpayer’s smoothie drink originated from milk and contained an element of milk within it, the Commissioner did not consider it to be a “preparation and extract derived from milk”.

The above case highlights the risks associated with placing significant reliance on Revenue’s VAT rate database in determining the VAT rate applicable to supplies of goods and services. Ultimately, the VAT treatment applicable to supplies of goods and services should be based on applicable VAT law and settled case law on the interpretation of such legislative provisions.

How EY can help

EY Indirect Tax specialists can advise taxpayers on the VAT treatment applicable to its supplies of goods and services and provide recommendations on best practice processes and procedures for determining the VAT rate applicable to new product/ services offerings.

2. EU judgment in Global Ink Trade (C-537/22) regarding evidence required to support VAT recovery on purchase invoices

Issue

On 11 January 2024 the CJEU released its decision in respect of a Hungarian tax authority refusal of the right to deduct VAT on the basis that it required, in connection with purchase invoices, evidence additional to that stipulated by EU law and, in the absence of such evidence, denied a taxpayer’s claim for input VAT deduction.

Relevance

This case demonstrates the importance of appropriate due diligence and maintenance of records to support checks undertaken by companies in relation to its suppliers and customers. It is also a useful reminder regarding the extent to which tax authorities can apply an argument of “knew or should have known” in relation to fraud, and that they cannot generally require a taxable person, who wishes to exercise the right to deduct VAT, to verify that the issuer of the invoice has fulfilled its obligations to declare and pay VAT.

As a brief background, Global Ink Trade Kft (“Global Ink”) is a wholesale trade intermediary and, during the period from July 2012 to June 2013, Global Ink purchased office supplies and ink cartridges from Office Builder Kft. (“Office Builder”), in respect of which it sought to reclaim VAT. The Hungarian tax authority discovered that Office Builder had not engaged in any real economic activity, had not fulfilled its tax obligations, and the director of Office Builder denied issuing invoices to Global Ink.

Despite witness testimony confirming delivery of the items, the Hungarian tax authority determined that Global Ink had not acted with appropriate due diligence in respect of its suppliers and denied Global Ink the right to deduct VAT on the invoices received, accusing them of passive tax evasion.

Global Ink, in turn, argued that the Hungarian tax authority failed to provide evidence and bear the burden of proof that its invoices were unreliable, unilaterally assessed the available evidence to Global Ink’s detriment and rejected its offers to submit evidence.

In summary, the CJEU held that:

• The principle of the primacy of EU law must be interpreted as requiring the national court to follow the interpretation of EU law provided by the CJEU, even if it means deviating from previous national court decisions.
  
  
• The right to deduct VAT relating to the acquisition of goods can be denied by a tax authority based on lack of care by the taxpayer (Global Ink in this instance), as long as the tax administration follows certain conditions and does not burden the taxpayer excessively.
  
  
• Considering the question of the refusal of the right to deduct VAT to a taxable person in the context of VAT fraud, EU law must be interpreted as meaning that it is for that tax authority, first, to characterise precisely the constituent elements of the fraud and to prove the fraudulent conduct and, secondly, to establish that the taxable person actively participated in that fraud or that he knew or ought to have known that the acquisition of goods or services was involved in that fraud.
  

How EY can help

EY's Indirect Tax specialists can assist any business denied VAT recovery in similar circumstances and consider the merits of challenging the decision.

3. Irish Revenue Developments

Issue

Revenue have published several e-Briefs in Q1 of 2024, providing helpful guidance on the VAT treatment of certain activities (noting our comments at 1. above regarding the level of reliance that a taxpayer can place on Revenue guidance given that it is non-statutory and is based on current practice which is subject to change).

There has also been a development in relation to the Debt Warehousing Scheme regarding the application of interest on deferred VAT (and other tax) payments. 

Relevance

Irish Revenue published new and updated e-Briefs providing guidance to taxpayers on several topical VAT issues, including in relation to the following:

1. VAT Return of Trading Details - To provide assistance to filers submitting the annual VAT Return of Trading Details (“RTD”). Guidance is included about the sections of the RTD, amending an RTD, compliance measures and to address specific queries raised about RTD filing.
   
   
2. Negotiation services – To provide guidance on the VAT treatment of negotiation services in respect of financial services and the scope of VAT exemption.
   
   
3. Construction services – To provide guidance on the VAT treatment of construction services, focusing on applicable VAT rates and the interaction of VAT with Relevant Contracts Tax (“RCT”). This replaced a previous e-Brief on a similar topic - Reverse Charge Construction.
   
   
4. Fixtures and fittings – To provide guidance on the VAT treatment of, and VAT rate applicable to, fixtures and fittings. The guidance includes a helpful listing of the types of movable goods that would be regarded as a fixture versus a fitting for VAT purposes.
   
   
5. Recovery of VAT on Motor Vehicles – To provide guidance on the entitlement to VAT recovery on motor vehicles. The guidance has been updated to provide further information on vehicle conversions for Vehicle Registrations Tax (“VRT”) purposes and the impact this could have on VAT recovery.
   

In addition, there has been a development in relation to the Debt Warehousing Scheme which was introduced in Ireland to assist taxpayers who found themselves in a difficult financial position because of the Covid-19 pandemic. The scheme permitted taxpayers to defer the payment of certain taxes (VAT, PAYE, and income tax) without incurring interest until 30 April 2024. However, on 5 February 2024, the Minister for Finance announced that the interest rate applicable to the Debt Warehousing Scheme will be reduced to 0%. Revenue has confirmed that it will operate the reduced interest rate on an administrative basis pending the legislative change. Revenue will also issue refunds of any interest at 3% already paid by businesses on the Debt Warehousing Scheme.

Businesses availing of the Debt Warehousing Scheme have until 1 May 2024 to either pay their warehoused debt in full, or engage with Revenue on addressing the debt, including arrangements for a Phased Payment Arrangement.

How EY can help

EY can support businesses with understanding the impact of any of the Revenue e-Briefs on their operations and assessing current operations considering recent updates. EY can also assist taxpayers to ascertain whether they have outstanding liabilities under the Debt Warehousing Scheme and assist taxpayers in any interactions with Revenue on this topic (e.g. in relation to agreeing a Phased Payment Arrangement).

4. Deposit Return Scheme

Issue

The Deposit Return Scheme is an initiative to support the recycling of empty drinks containers. The Deposit Return Scheme is operational since 1 February 2024 and, under the Scheme, anyone who buys a drink in a plastic bottle or a can will be charged a small deposit for the container. Customers are entitled to a refund of the deposit when they return the empty container to a retailer or other collection point to be recycled.

Relevance

A deposit is charged under the Deposit Return Scheme at each stage of the supply chain when the drink product is supplied. There is no VAT on the deposit when the drink product is supplied, which means that businesses in a supply chain supplying drink products in a plastic bottle or a can (i.e. producers, wholesalers and retailers) will not have to account for VAT on the deposit they charge. This is on the basis that the taxable amount for VAT purposes in respect of the deposit paid is nil when the drink product is moving through the supply chain. 

A VAT liability only arises on the deposits paid under the Deposit Return Scheme when empty plastic bottles or cans are not returned. In this case, the operator of the scheme (Re-Turn) will be the party who is liable the account for the VAT due on the deposits.

How EY can help

EY can assist businesses engaged in the supply of drink products in a plastic bottle or a can to understand their obligations in relation to VAT under the Deposit Return Scheme and assist with any practical considerations associated with the scheme (e.g. regarding the VAT treatment of handling fees, etc.).