Ireland: Potential VAT compliance changes

Officials with Irish Revenue are reviewing potential changes to how businesses report value added tax (VAT), and depending on the outcome, there could be changes to the VAT compliance requirements.

This year, 2022, marks the 50th anniversary of the introduction of VAT in Ireland. While there have been many changes to the VAT system over the years, businesses have largely reported and paid VAT in the same way—by filing a periodic (usually bi-monthly) summary VAT return reporting sales and purchases, supplemented by certain statistical returns mainly affecting intra-EU transactions. The resulting VAT returns and supporting books and records can then be selected by Irish Revenue for review either shortly after filing or as part of an audit.

In recent years, a treat among tax authorities in other jurisdictions is for additional requirements as to how businesses record and report VAT. This has included requirements to maintain supporting data in a particular format, or to provide this supporting data to the tax authorities at the time of or shortly after the transaction, or to require invoices to be issued electronically (in some cases, with pre-clearance from the tax authority).

There are already multiple examples of these changes across the EU. However, as there is currently no agreed EU-wide approach, these digital reporting requirements vary in terms of the form and frequency of reporting; the type of taxpayers and transactions covered; the data set required; as well as the means used to communicate the information to the tax authorities. The lack of consistency between reporting requirements creates significant compliance challenges and costs for businesses operating cross borders or in multiple jurisdictions.

In Ireland, Revenue has not yet introduced new VAT reporting requirements but has initiated a review with a view to modernising VAT reporting. In addition, the European Commission is undertaking a study of VAT digital reporting requirements and is aiming to announce EU-wide legislative proposals by the end of 2022 (which would then need the unanimous approval of the EU Member States before taking effect).

Therefore, some expect the VAT compliance regime in Ireland would change, most likely within the second half of this decade. While it is unclear or uncertain what these changes could be, businesses can begin to think ahead to determine that their current VAT processes meet “best practices.” In addition, businesses with VAT registrations in other jurisdictions may already be affected by changes and need to determine that their current processes are compliant.

Digital VAT reporting involves a business being required to maintain and/or submit VAT data to the tax authorities (over and above the summary data included in a standard VAT return) in a prescribed digital format. There has been speculation that these new forms of VAT reporting could lead to the death of the VAT return—because more detailed data would be provided to the tax authorities so that a summary VAT return would no longer be required. Alternatively, it could lead to a situation when the tax authority pre-fills the VAT return for review by the business. However, the experience to date is that these reports are supplemental to business’s VAT returns rather than replacing them.

At a high level, VAT digital reporting regimes can broadly be broken down between those that require periodic reporting of transactional data at regular intervals and those that use continuous transaction controls whereby transactional data is submitted to the authorities before, during or shortly after the relevant transaction.

As it stands, 12 of the 27 EU Member States have introduced some form of digital VAT reporting in addition to their normal VAT returns, and nine EU Member States require periodic reporting, while three have opted for continuous controls. 

Periodic reporting requirements generally require data to be provided using VAT listings or “standard audit file for tax” (SAF-T).

• VAT listings have traditionally been the most common approach adopted (for example in the Czech Republic, Estonia, Croatia, Latvia, Slovakia, and Bulgaria). They are transactional level listings typically submitted together with VAT returns. Reportable transactions to include in VAT listings vary, based on the jurisdiction but typically include both sales and purchases for domestic and cross-border business-to-business (B2B) and business-to-government (B2G) transactions.
• Some EU Member States use a SAF-T system for periodic VAT reporting (including Poland, Portugal, and Lithuania). SAF-T is a specific type of report based on an OECD standard that can be tailored to national requirements. While the main features of SAF-T are similar to VAT listings, the scope of transactions covered tends to be broader, and data relevant to other taxes is also collected. Certain other EU Member States, such as France and Luxembourg, only require information to be submitted in a SAF-T format upon request—for example in the event of an audit.

Continuous reporting involves businesses reporting data to the tax authorities on a near-time or real-time basis. Examples of these systems exist in Hungary and Spain.

• The Hungarian real-time information reporting (RTIR) system applies to all businesses that are VAT registered in Hungary. It requires the reporting of information via the tax authority’s portal on a transaction-by-transaction basis, within 24 hours of a transaction being invoiced.
• Spain’s immediate electronic reporting system requires that details of domestic and intra-EU transactions (sales and purchases) regardless of their value are provided to the tax authorities within four working days. It applies to all B2B, B2G, and business-to-consumer (B2C) transactions.

Mandatory e-invoicing is another form of real-time reporting. It requires that invoices (or invoice information) are prepared in a particular machine-readable format and are transmitted to tax authorities prior to a transaction taking place, at the time it takes place or shortly thereafter. Depending on the system in place, businesses may be able to send the e-invoice directly to their customers or they may require pre-clearance from the tax authority before doing so. Italy has had mandatory e-invoicing for certain domestic transactions since 2019 and will extend to this to certain cross-border transactions in July 2022. The French government announced plans to introduce mandatory e-invoicing for established businesses in respect of domestic B2B and B2G transactions between 2023 - 2025 while Bulgaria, Croatia, Hungary, Poland, Spain and Slovakia have also indicated an intention to introduce it.

“Making tax digital” (MTD) in the UK is a further example of enhanced digital reporting requirements for VAT. Under this regime, businesses are required to maintain a robust electronic audit trail of digital links from their original VAT records (e.g., accounts payable and accounts receivable) right through to submission of summary data to HM Revenue & Customs (HMRC) as part of the VAT return process. Although no additional data is submitted to HMRC under the MTD requirements, the digital journey of VAT data in a business will no doubt feature as part of any HMRC interventions or audits.

The currently fragmented nature of digital reporting requirements across the EU (as well as outside the EU) poses a significant challenge for businesses. The European Commission initiated a review of the various types of VAT digital reporting requirements and is scheduled to present a legislative proposal for EU-wide reform by the end of 2022. Any such proposal would then require the unanimous approval of the 27 EU Member States as well as sufficient lead in time for businesses to adapt, meaning that any harmonised changes are likely to be a number of years away.

The options under consideration by the EC include the development of a common EU digital reporting standard for all transactions; the development of a common standard for reporting intra-EU transactions only; and the introduction of a requirement for taxpayers to record transactional data in a pre-determined format (which could be accessed by the tax authorities on request). Comments have been requested as regards the design and scope of any new reporting standard to be introduced.

Whereas countries have already incurred significant costs in developing and implementing their own transaction based reporting systems, they may be less willing to agree to a new EU-wide reporting standard for domestic transactions (if different to the one they use). These countries may, however, be willing to agree a new common reporting requirement for intra-EU transactions to replace the current VIES system. As with any proposals for changes at an EU level, achieving consensus on a way forward will be a challenge.

It is not possible at this stage to predict the timing or impact of any potential change to VAT compliance in Ireland. However, ultimately, any change would likely involve businesses recording and (potentially) reporting data in a structured and digitised manner to support their VAT figures. As there are already detailed requirements to maintain books and records for VAT purposes, in many cases, businesses may already have the foundations in place to be ready for new VAT reporting requirements.

Read a January 2022 report prepared by the KPMG member firm in Ireland