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A reminder for all businesses involved in both VAT exempt and VAT taxable activities with a 31 December year end that your annual VAT recovery rate adjustment for 2019 should, at the latest, be included in the May/June 2020 VAT return, which will be due by 23 July 2020.

Typically businesses which carry out both VAT taxable and VAT exempt activities are entitled to full recovery on costs directly attributable to their VATable activities, no VAT recovery on costs directly attributable to their VAT exempt activities and partial VAT recovery on general overhead costs which relate to both VAT taxable and VAT exempt activities. As a basic example, a business with 80% VATable activities and 20% exempt activities will be entitled to recover 80% of the VAT incurred on its general overhead costs.

For those businesses which applied an “estimated” VAT recovery rate throughout 2019 (usually the prior year rate), the actual VAT recovery rate for 2019 must be calculated and any resultant adjustment arising included in the May/ June 2020 VAT return. Where the actual VAT recovery rate for 2019 is less than an estimated rate used throughout 2019 failure to submit a VAT adjustment by 23 July of this year will result in an exposure, including interest and penalties.

It is also possible some businesses may be under claiming input VAT through the application of an inappropriate partial VAT recovery rate and such businesses may be entitled to a refund of VAT under recovered.

Common areas of VAT under recovery involve the inclusion of VAT exempt income  in a partial VAT recovery rate which does not  appropriately reflect the usage of costs in a business or the failure to treat VAT exempt income earned from non-EU customers as providing a right to recovery of VAT on related costs.

This review exercise is not only applicable to those in the financial services sector (including those involved in banking, insurance/reinsurance, investment funds, pension funds) but also applies to those involved in a mix of VATable and exempt business activities, such as medical / healthcare, property letting, educational activities, aircraft leasing, local authorities, etc.

A number of different types of methodologies have traditionally being used by businesses to calculate a partial general overhead VAT recovery rate including, turnover, staff usage, floor area (for property) etc. However, changes introduced in 2016 make the turnover basis the standard basis for calculating a partial general overhead VAT recovery rate and a turnover based methodology must be applied to calculate a partial general overhead VAT recovery rate unless the turnover basis does not correctly reflect the use of overhead costs by the business or does not have due regard to the range of activities and supplies undertaken by the business.

Calculation

Consideration should be given by businesses to reviewing the approach applied to calculate their VAT recovery entitlements in particular where the methodology applied has not been reviewed for a significant period of time or where there have been changes in business activities, in order to ensure the methodology currently applied remains appropriate or where a business is looking at partial VAT recovery for the first time. 

KPMG have assisted many clients over the years achieve very significant immediate and long-term savings, as a result of carrying out annual VAT recovery rate methodology reviews. It is particularly important in the current environment, where businesses may be experiencing cash-flow difficulties, to ensure that businesses are optimising their VAT recovery position.

In addition, if you have recently commenced activities or are considering your VAT recovery position for the first time, KPMG can advise on how best to approach this.

The following is an overview of the typical KPMG approach to reviewing or calculating a VAT recovery rate:

High level review
1
Review current methodology
6
Advise on appropriate adjustment
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Detailed review
2
Review/test data
3
Assess current business model
4
Consider and design alternatives
5
Calculate actual rates
8
Document the processes & controls
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Liaise with Revenue
7
Liaise with Revenue to agree the methodology

Get in touch

If you would like to discuss the annual VAT adjustment or structuring a VAT recovery methodology please contact Glenn Reynolds, David DuffyCaitriona Shanahan, Keith Loughman or your usual KPMG Tax adviser. 

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