TAX BITES briefing Feb 2013

www.bdo.ie

risk areas in
Revenue Audits
PAYE Matters in Revenue Audits

VAT Matters in Revenue Audits

THIS PAGE

PAYE Matters in Revenue Audits

he BDO Tax Department have noticed a marked increase in

Revenue audit activity over the last 12 months. This activity is not
specific to one particular sector or type of taxpayer, yet there are
a number of re-occurring issues that are giving rise to tax exposures. The
purpose of this Tax Bites Briefing is to bring to your attention the most
common areas of non-compliance under the Payroll Tax and VAT tax
heads that we are coming across.
At the commencement of the visit the Revenue will request background
information on the business, the number of employees, the shareholders,
the directors the activity of the business, the number of bank accounts
and so on. They will also ask if there is a voluntary disclosure to be made
before the review of the books and records takes place. It is essential that
a review is undertaken before the audit commences otherwise the benefits
of non publication and reduced penalties will not be available.
One of the issues that arises is that of regrossing in the event of non
operation or incorrect operation of payroll taxes. As the company is
now settling a tax liability on behalf of a director/employee, the tax
understated is regarded as net pay and is regrossed.
Example
A company omits to subject a club subscription paid for an employee
of 1,000 to Benefit in Kind [BIK] and the employee pays tax at the
marginal rate of 52% (including PRSI and USC)
BIK liability = 1000 X 52% 520
Net pay
= 520
Tax regrossed =
520 X 1/(1-52%) X 52% 563
Total cost
1083
Employers PRSI X 10.75%
116
Cost before interest and penalties
1199
Therefore the tax settlement cost of non-operation of the BIK is more than
the benefit itself.
1. Revenue will look for copies of directors/employee credit card
statements and review expenses to check that they are business related.
Should they find expenses that have been expensed in the companies
accounts that are not business related and are personal expenses, they
will insist that these are regrossed.

2. Where employees provide their own cars and submit mileage claims for
business travel Revenue will check that the mileage rates 0.2846 per
km above 6,437 kms and subsistence rates are in line with civil service
rates (See Revenue leaflet, Employees Subsistence Expenses - IT54). If
the rates used exceed those limits they will deem the excess to be net
pay and seek tax on the excess on a regrossed basis.
3. Where company cars are provided users are required to keep detailed
records of business and private mileage travelled. If Revenue find that
the mileage records are inadequate they may seek to reclassify the
mileage to a lower band for BIK and seek tax on any understated BIK.
4. The status of consultants/agents involved in the business will
be considered and whether they are performing their roles in an
independent manner. If they are not then employer PRSI may become a
cost for the company even though the consultant is tax compliant.
Revenue will enquire if any wages and salary payments are made in cash
and what controls exits that payroll tax is remitted. How cleaners are
paid is often a common question.
5. Revenue will seek to ensure that directors fees have been subject to
payroll taxes even if paid to non-residents or to companies.
6. Revenue will normally request a reconciliation of payroll cost per the
accounts to the P35 submitted. This may show up accrued bonuses
at year end and these need to have been paid within six months of
the year end otherwise there may be an interest exposure. It may also
show up employees working totally abroad and being paid on a foreign

TAX BITES briefing

payroll. In such cases PAYE exclusion orders should be sought.

7. Revenue will seek to determine that there is a proper system of
reimbursing vouched expenses. This can be an area of weakness in
many businesses. Where the controls are inadequate or there is a lack
of back up receipts, this can lead to a net pay issue. Similarly if round
sum expenses are paid this will be deemed net pay.
8. If ex gratia payments are made in excess of the relevant allowable limit,
the excess will be considered net pay and tax will be sought on a regrossed basis.
9. Revenue will check the operation of BIK on health insurance premiums
paid by the company for employees against the 20% withholding tax
remittance made by the company.
Where the company has made interest free loans to employees, the
calculation of interest at 13.5% will be reviewed. If these loans are
made to shareholder-directors the withholding tax to be remitted will
be checked.
10. The status of proprietary directors for PRSI purposes will also be
considered.
11. Revenue have considered that subsistence expenses within 3km from
the companys head office is not subsistence and is entertainment
expenditure.
12. In a recent case Revenue contended that company death in service
policies were liable to BIK. However we agreed with Revenue that this
was not correct.
13. Finally payroll taxes apply to share incentive schemes and advices
should be sought on these.
SUMMARY
The following are areas requiring consideration:
Potential exposures to net pay
Credit card statements - personal expenses and inadequate
controls
Incorrect mileage rates
Incorrect subsistence rates
Inadequate mileage records
Non or incorrect operation of benefit in kinds:
Health insurance expenses
Company cars
Subscriptions
Interest free loans
Round sum expenses
Casual wages
Status of contractors
E x gratia payments
Share remuneration

risk areas in Revenue Audits

VAT Matters in Revenue Audits

AT would be considered a high risk tax as it applies to transactions

rather than profits. Due to the complexity of VAT, businesses may
be incorrectly accounting for VAT which can result in higher VAT
liabilities together with potential interest and penalties being accrued.
The following would appear to be the most common VAT errors that arise
during the course of a Revenue Audit:
1. VAT Rates
It is important for a business to ensure the correct VAT rate is being
charged on its supplies of goods/services.
The Budget can increase or decrease VAT rates or introduce new rates so it
is important to ensure the correct VAT rate is being charged when issuing
an invoice.
It is also important to ensure that when issuing a credit note that the VAT
rate applied is that in force at the time the original invoice was issued.
Composite and multiple supplies can be a complex area and due care
should be taken when invoicing for such supplies.
A composite supply comprises of a principal element to which other
elements are ancillary. A single VAT rate applies to the entire supply at the
rate applicable to the principal supply.
A multiple supply on the other hand is where two or more supplies are
combined as one for a total consideration, and each supply can exist
independently of each other. VAT is applied to each independent supply at
the appropriate VAT rate.
Where uncertainty exists regarding the appropriate VAT rate to be applied,
third party advice should be obtained or a determination sought from the
Revenue.
2. Time of Supply
For traders operating on the invoice basis of accounting VAT must be
accounted for (paid to Revenue) based on the date of issue of the invoice
and not the date the customer pays for the supply.
However, under the invoice basis of accounting for VAT, if a customer pays
for services/goods in advance e.g. a deposit, the supplier must raise an

invoice and account for VAT based on the date the funds were received.
For traders on the cash/receipts basis VAT must be accounted for when the
payment is received.
In order to account for VAT on the cash/receipts basis a trader must fulfil
either of the following criteria:
Annual turnover does not exceed 1,000,000 (1,250,000 with effect
from 1st May 2013), or
At least 90% of supplies are to customers who are not registered for VAT,
or are not entitled to claim a full deduction of the VAT.
Where a trader does not meet the criteria above he must move to the
invoice basis of accounting. Failure to do so will result in a potential
liability based on debtors outstanding at the time of the audit.
3. Record Keeping/Invoicing
Tax Payers are obliged to retain records for a period of 6 years from the
date of the latest transaction to which the record relates or in the case of
property transactions records must be retained for the duration that the
taxable interest is held in such goods plus a further 6 years.
It is important that input VAT is only reclaimed on receipt of a valid VAT
invoice. A valid VAT invoice must include the date of issue, a sequential
number, the suppliers VAT number, details of the service provided, the
name and address of the supplier and customer, invoice amount in euro
and the VAT rate applicable. Failure to produce a valid VAT invoice will lead
to the disallowance of an input credit.
4. International Supplies of Goods & Services
Goods
When supplying goods to customers in other EU Member States the
supply can be zero rated where the supplier obtains the customers VAT
number and retains proof that the goods were transported outside the
State. The invoice should denote that the recipient is required to selfaccount for VAT.
Where a customer receives goods from a supplier in another EU Member
State there is an obligation on the recipient of those goods to account for

TAX BITES briefing

the VAT on the reverse charge basis. This can sometimes be overlooked
as the invoice itself does not show any VAT and unless proper checks
and controls are put in place the reverse charge procedure may not be
exercised giving rise to under declared VAT in instances where the recipient
is not entitled to a full VAT deduction together with incorrect VAT returns
being filed.
Intrastat returns are required to be filed in instances where the total
value of goods supplied to customers in other EU Member States during
the calendar year exceeds 635,000 (Dispatches Intrastat) and similarly,
when the value of goods received from suppliers in other Member States
exceeds 191,000 during the calendar year a monthly Arrivals Intrastat
Returns must be filed with Revenue.
On occasion, the obligation to file Intrastat returns is missed where
the figures relating to dispatches and arrivals are not entered into the
appropriate E1 and E2 boxes on the VAT return.
Services
New VAT rules relating to the place of supply of services were introduced
from 1 January 2010. Care must be taken when providing services to
customers in other EU countries to establish if supplying to a business
customer or a private customer.
If supplying to a business customer the supply is generally zero rated and
the customer is obliged to self-account for VAT on the reverse charge
basis. In order to zero rate the supply you must ensure that the customer is
in business and this can be substantiated by obtaining the VAT registration
number of the customer, where possible. The invoice must include a
narrative clearly stating that the customer may be obliged to account for
the VAT arising.
Supplies to private individuals in other EU countries are generally liable to
Irish VAT, the supply is considered to have taken place in Ireland.
All supplies (goods & services) made to EU VAT registered customers must
be reported in the quarterly/monthly VIES return regardless of the value of
the supplies made.

5. Bad Debt Relief

Bad debt relief may be claimed where a debt is considered bad and will
not be recovered.
In order to claim bad debt relief the following criteria must be met:
The trader has taken all reasonable steps to recover the bad debt.
The bad debt is allowable as a deduction in calculating the tax
adjusted profit.
The bad debt has been written off in the traders accounts.
The obligation to keep records relating to the bad debt has been
fulfilled.
The trader is not connected to the person owing the bad debt.
An issue can arise during a Revenue Audit where VAT bad debt relief is
claimed too early. In addition where VAT bad debt relief is claimed and
some/all of the bad debt is subsequently recovered there is an obligation
to make an adjustment in the related VAT return in respect of the
recovered debt.
6. Non-deductible items
There are certain items that are specifically provided for in VAT legislation
where VAT recovery is prohibited. Such items include food, drink, petrol,
accommodation, and entertainment. Therefore the VAT incurred on
expenditure in relation to non-deductible items is a cost to the business.
During the course of an audit the Revenue will examine the business
records to ensure that VAT has not been recovered on such items. Where
VAT has been reclaimed the Revenue will seek a refund of this VAT
together with potential interest and penalties.
7. VAT Accruals
During the course of an audit the Revenue may request a copy of the
companys end of year accounts.
The accounts may include an accrual for VAT which should equate to
the current VAT liability. For example if the companys accounting year
end is the 31st December and VAT returns are filed on a bi-monthly basis
then the VAT accrual should tie in with the VAT liability in the November/
December VAT return. Where the VAT accrual is in excess of the VAT
liability this would indicate that there is an outstanding VAT liability due to
the Revenue.