VAT rate support for ESG and climate-related incentives. Medicines and clothing VAT rate guidance. E-invoicing and closing the VAT gap - business needs to be prepared.
The Revenue Commissioners have recently published E-briefs outlining the VAT treatment for the supply and installation of solar panels.
In addition, they have revisited and published up-to-date guidance notes on the applicable VAT treatment and rates that apply to clothing, as well as human and animal medicines.
The reported EU VAT Gap is estimated at plus €92bn in VAT revenues in 2020 as reported by the EU Commission.
VAT rate reduction in the supply and installation of solar panels
Continuing with the aligned commitment to Climate and ESG objectives adopted by the Irish Government and other EU Member States, the Revenue Commissioners announced the reduction of the VAT rate in the supply and installation of solar panels.
The supply of solar panels is subject to the standard rate of VAT. However, the reduced or zero rate may apply when solar panels are supplied and installed as part of a supply and install contract.
From 1 May 2023, the zero rate will apply to the supply and installation of solar panels on or adjacent to immovable goods, being private dwellings. Previously, the reduced rate was used where the solar panels did not exceed two-thirds of the total value of the supply.
Separate and differing VAT treatment from above applies to buildings not considered private dwellings, and these are outlined in the Revenue’s published E-Brief No. 105/23
Recent eBrief release on the VAT treatment and rates that apply to clothing, as well as human and animal medicines.
VAT treatment of clothing
The published guidance revisits in detail the VAT treatment of clothing for adults and children, including the conditions to be satisfied for the zero VAT rating for children’s clothing. It also outlines the differentiation of VAT rates that can apply to children’s clothing accessories, children’s fur clothing, baby clothing, and other items.
It confirms that the standard rate of VAT, which is currently 23%, applies to the supply and importation of adult clothing, sportswear, replica uniforms, and clothing hire. Repair of clothing is taxable at the reduced rate, currently 13.5%.
VAT treatment of human medicines
The updated guidance sets out the VAT treatment of human medicines.
The sophistication and delivery systems of healthcare administration and prescription of human medicines have developed rapidly.
Human medicines have evolved from oral consumption to targeted and bespoke delivery of medicines to cure and prevent illness and ailments.
It highlights that the standard rate of VAT applies unless medicines are sold for human oral consumption or for specific replacement therapies for human non-oral consumption.
In the case of medicines sold for human oral consumption or for certain replacement therapies for human non-oral consumption, the zero VAT rate applies.
Concerning incidental costs of the supply of medicines, such as dispensing and prescription fees, the VAT treatment of these costs follows that of the main supply, as outlined above.
VAT treatment of animal medicines
The updated guidance outlines that the supply of oral medicine for animals is zero-rated for VAT purposes. However, where such oral medicines are for domestic pets, these sales are excluded from zero VAT treatment.
The supply of oral medicine that is packaged, sold or designated for dogs, cats, cage birds, or domestic pets is standard-rated for VAT purposes. The guidance references examples of what is categorised as household pets, including fish, pet reptiles, rabbits and hamsters, but it also indicates that this list is not exhaustive, so due care needs to be adopted by sellers acting as taxable persons.
The supply of non-oral medicine for all animals, including domestic pets, is standard-rated for VAT purposes.
As reported by the European Commission in their VAT Gap 2022 report, “The VAT Gap is the difference between the expected VAT revenue, or ‘VAT Total Tax Liability' (VTTL), and the amount collected, in absolute or percentage terms. The VTTL is an estimated amount of VAT that is theoretically collectable based on VAT legislation and ancillary regulations. Therefore, the 2022 VAT Gap results are estimates and should not be considered actual measurements of VAT revenues foregone.
In the context of the 2020 EU-wide figures, the amount of €93 billion represents revenues lost to:
VAT fraud and evasion
VAT avoidance and optimisation practices
bankruptcies and financial insolvencies
miscalculations and administrative errors.
While some revenue losses are impossible to avoid, decisive action and targeted policy responses could make a real difference, particularly when it comes to non-compliance.”
While there has been a reported reduction €30bn in the VAT Gap in comparison to the 2019 figures, which is demonstrative of the positive impact of increased compliance owing to steps taken by EU member tax administrations and VAT legislative changes such as the 2020 EU reform measures. This includes the VAT 4 quick fix and the enhanced cooperation and information sharing tool under Eurofisc between EU Member States- additional steps are being adopted to improve VAT compliance and reduce the VAT Gap.
Part of the activities of Eurofisc includes carrying out risk analysis and actively using the Transaction Network Analysis (TNA). This facilitates the rapid exchange of processed VAT data arising from cross-border trade to facilitate the identification of cross-border VAT fraud.
With the new rules for the VAT reporting associated with online shopping, which was introduced in 2021, another data analytic tool is being developed and made available to Eurofisc in 2024, which will allow for the tracking of international e-commerce-related payments to identify e-commerce fraud.
Tax Administrations globally and within Europe are rapidly adopting mandatory B2B e-invoicing regulations that collate tax data at the point of sale and billing. This adoption of live reporting of transactional sales activity on a real-time basis further enhances and makes available data that can be subject to analytic data scrutiny to improve VAT reporting compliance and identify tax revenue loss. This leads to more efficient use of tax audit resources with a targeted focus on areas of fiscal loss risk.
For clients and their tax advisors, this enhanced investment in data analytic tools for forensic tax audit and compliance purposes presents challenges and the need for investment to maintain & adopt an adequate VAT and tax reporting framework.
Tax and finance functions within the business will need to work together with competent advisors to develop and adopt business activity reports that meet domestic and cross-border VAT and tax reporting rules.
Similar to past challenges, such as adapting to changes in the place of supply rule reporting and Brexit, timely resource investment is needed to maintain a competitive business edge and meet enhanced corporate governance in respect of tax and VAT compliance.
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars VAT team below:
Mazars was delighted to participate in the 2023 annual tax advisors survey with the Business Plus, which was published in November. Frank Green, Head of Tax, responds to editor Nick Mulcahy’s questions.