Financial Services Ireland

Annual Adjustment of VAT recovery rate

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Annual Adjustment of VAT recovery rate

If your business is only entitled to deduct part of the VAT it incurs on costs, and you have a 31 December accounting year end, it’s time to carry out the mandatory annual VAT recovery rate review for 2017. The adjustment should be included in the May/June 2018 VAT return, which must be filed by 23 July, otherwise statutory interest applies.

What is a VAT Recovery Rate?
A VAT Recovery Rate is the portion of VAT incurred that an entity is entitled to deduct. Different entities are entitled to deduct different amounts of VAT depending on the activities they are engaged in.

► VAT Taxable Activities – A business involved exclusively in VAT taxable activities is entitled to recover all VAT it incurs, i.e. it can recover VAT incurred on 100% of its costs (except for VAT incurred on a few specifically disallowed items). This entity does not usually need to carry out an annual VAT recovery
rate adjustment review.

► VAT Exempt Activities – A business involved exclusively in VAT exempt activities cannot deduct any VAT it incurs unless it provides services to non-EU customers or earns income from non-EU investment assets. It can deduct all VAT incurred which directly relates to its non-EU income/assets but only a
portion of VAT incurred on costs used for both its EU and non-EU activities.

► Both VAT Taxable and VAT Exempt Activities – A business involved in both VAT taxable and VAT exempt activities will be entitled to full VAT recovery on costs directly attributable to its taxable activities.  It will not have any VAT recovery entitlement on costs directly attributable to its exempt activities
unless it has non-EU income/assets.  This entity will be entitled to partial VAT recovery on costs which are used for both its taxable and exempt activities (known as general overheads).

There are a number of different methods an entity can use to calculate its VAT recovery rate; the most common method used is turnover but other commonly used methods include floor area, staff numbers etc. Where turnover is used, a business involved in both taxable and exempt activities will calculate its turnover from taxable activities as a percentage of its total turnover. The resulting percentage is the entity’s VAT recovery rate – see the table on the next page for simple examples. If it is your first time calculating a VAT recovery percentage, we can help you choose the best methodology for your business.

Please click here or on the box below to read more about what is required and if you would like to discuss this matter in more detail, please feel free to contact me direct.

Eamonn McCallion

Partner, Tax
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