For all that Budget 2015 was a give away budget with something for everyone, the Finance Bill was jam packed with anti-avoidance measures.
There are changes to the RCT rules, VAT changes introducing joint and several liabilities where there is VAT fraud, clogging of losses arising on passive trades, rules around pension funds and gilt stripping along with very far reaching changes to the anti avoidance and tax disclosure rules.
The VAT change was required by EU law but goes further than what was actually required, many of the income tax changes are copied from changes which the UK have introduced in recent years, but the package in total spells a new era for tax planning in Ireland. Recent austerity has created the political will to come down hard on tax avoidance, and this budget does just that. The next blog post will concentrate on the income tax changes and the general anti avoidance changes, the Vat and RCT changes are the source of the most immediate concern.
The first major change is to the RCT rules. A principal contractor is now subject to a penalty rather than a tax in respect of payments made outside the RCT system and the penalty ranges from 3% in respect of a payment made to a subcontractor who would have been eligible for a 0% withholding, through to 35% where the subcontractor was not within the system, and the previous €5k cap has been removed. Unlike the previous regime where the correct rate could be applied retroactively once the returns were submitted the new regime provides for no rectification since the amount is now a penalty and not a tax. The classification of the amount as a penalty means that it is not creditable against any income tax liability, and the obligation to make “unreported payment notifications” to Revenue carries no additional penalty, nor does it reduce any liabilities to penalties. In this regard it seems that there is no incentive for taxpayers to remedy any innocent errors made.
Where a VAT registered trader is reckless as to whether they are a party to a transaction which results in VAT evasion they can be jointly and severally liable for the VAT limited only by reference to any input tax which the fraudulent trader could have claimed a deduction for. This provision is much broader than the corresponding UK provision aimed at carousel fraud which is restricted to they types of goods usually used in that fraud being second hand electronics and phones and this seems intentional. While it may be difficult for Revenue to prove that a trader was reckless if they were charged VAT and didn’t know that the other party did not account for that VAT to Revenue, it seems certain that if a VAT registered business accepts a cash price for good or services and does not have reason to believe that the supplier is under the VAT registration threshold then they could be liable for the VAT. This will also take pressure off SMEs being pressured by large exempt clients to apply the wrong VAT rate since the large exempt purchaser now has joint and several liability.