10 current questions about the impact of VAT on business cash flow
In view of the current situation and the spread of COVID-19, businesses are now more than in the past concerned about the impacts of VAT on business cash flow, focusing mainly on the proposed measures related to the possibility to defer tax payment deadlines.
In addition to tax payment due dates, also other VAT rules can turn out relevant. Let's remind ourselves of some of them based on the following questions in the area of VAT, which can be put in place by businesses, and not only these days, with the aim of improving business cash flow.
1. Are we allowed to file VAT return covering a longer, or on the other hand, a shorter time-period?
Tax period of a VAT payer is generally a calendar month. A VAT payer may opt for a tax period of a calendar quarter provided that more than 12 calendar months have lapsed since the end of the calendar month in which he became a taxpayer and that he has not reached a turnover of EUR 100,000 for the period of previous 12 successive calendar months.
If a business submits VAT returns on a monthly basis, in which it regularly declares outstanding VAT due, changing the tax period from a calendar month to a calendar quarter can be considered. The VAT payer must notify the tax authority of the change, following the rules set out in the Slovak VAT Act.
On the other hand, if a business submits VAT returns quarterly, and based on the nature of its business it normally reports transactions giving rise to an excess VAT deduction, the tax period could be amended back to a calendar month, even if the turnover condition for a quarterly tax period is still met.
In this respect, it should be considered whether changing the tax period would impact the resulting position towards state budget.
2. Normally, we report an excess VAT deduction in our VAT returns. Can we request an accelerated refund?
The tax authorities will refund the excess VAT deduction earlier than within the time period based on the rules defined in Article 79 Section 1 of the VAT Act, if conditions set out by law are satisfied. The tax authorities will refund the excess VAT deduction within 30 days of the deadline for submitting the VAT return for the tax period in which the excess VAT deduction arose, if the VAT payer:
- files monthly VAT returns;
- has been registered as a VAT payer for at least 12 months; and
- has not had outstanding tax and other public debts exceeding EUR 1,000 in the preceding 6 months.
If the above conditions are met, the VAT payer can request an accelerated refund by ticking a box in the VAT return form.
3. We plan to secure a payment upfront from our customer, i.e. a payment prior to the actual supply. How will this impact the date of taxable event?
A mere request for payment upfront, i.e. prior to the supply of goods or service, does not give rise to a taxable event. Where a payment is received prior to the supply of goods or service, the VAT liability arises on the payment receipt date from the payment received.
4. Does the invoicing frequency affect the date of taxable event in case of recurrent supplies of goods and services?
If the supply of goods or services is rendered locally on a recurrent basis, then such goods or services are deemed supplied at the latest as of the last day of the period to which the payment for the recurrent supply of goods or services relates, with certain exceptions.
The date of taxable event is determined this way, if the payment for recurrently supplied goods or services is agreed for a time-period shorter than 12 calendar months.
For example, a lessor, VAT payer, leases immovable property (business premises) in Slovakia to a business with VAT and it is clear from the leasing agreement that the service recipient should pay for the leasing service within 15 days of the end of each calendar half-year. In this case, a recurrent supply of service on a half-year basis is concerned. This service is deemed supplied at the latest as of the last day of each calendar half-year.
For purposes of these rules, a recurrent supply of goods or services means a supply of the same type of services at recurring periods agreed upon in advance.
5. We face delays in receiving invoices for acquisition of goods from another EU member state. Does this fact have an impact on claiming the right for VAT deduction?
For an intra-EU acquisition of goods, VAT is chargeable on whichever is earlier:
a) the 15th day of the month following that in which the acquisition of goods took place, or
b) the invoice issue date.
However, business must hold an invoice issued by the supplier from another EU member state to be allowed to exercise its right to VAT deduction.
If a business customer, a Slovak VAT payer, faced a delay in receiving invoices from his supplier from another EU member state, it may happen that he would become obliged to declare VAT liability and pay the VAT before becoming allowed to exercise his right to VAT deduction. Such situation leads to negative impact on business cash flow.
Therefore, it is important to communicate with the supplier and design reliable processes for managing the flow of documents between the contractual parties, with the aim of securing timely receipt of invoices and thus a neutral impact of a transaction on the outstanding VAT liability.
6. Is there space for introducing internal measures for an earlier or additional exercising of the right for VAT deduction based on the received invoices?
A VAT payer can exercise the right for VAT deduction from the received invoices for domestic supplies of goods and services in any VAT period of a calendar (financial) year, however not earlier than in the tax period, in which the right for tax deduction arises, and not later than in the last tax period of the calendar (financial) year, in which the right for tax deduction arises, if he holds, up to the deadline for filing the VAT return for the tax period in which the VAT payer exercises the right for tax deduction, an invoice from a Slovak supplier.
Businesses can consider whether there is space for making the process of registering, processing, reviewing and approving the received invoices easier and more efficient, to prevent unnecessary delays in including them in the VAT return, and hence to a later exercise of the right for VAT deduction.
If there are still any invoices from the previous calendar (financial) year kept on file, based on which the input VAT could no longer be deducted in the current year, it is appropriate to claim the deduction as soon as possible via a supplementary VAT return.
7. We record a VAT overpayment based on the submitted supplementary VAT return showing a decreased VAT liability compared to the VAT return first filed. Do we have to take any further steps to claim its refund?
The overpaid VAT will not be refunded to the VAT payer's bank account automatically. If the VAT overpayment cannot be used to settle any tax arrears, tax prepayments due, customs duties or other payments due, the tax authorities will refund the VAT overpayment based on a submitted application within 30 days of its receipt.
8. We bought goods in other EU member states for business purposes, incurring local VAT. Do we have to wait until the end of the year to reclaim this VAT?
Application for EU VAT refund can be filed, in line with the Council Directive 2008/9/EC, for a refund period of not more than one calendar year or less than three calendar months. Refund applications may, however, relate to a period of less than three months where the period represents the remainder of a calendar year.
If the refund application relates to a refund period of a calendar year or the remainder of a calendar year, the amount of VAT may not be less than EUR 50 or the equivalent in national currency. If the refund application relates to a refund period of less than one calendar year but not less than three months, the amount of VAT for which a refund is applied for may not be less than EUR 400 or the equivalent in national currency.
Potential limitations of the individual EU member states must be respected.
9. We will refund the invoiced amount or its part to our customer, as the supply of goods or service was wholly or partially cancelled, or the goods were returned to us. How can we reclaim the VAT previously settled with the tax authority?
Under the mentioned circumstances, the VAT payer will adjust (decrease) the taxable amount. The difference between the original and the adjusted taxable amount and the difference between the original VAT and adjusted VAT will be declared in the VAT return for the tax period in which the document on adjustment of tax base is issued, with certain exceptions. This document must be issued within 15 days of the end of the calendar month in which the event decisive for performing the adjustment of taxable amount has occurred (cancellation of a supply of goods or service, return of goods).
10. Can we opt for paying VAT on our sales to the state budget only when our customers pay us?
Businesses can pay VAT to the state budget only when the customer pays their invoice, if they apply the cash accounting scheme in line with Article 68d of the VAT Act. This special scheme is focused on small businesses – only VAT payers established in Slovakia can opt for its application if they don't reach the turnover of EUR 100,000 for the preceding calendar year and reasonably do not expect this turnover to be exceeded in the current calendar year. Excluded are taxable persons who declared bankruptcy or entered into liquidation, subject to further conditions.
As it is apparent from the practical implications of the mentioned rules, process settings in the area of VAT can have a considerable impact on business cash flow and, not least, on administration costs of businesses.