VAT Registrations: Practical challenges and pitfalls

This article first appeared in Irish Tax Review, 37/2 (2024).

VAT registration complexities: Criteria, challenges, and tips for Irish business success.

In brief

• VAT registration has evolved from a straightforward task to a complex process, important for profiling businesses and preventing tax fraud.
• Businesses must demonstrate they are accountable for VAT, amidst Revenue's efforts to combat costly fraudulent activities.
• Foreign and new Irish entities face hurdles in proving economic activity and trade intent to obtain VAT registration.

What has happened the humble VAT registration?

Once a “simple” procedural matter, it has now become a significant administrative and practical challenge for businesses. The “why?” this article will seek to explore and determine, but in simple terms a VAT registration has value, both for businesses and for Revenue. The process of obtaining a VAT registration and the supporting documentation needed provide value in building a profile about a particular business that may shape future engagements between the entity and Revenue.

How Have We Got Here?

The tax registration process is generally the first interaction that businesses have with Revenue, as it is the registration process that permits businesses “into the tax system”. The tax registration application forms cover a range of taxes, but it is fair to say that the tax that invites the most scrutiny from Revenue is VAT.

A clear theme is emerging from Revenue in relation to the granting of Irish VAT registrations insofar as the onus is on the applicant to substantiate clearly to Revenue that it is an “accountable person” (ss5 and 9 of the Value-Added Tax Consolidation Act 2010 (VATCA 2010)) from a VAT perspective and, as such, is required to register for Irish VAT. This is, however, not just a matter of Revenue’s adding red tape to what should be a relatively straightforward application process. Unfortunately, VAT registration numbers are sometimes being used in “carousel” or “missing trader” fraudulent schemes. These schemes are operated by traders who fraudulently use VAT numbers to purchase goods that are subject to Irish VAT and then create fictitious zero-rated cross-border supplies of the goods. This enables the traders to generate VAT refunds on their purchases through their VAT returns, and after receiving the VAT refund the traders will “disappear”. It is estimated that the “VAT gap”, or VAT cost of carousel or missing trader schemes to tax authorities, runs into billons of euro annually across the EU. Revenue therefore has a duty both to the Irish Exchequer and to the other members of the EU to ensure that VAT numbers issued are validly used.

There are several circumstances where a “taxable person” (s2 VATCA 2010), i.e. a person that is engaged in an economic activity in the State or elsewhere, should be considered an “accountable person” (a person obliged to register for VAT). The activities that require a taxable person to register for Irish VAT are:

• The taxable person makes a supply of goods or services within the State in the course or furtherance of a business and the value of its supplies exceeds or is expected to exceed the VAT registration threshold (€40,000 for services and €80,000 for goods – s2 VATCA 2010) in any 12-month period.
• The taxable person receives goods and/or services in the State from abroad and is required to self-account for VAT.
• The taxable person makes a supply of goods and/or services from the State to an EU VAT-registered business, and it is required to report the net amount of the supplies in the statistical “E” boxes in its Irish VAT return and to submit VIES or Intrastat returns.

Registration Process

There are two types of Irish VAT registrations that a taxable person may apply for:

• a “domestic” VAT registration, which is issued to applicants who will engage in domestic supplies of goods and services only; and
• an “intra-EU” VAT registration, which relates to taxpayers who will engage in domestic transactions and have cross-border transactions in relation to either the sale or the purchase of goods or services.

The VAT application process, itself, is relatively straightforward. The registration is applied for by completing a single form, which covers all taxes. There are 21 general questions on the form, which provide background information on the applicant, with a further 11 questions devoted to VAT (two to intra-Community trade). Along with the VAT registration application, it can help to provide Revenue with a more detailed letter giving further context regarding the applicant and the reason why VAT registration is being applied for.

In many cases this will be sufficient for Revenue to allow the application and issue the VAT number. However, if Revenue has queries or requires further documentation, it will sometimes issue a further questionnaire. The completion of this process should lead to the registration’s being permitted, but in practice businesses are facing many challenges in substantiating to Revenue the rationale for why a VAT registration is warranted.

Depending on the responses to the questions, Revenue will issue a “domestic only” VAT registration number or a registration number that is linked to intra-EU trade. Although this process runs smoothly for many registrations, there are some areas that can delay the registration process, which we outline below.

What Are the Issues Faced by Entities Seeking to Register for Irish VAT?

Domestic suppliers of goods and services only

In general, the domestic VAT registration process runs smoothly where it is an Irish-established business that has Irish directors, an Irish-established partnership or an Irish-established sole trader that makes a supply of goods or services in the course or furtherance of a business and the value of its supplies exceeds or is expected to exceed the VAT registration threshold in any 12-month period. This is on the basis that it is usually clear in these circumstances that the applicants are established and in business in Ireland.

However, where domestic VAT registration challenges typically arise is where newly incorporated Irish entities are in start-up phase or have an intention to trade. This has become more prevalent in Ireland since Brexit, as a significant number of foreign companies are seeking to incorporate separate legal entities in Ireland to make domestic supplies of goods or services in Ireland.

A foreign-owned Irish company seeking to trade in Ireland seems to invite additional scrutiny from Revenue in relation to VAT registrations. In some instances these entities can face significant challenges in obtaining domestic and intra-EU VAT registrations. This usually occurs where the entity seeking to register for Irish VAT either is in a start-up phase or is an intended trader and has been Irish incorporated with the Companies Registration Office but there is little else in terms of substance in Ireland, e.g. direct employees or office space where the day-to-day business function of the company is performed. Consequently, Revenue may seek substantive evidence to support Irish-established entities’ seeking to register for Irish VAT in terms of whether the entity is properly “established” in Ireland for VAT purposes in respect of the receipt of services and/or to apply VAT postponed accounting on the import of goods from “third countries”.

Although the jurisprudence of the Court of Justice of the European Union (Rompelman v Minister van Financiën C-268/83, Inzo v Belgische Staat C-110/94) specifies that traders in start-up situations are entitled to recover the VAT incurred on their costs before commencing trading and, by implication, are entitled to a VAT number, it is also stipulated that tax authorities are entitled to seek proof that trading will commence. Revenue will therefore very often seek draft contracts with customers or suppliers as evidence that a trade will commence. We would point out that intending to trade does not always imply that customers are in place. There can be a long lead-in time before any sales are generated, and we believe that, although these cases perhaps merit greater attention, they should be looked at in the whole context of the trader’s activities.

Foreign companies registering for VAT in Ireland

Generally, a foreign entity applying for an Irish VAT number may encounter some delays. The issues outlined above for domestic intending-trader applications also apply where the trader is seeking an “intra-EU” VAT registration but will not commence operations for some time.

In addition, if a foreign entity is registering for VAT, issues may arise in relation to whether it has sufficient substance in Ireland to constitute a VAT establishment. This is especially relevant to service providers, particularly if the service provider operating from an Irish establishment is engaging in cross-border supplies. Where an entity is applying for an Irish VAT registration to self-account for VAT on an acquisition of services from abroad, Revenue may seek not only a copy of the invoice but also a copy of the underlying agreements between the parties and proof that the invoice was paid from the applicant’s bank account. In some instances Revenue case managers have visited the registered business addresses of the applicants to determine the level of substance present in Ireland that is capable of actually receiving the services from abroad. Similarly, Revenue will seek substantive evidence to support a basis for an intra-EU VAT registration where the applicant intends to purchase goods or services from another EU business.

The extent to which Revenue has challenged VAT registration applications is highlighted in a determination by the Tax Appeals Commission (TAC), 115TACD2023, where the TAC was asked to consider whether a VAT registration applicant had provided sufficient evidence that he was a taxable person engaged in economic activity. Revenue sought information from the applicant, which included a detailed description of the VATable activity being carried out by the business, confirmation of the correct business address and evidence that the business is currently trading. An agreement was submitted to Revenue evidencing that the applicant was engaged in a consultancy project, but some queries had not been responded to, and Revenue sought additional documentation to evidence the place of business and banking details to substantiate the commencement of activity. Revenue also visited the address provided by the applicant and was of the view that the address was used only as a virtual office for postal deliveries and that the business is not being operated from this premises, and it rejected the application. Ultimately, the TAC agreed with Revenue and found that the applicant failed to prove that he is a taxable person or that the economic activity that he indicates he wishes to carry out will be carried out from within the territory of the State.

There are other challenges to VAT registration applications where foreign traders are seeking to register for Irish VAT as non-established entities to move goods from outside the EU to Ireland in order to make domestic supplies of goods either to non-business customers or to Irish-established businesses. The difficulties faced by non-established traders seeking to register for Irish VAT in these circumstances are as follows.

• Where there is a supply of goods to non-business customers, Revenue may seek that the trader account for VAT through an Import One-Stop Shop (IOSS) scheme rather than through a domestic Irish VAT registration. At a high level the IOSS allows a taxable person to register in a single Member State to declare and pay import VAT; however, it is not compulsory for such taxable persons to obtain an IOSS registration. The requirement to appoint an EU-established intermediary on behalf of the foreign trader can act as a barrier in relation to the IOSS scheme, and therefore the foreign trader’s preference may be to register for EU domestic VAT registrations, including acquiring a VAT registration in Ireland.
• Where there is an intention to move goods from abroad and to make an onward domestic supply of the goods to an Irish business customer, Revenue may seek supporting evidence such as import documents and contracts with the Irish customer to substantiate the foreign trader’s basis to register for Irish VAT. This may be problematic where the logistics provider is not prepared to act as an indirect representative in relation to the import of goods under the duty delivery paid (DDP) Incoterms because joint and several liability applies. In such cases the import documentation (Single Administrative Document) is completed by the logistics providers in a manner that does not support a basis for the foreign trader to register for Irish VAT, e.g. the Incoterm is not DDP or the incorrect entity is stated as the importer of record. This can result in what feels like a “chicken and egg” scenario. A trader cannot show proof of import without a VAT registration number but cannot get a VAT registration number without proof of import.