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Revenue’s eBrief No 70/11 highlights the VAT anomalies and pitfalls that face cash businesses

Wednesday, December 7, 2011

by Nick Ryan

When I read this eBrief, released on 14 November, I was once again struck by the pedantic approach taken by Revenue in determining rates of VAT. Here we are informed that bread is not bread when applying the zero rate. We have to consider firstly is the bread product a purist bread product and secondly, just to be on the safe side, does the bread pass the 2% ingredients test.
The eBrief clarifies that some breads which might be considered by many to be varietal and/or a healthier option do not qualify for the zero rate but are subject to the reduced rate of 13.5%. These include breads such as garlic, onion or seed variants i.e. fennel. Why is that? Surely bread is bread is bread? No say Revenue, onion bread is not bread as it includes onions!
For the test we have to consider the ingredients and where the sugar, bread improver and fat individually exceed 2% of the weight of the total ingredients then that bread does not qualify as a zero rated product.
This small matter of bread further emphasises the difficulties that face both producers and cash businesses. Just consider the ingredient test above and where a producer inadvertantly makes bread with a 2.2% fat content though classifies the bread as zero rated. For them they have a VAT error in applying the incorrect rate, this under accounting of VAT can be sought form their customers but for the cash business, if they get the rate wrong, then this under declaration of VAT is an additional cost to them and an impact on their turnover. We will not consider the potential knock on effect of additional costs incurred by the business in rectifying matters.
As you can see this eBrief emphasises one of the key areas in VAT that can cause problems for both the producer/supplier and the cash business being that of the rate of VAT for products. Apply the wrong rate and this could lead to significant error and not just in monetary terms.
The accounting of VAT is another key area which encompasses the use of correct VAT rates. Over recent months our assistance has been sought in assessing cash businesses potential for error in their VAT accounting and compliance functions. Key identifiers have been the use of weighted margins/mark ups in order to determine the VAT due on the total takings, at times these margins have been based on historical and not reflective of current trading positions.
Use of cash registers and EPOS systems were also found t be at fault as the systems had not been updated to reflect VA rates for product lines. The application of green taxes such as the plastic bag levy were found to be misunderstood as were the application of VAT for vouchers, multi buys and promotional sales.
Managing the VAT function is essential for all businesses if that business is to minimise the potential for error and the associated costs incurred in correction of the error. For cash businesses getting it wrong can provide for a much greater impact on their business and therefore the extra effort can often provide for that greater reward.
These are just some of the issues that require regular consideration for both cash businesses and their product suppliers.
For more information on VAT and cash businesses or to discuss a particualar query then please contact me.