Responding to COVID-19: How to manage VAT and optimize cash flow

The current coronavirus situation is putting pressure on finances and testing many businesses like never before. As businesses struggle to manage cash flow, understanding and managing the impact of VAT is critical in safeguarding your business. The effective management of indirect taxes could directly benefit your cash flows.

Despite the urgency of implementing the appropriate operational measures, the VAT consequences must be considered to take advantage of any reliefs and mitigate against risks, such as unrecognized additional registration obligations.

Below, we outline certain measures in relation to indirect taxes (VAT) that may be considered with the aim of avoiding business disruption and shaping your strategy for recovery.

Cash accounting scheme

Smaller businesses, under certain conditions have the right to apply the Cash Accounting Scheme. The Cash Accounting Scheme enables a taxable person supplying goods or services to account and pay output VAT and simultaneously claim input VAT on a cash basis rather than accruals basis. This scheme provides the benefit of delaying the time of transaction to when the funds are actually collected. Taxable persons wishing to apply the Cash Accounting Scheme must notify the VAT Commissioner in writing.

VAT and bad debts

Bad debt relief provides an opportunity to claim a refund on the output VAT paid in relation to supplies for which payment has not been received by the debtor.  The Cyprus VAT Law prescribes that receivables remaining outstanding for more than one year from the date of transaction may qualify for bad debt relief. Just as importantly however, there is a limitation of four years to exercise the relief after which the benefit cannot be exercised.  A thorough review of outstanding receivables may identify items which can be treated as bad debts and, subject to other conditions being cumulatively met, any VAT charged and paid to the Tax Authority. can be reclaimed via the VAT return.

Refund for expenses incurred in other Member States

Businesses may claim electronically for the refund of any VAT paid on business expenses incurred in another Member State (Member State of refund). VAT may be refunded on prescribed business expenses in accordance with the VAT legislation governing input VAT recovery of the refunding Member State. Please note that the deadline for reclaiming VAT for the fiscal year 2019 from other EU territories is by 30 September 2020.

Apportionment methods

Businesses engaged in exempt activities and/or in non-business activities may be able to achieve cashflow advantage by reviewing the partial exemption and business/non-business methods in order to ensure they are fit for purpose or if alternative methods will increase VAT recovery (where appropriate).

VAT refunds

The Tax Department continues to process any VAT reclaims and refunds due to businesses even though in practice delays of several months are being experienced. Please note that from 19 February 2013, refunds are returned with interest based on the Unified Public Interest Rate for Overdue Payments (currently 1,75%).

To enable expedient receipt of refundable balances, outstanding recovery claims should be submitted on a timely basis and inquiries from the Tax Department should be handled quickly and thoroughly.

Set-off of refundable VAT with other payable taxes

Businesses that have VAT refundable balances should consider whether they can request to be set-off against any other payable taxes such as income tax, social insurance or GHS deductions.

VAT return filing period

The VAT return filing in Cyprus is made with reference to quarterly periods. Upon request, VAT return periods can be changed from quarterly to monthly cycles with the aim of expediting VAT repayments. Traders who are consistently in a refundable VAT position would benefit from this policy.

VAT Grouping

Cyprus applies a VAT grouping regime whereby companies which meet the requirement for the existence of economic, financial and organizational links, can form a VAT group. This enables the filing of one combined VAT return and the supplies of goods or services between the members of a group, for VAT purposes, are ignored. This option would preclude the negative cash-flow impact resulting from intra-group charges. The relevant criteria to qualify as a VAT group are interpreted strictly by the Tax Department, and applications are subject to extensive scrutiny. Applications also take some time to be reviewed and the outcome remains at the discretion of the Tax Commissioner.

Eliminating or mitigating businesses risk to incur monetary penalties

Businesses need to ensure they remain compliant with Tax Department guidelines to avoid further impacts on their trading. All companies operating in the Republic, whether VAT registered or not, may find themselves the subject of a VAT investigation by the Tax Department.

Due to the current economic crisis, It is reasonable to expect that the Tax Department will increase the scope and intensity of investigations with the aim of confirming conformity with compliance regulations.  An unexpected assessment under the current circumstances could be detrimental to the business’ cash flow position. It is highly recommended, that policies relating to input VAT recovery, accounting for output VAT, record keeping, and other aspects of the VAT Act and regulations are regularly reviewed to ensure full compliance.

Negotiation of monthly payments and amnesty for outstanding VAT balances

Long outstanding unpaid VAT liabilities and other infringements to VAT compliance obligations may lead to serious business disruption in the form of legal action against the business and its Directors. In many cases payment plans may be negotiated at the discretion of the Tax Department. The Cyprus’ Law Regulating the Settlement of Overdue Taxes provides relief from interest and penalties on overdue taxes for years up to and including 2015. The application deadline has been extended until 14 August 2020.

Registration Obligations or Rights

Businesses who have an obligation to register and fail to do so incur a penalty for each month of delay and may possibly face fines for unsubmitted VAT returns. There are situations where the obligation may not be obvious as in cases, for example, of holding Companies which may inadvertently find themselves carrying out economic activities. Registration obligations should be reviewed by non-registered businesses at regular intervals and especially prior to any intended business initiative or transaction. Registration provides a right for businesses to recover VAT on goods purchased for up to three years and services for up to six months prior to registration.  In certain situations, it may be beneficial to proceed with VAT registration, for example where capital expenditure has been incurred. If a business has ceased to trade or has suspended its activities for an extended period there is an obligation to notify the Tax Department and de-register from VAT.