New VAT Regime – VAT Cash Accounting System

New VAT option, designed to ease cash crunch for companies in Portugal, is meeting with slow acceptance.

A new VAT regime took force on October 1, 2013, in accordance with Decree Law no. 71/2013, dated May 30. The aim: to improve the cash flow of Portuguese companies, which have suffered from a particularly adverse environment in the last three years. The results so far have not been too encouraging. It seems that businesses didn’t fully understand the benefits of the new system or they didn’t find those benefits appealing enough. According to the authorities, as of a week before September 30, 2013, only about 70 companies had chosen the new VAT regime, which is optional and could potentially cover 85% of Portuguese companies. Companies may have realized that there’s no such thing as a free lunch.

Companies and operations covered by the law
The new system applies to taxable persons with annual revenue up to EUR 500,000 that do not qualify for tax exemption, and to supplies of goods and services whose beneficiaries are other taxable persons. Only companies registered for VAT purposes for more than 12 months, with their tax affairs in order and their reporting obligations duly met, can opt for this VAT regime.

Deadlines for opting in and duration of the application of the regime
With the exception of the transitory rule deadline, businesses are to make use of the option provided by this new law by October 31 of each year. The option comes into effect on January 1 of the following year. It is mandatory to remain in this regime for a minimum of 2 years unless the taxable person ceases to meet the requirements. It should also be noted that, if businesses no longer meet the requirements to stay in the cash accounting system or if they choose to return to the standard VAT regime, they are also to stay there for a minimum of two consecutive years.

Rules on the chargeability and deductibility of VAT
VAT for operations covered by this regulation is due at the moment of payment, in full or in part. The VAT included in unpaid invoices (in full or in part) becomes due in the twelfth month after the date of the invoice in the tax period corresponding to the deadline. Taxable persons in the VAT cash accounting system may deduct VAT from input transactions only if they have an invoice or receipt as evidence of payment. Nevertheless, the VAT included in unpaid invoices (in full or in part) is deductible in the twelfth month after the invoice is issued.

Requirements for invoices and receipts
Under the VAT cash accounting system invoices must be issued in a special series and must bear the words “IVA–regime de caixa” (VAT–cash accounting system). At the time of payment, in full or in part, advances included, a receipt must be issued for the amounts received. This applies not only to the taxable persons in the cash accounting system but to all taxable persons who carry out a transaction with businesses categorized under the VAT cash accounting system. The date of the receipt must be in line with the date of payment. The receipts must be issued as an original and a copy and should be communicated to the tax authorities under the conditions stipulated for invoices (submission of the SAFT(T) file by the 25th of the following month).

Benefits versus costs
The VAT cash accounting system’s subdued reception has surprised authorities. While its implementation can have immediate benefits for a company’s cash flow, they come at a cost. If one recalls the enormous financial, economic and administrative burden that many other changes caused Portuguese companies in recent years, it is understandable that they might think twice before incurring additional costs when a limited return is at stake. Finally, we must wait a few more months before drawing any conclusions regarding the real impact of this special program on Portuguese companies.

Author
Fátima Gouveia
fatima.gouveia@ecovis.com