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GAZETTE
NOVEMBER 1992
Bad News for Sol i c i tors
F i nance Ac t , 1992 - VAT
By Fergus Gannon, Deloitte &
Touche
The news for solicitors is very bad!
From 1 January, 1993, the cash
receipts basis will be available only
to those whose turnover is 90% or
more to unregistered persons. Many
solicitors will not be within this
category and are, therefore, going to
lose their entitlement to the cash
receipts basis.
Under the Value Added Thx Act
( VATA) 1972 section 14 (1) (b), a
person supplying services may
choose to account for VAT, " b y
reference to the amount of monies
which he receives" (usually referred
to as the cash receipts basis or the
cash basis) rather than by reference
to invoices issued. You are no doubt
familiar with the cash flow
disadvantages of the invoice basis
arising from the necessity to fund
the payment of VAT to the Revenue
Commissioners while awaiting receipt
of the VAT from the customer or
client. The cash receipts basis is a
derogation permitted under Article
10 of the EC
6th
Directive on VAT
at the option of Member States.
Section 177 of the Finance Act, 1992
amended section 14 VATA 1972 with
the result that the cash receipts basis
will only be available to a person
who "derives not less than 90 per
cent of his turnover from taxable
supplies to persons who are not
registered persons". The double
negative of not less than and not
registered obstructs the ease of
understanding. Put more positively
the cash receipts basis will only be
available to a person who derives
90% or more of his turnover from
taxable supplies to persons who are
not registered persons. The provision
will be effective from 1 January,
1993.
Fergus
Gannon
This will exclude the majority of
accountants, solicitors, architects,
advertising agencies, consulting
engineers, management consultants,
recruitment agencies, sub-contractors
and others providing services to
registered persons.
It follows that those who will lose
the entitlement to the cash receipts
basis should review their cash
requirements for 1993. On 19 March,
1993 VAT will be payable on all
invoices issued in January/February
1993, even though payment will not
have been received in respect of
many of them.
Debtors Adjustment
Section 14 VATA 1972 was originally
supported by Statutory Instrument
No. 177 of 1972. S.I. 177 of 1972
was replaced from 1 March, 1979 by
Regulation 7 of the Value Added Thx
Regulations, 1979 which in turn was
replaced by Statutory Instrument No.
298 of 1986 with effect from 2
September, 1986. S.I. No. 298 of
1986 provides for what is commonly
referred to as a debtors adjustment
for those who have been on the cash
basis for 6 years or less. This means
that in the VAT period in which a
person changes from the cash basis
to the invoice basis he will have to
account for VAT on the increase in
debtors during the period he was on
the cash receipts basis. For example,
an accountant commenced practice
on 1 January, 1988 and from the
beginning was on the cash receipts
basis. On 31 December, 1991 he
changed to the invoice basis. At 31
December, 1991 his debtors were
£36,300 made up of £30,000 plus
£6,300 VAT. He had not accounted
for VAT on these debtors while on
the cash receipts basis. He had to
include an additional £30,000 in the
sales section of his Nov/Dec 1991
VAT return to account for the
increase in debtors while he was on
the cash receipts basis thus capturing
the VAT not caught while on the
cash receipts basis. This means that
those who will lose the cash receipts
basis from 1 January, 1993 face a
double blow, firstly, a debtors
adjustment in their
November/December 1992 return and
secondly, being on an invoice basis
after 1992. I understand that the
Revenue Commissioners are
sympathetic to the idea of allowing a
staged payment of the VAT arising
on the debtors adjustment, but a
final decisions on this has not yet
been made.
On Cash Receipts Basis for more
than 6 Years.
Up to 16 April, 1992 there was no
debtors adjustment for those
changing from a cash basis to an
invoice basis if they had been on the
cash basis for more than 6 years.
From 16 April, 1992 a person who
has been on the cash basis for more
than 6 years and changes to the
invoice basis is required to make a
debtors adjustment by reference to
his debtors 6 years previously rather
than by reference to his debtors
when he commenced on the cash
receipts basis. This is as it is set out
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