Portugal decided to implement the so-called “cash accounting” scheme in its VAT Code (Decree-Law no. 71/2013, of May, 30 2013), effective and in force from 1st October, 2013 onwards, by means of transposition of the EU VAT Directives (2006/112/CE and 2010/45/EU, the latter regarding invoicing rules in particular) in this matter. The goal is to improve the treasury situation and the cash-flow of small and medium sized enterprises (SMEs).

SCHEME ANALYSIS

Firstly, the cash accounting is optional. The taxpayer only opts in if it sees some advantages in it. Taxpayers who want to opt in for 2013 must do so until September, 30 and in subsequent years until October, 31 of each year. The opting in implies a minimum period of permanence of two years. And the opting out (re-entry into the general regime) also implies a minimum period of permanence of two years in the general regime.

Secondly, at least for the time being, only some taxpayers can opt in and there are some conditions to be met:

  1. annual turnover up to € 500.000,00 (the EU VAT Directive allows Member States to make it available to micro enterprises with an annual turnover no higher than EUR 500.000, or EUR 2 million after consultation with the EU VAT Committee);
  2. not VAT exempt;
  3. activity has started more than one year ago;
  4. tax situation regularized.

Essentially, in the VAT operations’ chain, the cash accounting scheme allows for the taxpayer supplier of services or provider of goods to only hand over VAT to the State coffers when it receives it from the debtors by the time the invoices are paid, i.e., the regime allows for a deferral of VAT remittance to the Revenue until effective receipt of payment from customers, instead of paying the output VAT - the VAT they charge on other taxpayers - upon issuance of the invoice, which is the VAT most generalized rule used by MS (article 66, point a) of the EU Directive).

On the other hand, cash accounting also means that the taxpayers, when acting as purchasers or acquirers, can only deduct the input VAT - the VAT they were charged with by other taxpayers - from the invoices once they pay them.

This means that the “Cash accounting” regime is not appellative to SMEs which usually have an input VAT credit position.

In order to know on what accounting scheme the operations are taking place, the invoices must mention the “Cash accounting” expression, if that’s the case.

The VAT is partially or fully remitted or deducted, as the case may be, depending on the payment being partial or complete.

Nevertheless, on the 12th month subsequent to the invoice date of issuance, taxpayers have to remit the output VAT to the Revenue, irrespective of invoices’ payment. At the same time, a fortiori, they may also then deduct the input VAT from invoices even if they haven’t paid them yet.

The cash accounting scheme does not apply to the following operations:

  • Import and export;
  • Intra-community supplies of goods and provision of services;
  • Reverse charge operations (in which the purchaser is simultaneously the taxpayer);
  • Taxpayers with special relations.

With the entry into force of the cash accounting scheme, other regimes are revoked, like the ones applied to National Road Transportation of Goods, Public Constructions and Supplies of Goods to Agricultural Cooperatives. In this respect, some experts are saying that particularly in the construction activity the “Cash accounting” regime may be not so appellative than the specific VAT regime for construction.

Once an eligible taxpayer starts to carry out exclusively exempt operations and/or has an annual turnover that exceeds € 500.000,00, it must communicate that fact to the Tax Authorities and once it does so it will automatically fall out of the “Cash accounting” regime. The same applies, namely, as soon as there is evidence that the exceptional regime is being misused or being used for the sole purpose of tax fraud and the same applies if the taxpayer ceases to have its tax situation regularized.

If the taxpayer falls out of the regime on the basis of not having its tax situation regularized, the cash accounting regime ceases effective immediately and even if the taxpayer regularizes its tax situation in the meanwhile, nevertheless it can’t opt again into the regime for a whole year.

But before the regime ceases automatically, the taxpayer has the right to a prior hearing, in accordance with the Tax Procedure and Process Code.

UNCOLLECTIBLE RECEIVABLES AND DOUBTFUL CLAIMS

The regularization procedures foreseen in articles 78 and 78-A of VAT Code are only applicable after VAT is due by the “12th month after issuance of invoice’” rule above mentioned.

TRANSITIONAL REGIME

Those taxpayers that were included in special accounting regimes that are now revoked with the introduction of cash accounting must consider the following transitional rules:

  • On what concerns invoices from previous regimes not yet paid, the VAT shall be remitted to the Revenue by no longer than the 12th month after the entry into force of the Decree-Law no 71/2013, i.e., October, 1 2014;
  • If those taxpayers don’t opt now into the cash accounting scheme, they must remit VAT to the Revenue on the very next VAT Declaration applicable through general rules terms, which now will apply to them.

BANK SECRECY WAIVING

The greatest news of Decree-Law no. 71/2013, of 30th May, is that in opposite to what was expected and previously announced by the Government, in order to being able to opt into the cash accounting scheme, taxpayers no longer have to authorize the Tax Authorities an automatic waive of bank secrecy.

For one hand, it becomes more challengeable to the Tax Authorities to cross information regarding the transactions, particularly on what concerns the moment the invoices are issued and the moment they are effectively paid. In any case, Tax Authorities are currently much better informed about the transactions taking place due to the new rules on mandatory communication of invoices (Decree Laws no. 197 and 198/2012, of 24th August).

But on the other hand, it is a very commendable change to the initial choice since it grants taxpayer’s rights and rightfully so.

CONCLUSIONS

In our opinion, the cash accounting scheme shows, at least for the outset and to the majority of SMEs, more advantages than disadvantages, especially in this economic and financial crisis scenario, that were struggling to remit the VAT to the Revenue when in the majority of cases they didn’t have yet collected the VAT from their customers.

This scheme is hoped to bring more stability to enterprises’ cash-flow and treasury and liquidity situation.

The deferral opportunity is also limited in time in order to avoid abusive situations and the mechanism’s misuse.