VAT recovery update: annual adjustment and key considerations for Irish businesses

For taxpayers with a 31 December year end, this means the deadline to complete this review is 30 June 2026, with any required adjustments to be made by the filing deadline of the May/June 2026 VAT return in July.

Allocation of costs – direct attribution

Direct attribution remains the primary method of determining VAT recovery:

• Full input VAT recovery may be claimed on costs directly attributable to taxable supplies and qualifying activities.
•  No input VAT recovery entitlement arises for costs directly attributable to VAT exempt supplies.

Qualifying activities are supplies that are outside the scope of Irish VAT, but which entitle a taxpayer to reclaim VAT on related costs – so they ‘qualify’ for VAT recovery. Qualifying activities include certain supplies of goods and services, and some VAT exempt services supplied to customers outside EU.

Apportionment calculation for dual-use costs

• Dual-use costs cannot be directly attributed to a specific activity and are typically general costs of the business.
• Residual VAT on ‘dual-use costs’ can be reclaimed using a pro-rata calculation, generally based on an apportionment of turnover from deductible supplies (taxable and qualifying activities) as a percentage of total turnover. 

Example 1:

If a business has VATable turnover of €100,000 and VAT exempt turnover of €25,000, the VAT recovery rate is 80% (€100,000/€125,000) and the business can reclaim 80% of residual VAT on dual-use costs.

Where the turnover method does not correctly reflect the taxable use of dual-use costs or have due regard to the range of the activities of the business, the business can use an alternative method to calculate the VAT recovery rate. Alternative methods include, for example, square footage, employee headcount, time spent, etc. Revenue agreement is required to use any method other than the turnover method, being the method prescribed by legislation.

Provisional Rate and Annual Adjustment

Businesses typically apply a provisional VAT recovery rate throughout the year, based on the prior year’s actual recovery percentage or an estimated recovery rate for the current year.

At year-end, the actual VAT recovery percentage must be calculated and compared to the provisional rate applied during the year. Where the provisional rate results in an under-recovery of VAT, a refund of the additional VAT may be claimed. Conversely, where VAT has been overclaimed, an adjustment is required, with the additional VAT payable to the Revenue Commissioners.

Example 2:

Following on from Example 1 above:

• Dual-use VAT incurred during FY25: €10,000
• Reclaimed at a provisional rate of 70% - €7,000
• The actual recovery rate for FY25 following the year-end review: 80% = €8,000

The uplift in VAT recovery for FY25 of €1,000 may be claimed as additional input VAT in the May/June 2026 VAT return.

The 80% recovery rate should be used as the provision VAT recovery rate for FY26 for all remaining VAT returns in 2026.

Timing

Legislation provides that these adjustments should be made in the VAT return period immediately following the financial year end. However, Revenue concessionally allow the adjustment to be included in any of the three VAT return periods following year-end. Therefore, for taxpayers with a 31 December year-end, they have until the May/June VAT return (due on/before 23 July) to calculate and include any adjustment.

Practical steps

If your business has a 31 December year-end and has mixed supplies, you should undertake the following steps before filing the May/June 2026 VAT return:

• Calculate the actual recovery rate for the year
• Compare this to the rate used during the year
• Identify and include any adjustment (refund or liability) through the May/June 26 VAT return
• Apply the updated rate going forward

Final thoughts

The annual adjustment is both a compliance requirement and a window to ensure VAT recovery is accurate. It gives businesses an opportunity to ensure they are correctly identifying and capturing qualifying activities and ensure that the VAT treatment of overhead costs is applied consistently and accurately across the business.  

Forvis Mazars supports clients in reviewing VAT recovery methodologies, identifying opportunities for improved recovery and ensuring compliance with Revenue requirements.

If you would like to discuss your VAT recovery position ahead of the July deadline, please get in touch with a member of the Forvis Mazars VAT team