Proposed originally by the German industrialist Wilhelm von Siemens in 1918, Value Added Tax or VAT has become an important part of the Tax structure in many countries. France was the first country to introduce VAT in 1954. Today it is, for France, the most important source of State Finance and forms almost 50% of the Government’s revenues. Other countries were quick to add VAT to their own Tax structures. Most countries in the world today charge Value Added Tax, as part of their fiscal policy. It is a Tax that even visitors to such countries have to pay. It is unavoidable. It can be as high as 25.50% in some countries. Every hotel stay, or restaurant bill, involves VAT. The Scandinavian countries charge the highest rates. In some countries, different services or goods, attract different rates of VAT that is chargeable. VAT varies from 5% to 25.50%. Fortunately, many companies become eligible for a VAT refund on the business travel of their employees.
What Are Value Added Tax (VAT) Refunds?
The scope of this post is restricted to VAT refund on business travel. It has nothing to do with VAT recovery related to Leisure travel or personal shopping. Most companies today, just budget the VAT amounts as part of their Travel and Entertainment (T&E) expenses, and write them off as an expenditure. Many companies do not seem to realise that these amounts can be recovered.
Many countries (mainly in Western Europe), actually refund VAT. Among the Directives that govern VAT refunds, two are most important to business entities. The 13th Directive: it relates to refunding countries that refund to non European Union (EU) countries. The 8th Directive: which is concerned with EU member countries refunding to other EU countries.
Some VAT Refunding Countries
Among the countries that refund VAT are: Austria, Belgium, Denmark, Finland, France, Germany, Japan, The Netherlands, Norway, South Korea, Spain, Sweden, and the United Kingdom. It must be noted, however, that not all countries refund to every country around the world. Some apply the rule of reciprocity. In other words, they will only refund to travellers from countries, who refund to their own business travellers.
Expenditure under several categories are eligible for refund. Here are some items on which VAT can be refunded: Hotels, Car Rentals, Meals, Banquets, Meetings, Seminars, Conferences, Training, Trade Shows, Legal, Advertising, Research and Development (R&D), and Technical Fees etc. It must be noted that not all categories are refundable in all countries.
In spite of the arrangements with various governments to refund VAT, too many companies leave their recoverable Value Added Tax unclaimed. Millions of dollars that can be refunded each year, are never claimed. It is difficult to understand why. In some cases it may just be ignorance; in others, it may be due to inadequate internal company processes. It really is a saving option that is up for grabs.
What Does a Company Have To Do To Recover VAT on Business Travel?
There are two ways to do it. The company can use it’s own Tax Department (if they have one), to file for VAT refunds. Alternatively, they could employ a VAT recovery company to recover their refundable VAT, on their behalf. The former can be a lot of work and time-consuming. Different governments have different regulations and often, even completely different processes. The documentation involved can be different as well.
I would recommend that a company outsources the filing process: appoint an established VAT recovery company with a good recovery record, to do the work. Most often there are no upfront fees that the corporate would have to pay. The VAT recovery company would just deduct the mutually agreed service fee, upon successful recovery of the refundable VAT.
Are There Deadlines For The Submission of VAT Refund Claims?
Yes, there are deadlines. This may differ between some countries. The financial year in the UK is July to June. The UK will give an applicant an additional 6 months to submit the claim. The deadline therefore for the Country will be December 31, for the preceding fiscal year. For most European countries, however, the deadline will be Jun 30 for the preceding fiscal year. The deadlines may however vary for refunds that are entirely within the European Union. In other words, from one EU country to another EU country.
Which VAT Recovery Company Should a Corporate Choose?
In the process of selecting a VAT recovery company, the following questions will prove useful:
- How long has the Company been in the VAT recovery business?
- Do they have a process that is able to interface/interact with client Expense Management System software to evaluate the full potential of the service and also use the same access to maximise the client’s VAT recovery?
- What is the percentage of successful recovery? (percentage between submissions and recovery)
- How many countries can they recover VAT from?
- Will they handle registration that some VAT refunding countries may require?
- Do they have any upfront fees?
- What do they do when an invoice/receipt with a large VAT value, is rejected by the relevant VAT authorities? Do they have an internal process to work around the issue?
- Are they able to go beyond VAT recovery on routine business travel? For example, handle VAT on Accounts Payable invoices.
- Do they provide online summary reports on what has been submitted, recovered and what is in the pipeline?
- Do they provide clients with an Account Management service?
Investing a little time in choosing the right VAT recovery company to handle their VAT refunds could go a long way in the successful recovery of VAT. Sometimes the process can become part of a Corporate Travel RFP, and the company can leave it to their Travel Management Company (TMC) to deal with the VAT refunds. Many TMCs today have arrangements with VAT recovery companies to handle the process for their clients as part of the TMC service.
I would personally urge you as a business entity, not to leave your refundable Value Added Tax unclaimed. Refundable VAT invoices/receipts have a limited shelf life for the process. After the stipulated deadline passes, you would have lost the opportunity to convert paper into cash. Why on earth would any business wish to throw money away? Do convert the paper in your files, to cash.
Note – This article was updated on October 12, 2021. Should you have any comments or queries, please do use the comment box here below. I will respond to every comment within a reasonable period of time. I’d also be delighted if you share this blog with contacts of yours who may benefit from its contents. Please use one of the Social Media share buttons below. Finally, I’d love to have you subscribe to my blog: you will never miss a post!
© 2021 Mano Chandra Dhas
What is Value Added TAX (VAT)
Value Added Tax (VAT) is a tax charged in many countries that the user of a facility or a buyer of goods and services has to pay according to the Taxation Laws of the country involved.
Is VAT Refundable?
Yes. VAT is refunded by many countries. There however are deadlines for submitting a claim.
What does it mean when it is said, "refundable only on a reciprocal basis."
Some countries apply the rule of reciprocity. In other words, if Country A refunds VAT to Country B; then Country B will refund to Country A. Spain is a typical example.
Who is eligible to receive the refunded VAT?
VAT refunds on Business Travel is only made to the Companies who had their employees travelling for and on behalf of the company.
Are individual travellers eligible for VAT refund on Business Travel?
The refund is always made to the company. If the individual traveller is also the owner of his company, it will be refunded to the company he owns.
Are there deadlines for submission of a VAT Refund claim?
Yes, there are deadlines. They may however be different for different countries.
VAT has been charged on an Accounts Payable Invoice for an item that was bought from a European country. Are we eligible for a refund?
In my experience, in most cases the invoices will be eligible for a refund. I may need to see the invoice before I can tell you whether or not you are eligible.
In what currencies will the VAT refund be made?
The VAT refunds will always be made in the currency of the original payment. Most often the refund will be paid to the bank account of the VAT Refund Company soliciting the refund. They will usually convert it to your currency at the bank rate on the day applicable.
Is the submission of a VAT refund claim difficult?
The short answer is, “no it is not difficult.” However, as there are many rules and regulations involved, it may be best left to a VAT recovery company to handle your submission.