Value Added Tax (VAT) is one of the trickiest taxes to administer; and it has great potential for optimization that is often overlooked. The rules and regulations vary significantly in different countries and jurisdictions, and it is not always clear which rules to apply, which adds to confusion. As VAT can add a significant amount to a company’s expenses (up to 27%), reclaiming VAT, as tricky as it is, should be one of the primary concerns in tax return (in Europe and other jurisdictions).
What Is VAT?
VAT is an indirect tax levied on the consumption of goods and services. It is ultimately paid by the end consumer; however, VAT is applied to all commercial activities involved in the production and distribution of goods and services. What is important to note here, is that VAT is collected fractionally to avoid snowballing taxation with every transaction. In plain words, this means that taxable entities deduct the VAT they paid to other taxable entities on purchases for their business activities from the amount of tax they collected.
Actual tax rates vary greatly across various jurisdictions: countries both inside the EU and abroad apply different rates to certain types of products (or exempt them altogether). This is one of the reasons what makes VAT particularly tricky to administer with cross-border transactions: it takes a lot of time and human effort, while the opportunities to reclaim tax are often overlooked.
The Often-Missed Opportunity: Reclaiming VAT on T&E
T&E stands for Travel and Expenses, or Travel and Entertainment Expenses. It is one of the largest operational costs that often closely follows salaries and may average around 10% of the company’s total budget. The more surprising is the fact that many organizations fail to claim this on their tax returns under business travel and subsistence expenses.
T&E generally include such travel-related expenses as:
- Hotels and restaurants
- Cabs, public transportation, car rentals, and fuel
- Professional conferences and trade shows
Makes sense, right? Almost. VAT refund rates and policies vary between countries, and sometimes countries even have multiple VAT brackets.
For instance, air travel is generally zero-rated, but not always. A flight within the UK on a private jet that seats fewer than 10 people may be taxed, so using a helicopter for domestic flights in this country will have VAT applied. And that’s just one example!
Think about a business lunch with prospective partners – a routine event that incurs business-related expenses that fall within T&E category. Your VAT reclaim will depend on the country: in Germany, the VAT is deductible for both employees and guests, while in the UK it is only deductible for employees.
It is hard enough to track all the rules and regulations within the EU, let alone other countries that levy VAT, such as Australia, Japan, Russia, Singapore, and so on. Remember, VAT is applied to all commercial activities in the production and supply chain. Failure to deduct reclaimable VAT not only means less money in your company’s bank account, but it also makes your goods and services less competitive. It is the final customer who bears the burden of footing the bill at the end of the day.
That is why it is vital to know what expenses are subject to tax returns, and use this knowledge as the driver of your competitive strength.
Documenting Business VAT Reclaim
Keeping track of the ever-changing rules and regulations in different jurisdictions is but a part of the problem in reclaiming VAT. A VAT-registered business must keep a separate summary of VAT sales and purchases and issue correct invoices. Tax authorities reserve the right to visit your company and inspect your record keeping that go years back, and penalize you if it has not been kept to standard. 93% of corporations with assets >€20B were audited in 2015.
Valid invoices are a must for reclaiming VAT. These can be paper or electronic, but your company must keep copies of all the sales invoices it issued, even if they were canceled or issued by mistake. You should also keep all purchased invoices from the items you buy.
Invalid invoices, as well as pro-forma invoices, payment requests and such cannot be used for tax return purposes! A valid invoice must contain certain information depending on your jurisdiction and the type of invoice you are using (full, simplified, modified).
It gets yet more complicated with foreign VAT reclaim, especially if you issue VAT invoices in a foreign currency and/or language. As a general rule, you must provide a translation of any invoice upon request from tax authorities. You should also know the procedure of converting currencies for reporting, and be aware that exchange rates are subject to change.
Automating VAT Documentation
Although it is the end customer who bears the burden of paying VAT, it is businesses that administer it. This means continuous updates to your processes and procedures to comply with the tax laws as they change. This includes issuing valid invoices with correct tax rates that are subject to change, calculating the correct amount of deductibles, meeting the deadlines, and keeping all your records accurately and completely.
Managing VAT documentation, as well as keeping track of all the novelties and nuances in tax legislation, are extremely labor-intensive and not a cost-effective process at all. A VAT Manager spends at least 50% of his time on just gathering data! What’s worse, with all the effort put into it, reclaiming VAT using manual processes still lacks transparency within your organization and result in zero visibility and missing out on opportunities to optimize your tax burden.
VAT technology has advanced in many ways, making it easier for VAT recovery to be done automatically. By allowing employees to upload receipts and digitally enter the relevant data, it will be easier for companies to track their VAT spending and increase the transparency for all relevant transactions.
The intricacies of both domestic and foreign VAT can be difficult to keep track of and even fully understand. That is why it is important to have a reliable solution that manages the details of the entire VAT recovery process. Better technology means more detailed reports, more cost-effective solutions, and more reliability in the results. By implementing a VAT analysis solution, your company will reap the benefits of a more accurate (and hopefully greater) VAT return.