Internationally active companies often miss out on potential refunds of 7 – 10% of VAT paid in foreign countries, considering them as lost due to the effort needed to reclaim them.
VAT reclaim is a huge opportunity to reduce business costs and put money back in your budget.
Many companies who are entitled to VAT refunds do not claim it as they are unaware of the fact that there is a percentage of tax in many expense types that can be reclaimed when their employees traveling for business returns to their home country from over 180 countries.
This is despite the fact that the top business priorities for the companies in such inflationary macro-economic scenarios are often
- Cutting back on the costs
- Improving the bottom line
- Increasing the cash flows
Let’s dig in and discuss the nuances of VAT and how non-EU businesses can reclaim VAT on employee expenses.
VAT is your money, claim it back!
Employers can recover VAT on foreign expenses of the employees. However, not all the employee’s expenses qualify for reimbursements and VAT cannot be reclaimed on all the expenses that qualify for reimbursement.
First and foremost, the expenses on which VAT can be reclaimed should meet the criteria of an essential business purpose:
- Check the employee’s expenses are essential for business purposes.
- Expenses must come with invoices indicating the name of the company and the VAT paid.
Besides, the companies need to be aware about the expenses the VAT on which can be reclaimed, depending on the country and its legislation. The companies operating in the EU realize that VAT regulations remain highly localized and specific from country to country. Because each country has its own set of rules on what can be allowed and what is forbidden for refund, a lot of senior finance leaders do not feel confident that they understand how to claim back international VAT.
However, while processing the refund claims, the tax officers usually only want to be able to answer four questions:
- Did you actually pay the money?
- Was there VAT on the payment?
- Have you recorded it correctly?
- Was it for business or personal expenses?
It is important to keep in mind that not all expenses are eligible for VAT reclaim. Even though the type of expenses on which VAT refund is eligible differs, some common expenses that can be reclaimed are:
- Business travel
- Professional training/seminars
- Exports
- Events and conventions
- Supplier invoices
- Additional business expenses.
Expenses that do not meet the criteria of essential business purpose are usually ineligible for reclaim across the countries. Some common expenses that cannot be reclaimed are:
- Any personal expenses like food, transportation, and accommodation
- Any kind of business entertainment
- The cost incurred on VAT exempt-supplies. For example, the UK exempts on items such as insurance, medical services provided by doctors, etc.
The challenges in VAT recovery
The world of VAT compliance is filled with all little details, snags, and pitfalls. The discrepancies or anomalies in VAT returns, either due to a genuine error or fraudulent entry, still end up in exhausting audits by the tax authorities. Surely the businesses would not want to go through it and end up having to pay punitive fines due to incorrect claims rather than getting a VAT deduction.
Besides, as we saw earlier, despite harmonization at the EU level, the laws are highly localized, and the procedures remain cumbersome. This is the reason companies often view the VAT reclaims as not high enough to chase and end up losing the rightful claim to VAT refunds.
Digitalization of VAT operations can be an answer to such concerns. The IDP capabilities backed by AI-based analysis can help in transforming the paper invoices to machine-readable format and verify the eligibility of reclaim based on the jurisdictional VAT laws to prepare the refund claims. The automation in analysis and claim compilation can increase the VAT refund yield and where tech cannot replace the human touch, you can get in touch with us at
Author
Komal Vithalani
Content Writer
Komal Vithalani, a Chartered Accountant and Commerce graduate, is a dedicated professional committed to delivering value with years of expertise in navigating the complexities of indirect tax laws. Her practical excellence includes managing perplexed litigations, dispensing tactical tax advice, conducting thorough compliance checks, supervising audits, and crafting articulate and insightful content. At Cygnet, Komal seamlessly blends her profound understanding of tax regulations with cutting-edge tax technology. Leveraging her competence, she adeptly transforms complex tax tech jargon into concise, impactful, and engaging content. This not only aids readers in comprehending tax-related topics with enlightening clarity but also ensures the delivery of narratives that resonate broadly.