What you need to know about VAT recovery

Companies lose more than €18 billion unclaimed each year. Reclaiming VAT from abroad can be an overwhelming process – but it does not have to be.

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If companies would like to have their VAT reclaimed from abroad, this is often only done through a great bureaucratic effort. Although VAT is refundable in more than 40 countries worldwide, not all tax rates, deadlines, processes, and guidelines are the same.

Circula's newest partner WAY2VAT proves that it can be done differently, allowing companies to have their foreign and even local VAT reimbursed completely automatically. Sarah Fadida Razlan, Partnership Marketing Manager at WAY2VAT, explains how this works and what else companies should pay attention to when it comes to VAT refunds.

VAT and Employee Expenses

Many businesses have Accounts Payable systems designed and set up to capture VAT on suppliers’ invoices. Those same businesses will also operate complex expense management systems to support employee expense and travel expense processes. These ensure that the data is captured in an efficient manner with minimal disruption to employees.

Unfortunately, one area often completely ignored is VAT recovery. This is a shame because fundamentally, any VAT incurred in the course of business activities can often be recovered. Expense Management Systems are often ignoring this opportunity. Given the fact that the average VAT rate is more than 20% in the EU this can amount to significant amounts. Globally, companies lose more than €18 billion each year due to unclaimed VAT on expenses.

Taking Germany as an example, the standard rate of VAT is 19%. A lower rate of 7% applies to a range of goods and services including: books (including eBooks), passenger transport, hotel stays etc.

What VAT Can You Recover?

In order to recover VAT, a valid VAT invoice or customs document must generally accompany a claim for input VAT. The German tax authorities may not allow VAT recovery for an invoice that does not include the requirements for a German VAT invoice. It is possible that such an invoice may be corrected or amended retroactively under certain conditions.

The following is a list of items for which input VAT is deductible if it is related to business use:

• Hotel accommodation
• Restaurant meals for employees on business trips
• Books
• Transport services
• Parking
• 100% purchase, lease or hire of cars by businesses (with VAT chargeable on employee private use)
• Fuel
  
  

Who can Recover VAT?

Most businesses will incur VAT when they purchase goods and services to enable them to operate their business activities. As a general rule, businesses in the European Union (“EU”) can recover VAT through their VAT filings if they are registered for VAT in the same country as where the VAT was suffered. This may sound obvious, but it is an important principle to VAT recovery. A German company which incurs German VAT can recover the VAT on its German VAT filings. It follows that if the German business incurred French VAT, it would be unable to recover the French VAT on its German VAT filings. Instead, there is a special EU Refund mechanism under which the German company can recover the VAT from the French tax authorities. We will touch on this later.

Not all businesses can recover VAT. A business which makes exempt supplies (such as financial services), may be unable to recover some or all of its VAT. The majority of businesses are able to recover VAT.

Restrictions to VAT Recovery

Input VAT cannot be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use). This is the position across the EU. The following specific rules apply to VAT recovery in Germany:

• 10% rule. If goods or services are used for less than 10% business purposes, no input VAT recovery is allowed.
• Private use. For VAT registered businesses, the purchase of goods or services is treated as being made for business purposes and German VAT can be recovered in full. However, to the extent that there is private use (e.g. by employees) a supply is deemed to arise and output VAT is due. If the goods were purchased with private use in mind the position is not so clear, and it is likely that no VAT would be recoverable.
• Business gifts. In addition, German VAT is not recoverable for business gifts valued at more than €35.
• Phone bills. VAT incurred on employees’ private phone bills and paid by a business is also not recoverable.
  
  

Evidence Needed for VAT Recovery

While the rules can appear complex, the reality is that there is likely to be VAT that can be recovered on employee expenses. As detailed above the key is to retain the correct evidence such as invoices. If you haven’t recovered VAT yet, not all is lost. Often it is possible to submit a back claim for local VAT that could have been recovered. Generally, the rule in Germany is that it is possible to claim for a period going back up to 5 years.

Overseas VAT Recovery

So far, we have dealt with cases where a German business incurs German VAT and how it can recover this on its German VAT filings. As Covid-19 restrictions appear to be easing we are beginning to see more international business travel. It is therefore likely that a German business may send its employees on business trips, conferences, trade shows and exhibitions which take place in EU countries. Employees will incur VAT in such countries on hotel accommodation, meals, certain transport, conferences etc. As detailed above, VAT incurred across the EU is not recoverable on business’s German VAT filings.

Scheme to Recover EU VAT

Instead, VAT may be recovered under the EU VAT Refund Scheme. For example, if a German business sent its staff to a conference held in Belgium and the cost of the conference and hotel accommodation was all subject to Belgian VAT. Under the scheme the German VAT registered business is entitled to submit a VAT refund claim via the portal of its tax authority – namely the German tax authority. Invoices will need to be scanned and uploaded to the portal. After an initial check by the German tax authorities, the claim will be sent to the Belgian tax authority which will undertake some checks and any VAT repayment will be made directly by the Belgian tax authorities.

There are some strict rules associated with the submission of such claims. Firstly, such a claim can only be made if the German business has no obligation to register for VAT in Belgium. In addition, there are strict time limits for submission of claims. The claim period covers a calendar year, and the claim needs to be submitted no later than 30 September following the end of the calendar year.

VAT can only be recovered based on the rules of that EU Member State. It is therefore important to ensure that you understand what VAT is recoverable in that Member State. The rules surrounding this are complex and if you think you may be eligible for a back claim, please get in contact with us and we would be happy to discuss the scope and possibility for such a claim.

Circula and WAY2VAT are offering companies with business expenses both home at home and abroad, the ideal solution for post-travel-expense-reporting automated VAT refunds.

Already scanned and submitted receipts from global business expenses are transferred via interface from Circula to WAY2VAT, before being automatically verified and transferred to the foreign tax authorities.

This eliminates the (previous) time-consuming process of applying for a VAT refund and is automated for you after your travel expense report has been checked with Circula.

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