If you want to increase profits or cut costs, make sure you reclaim all the VAT you can.
It sounds obvious, doesn’t it? But even before the global economic slowdown began Ernst & Young surveys revealed “a surprising tolerance of failures to track, fully report and legitimately reclaim indirect taxes”. Businesses of all sizes are losing significant sums this way.
In this summary, we will focus only on the mountain of foreign EC VAT that goes unreclaimed.
Do you reclaim foreign VAT?
Many smaller businesses now are trading internationally within Europe, especially via the internet. Even a typical business trip to Europe will attract foreign VAT charges which can often be recovered for the business:
- Taxi from airport to hotel
- Business event (conference / training / exhibition / show)
- Car-hire to see local clients
Indeed, whenever foreign VAT is charged to a business, this should be examined closely. For instance, it is not uncommon to see purchase invoices charging up to 25% VAT, when there should not have been any VAT charge at all.
The Bad News
Most VAT is recovered on a periodic UK VAT return. But separate mechanisms exist for businesses recovering the foreign VAT charged on its various expenses.
Unfortunately, the mechanisms are complex, not least because different rules apply in different EC countries. For instance, in the UK the full rate of VAT is charged on hotel stays and is usually fully recoverable; whereas in France a reduced rate of VAT applies but recovery is restricted.
Rejections of foreign VAT reclaim applications are therefore frequent and it is understandable that many business (or their accountants) do not want to get involved, wasting their valuable time fighting to reclaim a few thousand Euro.
The Good News
Fortunately, there are specialists who will do this on behalf of businesses or their accountants, charging just a percentage of the recovered foreign VAT. The good news, therefore, is that it is “no-win no-fee” terms and there is nothing to lose: a pain-free solution, at no cost to the business, resulting in a positive cashflow which would otherwise have been lost as an expense. Can the UK’s many hard-pressed small businesses afford not to recover foreign VAT on these terms?
Nor is recovery of foreign VAT confined to purchases made within the EC. If a business suffers VAT in other countries, it is sometimes possible to recover this too. Switzerland is one popular example.
But perhaps the best news is the deadline for recovery of EC VAT: 30th September (for purchases made in the 12 months up to the preceding 31st December)
How is this deadline good news? Well, for EC VAT registered businesses, the European authorities recognised what a monumental obstacle the new 2010 mechanism had been and deferred to 31 March 2011 the deadline for claiming VAT on purchases in 2009. If you have read this article in time, please act quickly.
What should you do now?
Check whether your business currently reclaims foreign VAT already.
If not, contact a VAT specialist who will talk you through the options open to your business. In particular, some simple steps can be taken immediately to ensure foreign VAT is reclaimed.
Set a reminder in your diary for every 1st January.
Whenever a purchase invoice shows foreign VAT, flag it up or put a copy in a separate file.
Then forget about it and let your specialist battle their way through the complexities on your behalf.
A broad overview on this subject can be found on the European authority’s website here.
You can find lots more help and advice to help you deal with VAT on these other ByteStart guides;
- ByteStart’s guide to Value Added Tax (VAT) for start-ups and small businesses
- VAT registration – when should you register for VAT?
- Why it’s vital you check if a VAT registration number is valid, and how to do it
- Flat Rate VAT Scheme – an overview for small businesses
- What is the VAT cash accounting scheme?