Did you know companies fail to claim a whopping $30 billion every year on VAT on employee expenses?
According to research carried out by Taxback International,
“Companies globally are missing out on $30 billion (€26.6 billion) of potential refunds every year.”
So why do companies that are entitled to VAT refunds not claim it? In this article we discuss the nuances of VAT and how a non-EU business can reclaim VAT on employee expenses. Let’s dig in!
What is VAT and how does it work?
VAT or Value-Added Tax is a tax levied on goods and services. It is based on its incremental value at every stage of distribution and production. VAT is already included in the price of the goods and services purchased. When a business levies VAT on an item, it creates a layer of accountability and obligation to the tax authority.
The end retailer or supplier collects this tax. It is then remitted to the appropriate authority. VAT is not considered as an additional revenue by the business levying the charges.
1. A VAT is destination-based, the price of the tax depends on the location where the employee makes an expense.
2. 166 countries are VAT-related countries and are found in the European Union (including the UK.)
3. Depending on the country, VAT may vary between 15%-25%. In the UK, the standard VAT is 20%.
Reclaim VAT on employee expenses: Non-EU businesses
The value-added tax is meant to be paid by residents of the country levying the tax. The tax does not extend to visitors of the country. On this note, the administration of the country has provision for VAT reclaim.
A Non-EU company can reclaim VAT on employee business travel and expenses (T&E) incurred in the EU. For example, an employee staying in a hotel overnight for business purposes. The VAT can be reclaimed from the bill.
The list of expenses that can be claimed depends on the country and its legislations. But some of the common claimable expenses are:
- Business travel
- Professional training/seminars
- Events and conventions
- Supplier invoices
- Additional business expenses
You must pay attention to VAT if:
- If you are a non-EU company and have a lot of customers overseas
- If you’re sending employees for business purposes in a VAT-registered country
What do you need to know before reclaiming VAT on employee expenses?
A VAT can be reclaimed by companies if they have incurred expenses in a VAT-registered country. But they should make sure they’re eligible to claim those expenses. The companies should also be thorough with necessary details and requirements. Having proper awareness before making a claim can make the process simpler and easier.
Eligibility criteria for reclaiming VAT
For a non-EU company to reclaim VAT, it is important to fulfil the following criteria:
- The company should not be VAT-registered in the country it applies for refund.
- It should not have a place of residence or business in that country.
- The company should not manufacture any supplies in that country.
Before going ahead to file for a refund, remember to make sure you fulfil this criterion. Falling short on the eligibility requirements can reduce your chances of getting a refund.
Type of expenses that cannot be reclaimed
Each country has its own rules on what’s allowed and forbidden for refund. The rules may vary considerably from country to country. For example, some countries may not allow recovery on fuel costs or accommodation.
Even though the type of expenses on which VAT refund is eligible differs, 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, UK exempts on items such as insurance, medical services provided by doctors, etc.
Items required to reclaim VAT on employee expenses
To recover VAT on employee expenses, the company should provide evidence of the expenses. This proof can either be a VAT-invoice or a receipt. There needs to be a clear proof that the product/service purchased are being used for business purposes only.
For the invoice or receipt to be valid, it should be issued by someone who is VAT-registered. The issued invoice should contain the date of purchase, supplier’s business name and address, the supplier’s VAT number, and the amount of VAT. Also, the invoice should include the customer’s name and address and the purchase amount.
1. VAT can be claimed from EU countries and other countries well.
2. Ensure receipt submissions happen per the national currency of the country the expense was incurred in.
3. VAT is inclusive of the overall price of expense. In a receipt, the VAT value is shown as a separate value.
4. Supplier statements, delivery notes, payment requests, and pro forma invoices are invalid forms of proof of expense.
Steps to reclaim VAT on employee expenses
1.Confirm eligibility to reclaim VAT on employee expenses
For a non-EU company, they have to fulfill specific criteria to reclaim VAT. As discussed earlier in the article, the company should not be based in a VAT-registered country. The business should also have no place of residence, business, or manufacturing industry in that country.
2. Make sure you have proof of purchase orders
A reliable source of proof of the business expense should be present with you as evidence. The invoices you collect should include all relevant details such as business name & address, VAT number, amount, and the date of purchase.
Insufficient records can lead to the rejection of claims by tax authorities. To ensure your claim doesn’t get rejected, make sure the invoice provided is compliant with the VAT rules.
3. Calculate how much VAT your business can claim
It is important that you always organize all your VAT-related expenses and maintain a record of it. Keeping a separate record of VAT on purchases can help you determine how much you can reclaim. Once done, calculate the VAT amount charged on each receipt. Also, make sure all the VAT expenses you plan to reclaim are recoverable under the country’s VAT expense rules.
4. Apply for VAT return
Assuming that you fulfill all the requirements, the application for reclaiming VAT should be sent to the authorities in the country you operate. Make sure you file for refunds within the VAT period.
The VAT reclaims, if approved, are refunded by tax authorities in the country where your business has incurred expenses. In case of rejection, the company may have to provide additional documentation.
Electronic submission is allowed and should be submitted no later than 30th September.
Challenges in reclaiming VAT on employee expenses
- VAT rules vary based on geography
Every country has its own set of tax legislations. They also have their own tax charges, which may vary from product to product. In such cases, companies that operate in multiple countries may find it challenging to stay on top of things.
- Lack of evidence of business spends
Receipts and invoices are the ultimate sources of truth to make claims. Any missing information in the invoice can result in losing out on VAT reclaims. Therefore, it is crucial to document the receipts and invoices with the details required by the specific country.
- Hidden costs of reclaiming VAT on employee expenses
The procedure may require a lot of back and forth with tax authorities. It also requires an in-depth knowledge of technical taxation and accounting terms. This can be taxing and requires a high level of diligence and expertise for smooth operation. Ultimately, the procedure may take up a lot of time and effort.
Recovering VAT on employee expenses
The whole procedure of reclaiming VAT can be tedious and time-consuming. For companies operating in different countries, they have to keep up with all the travel and expense policies. The companies also have to make sure they’re up-to-date. This includes making sure whatever expenses your employee has made is reclaimable under the law.
Each country also has different VAT rates. VAT tax can start at 5% and go up as high as 25% of the total invoice spend. For companies operating largely overseas, this can put a dent in their finances.
Even though the process can be stressful, having a robust expense management software in place can help you tackle the challenges. This can help you to successfully recovering foreign VAT and avoid losses.
VAT is an end-user tax. It is not intended for businesses to lose money.
To avoid losses while recovering VAT on employee expenses
- Seek refunds that rightfully belong to you
- Carefully document all VAT-related receipts and invoices
- Ensure seamless integration between all VAT related activities and your business plans
- Maximize VAT refunds and avoid non-compliance penalties
Whether your employees are traveling to Germany for a business conference, or to the United Kingdom to close a business deal, maintaining proof of business expenses is vital to reclaiming VAT. This is where a travel and expense management software such as Fyle comes into play.