Cross-border VAT Recovery: the Clock is Ticking

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Rob Janering

Rob Janering Accordance, U.K.

Rob Janering is Associate Director at Accordance, U.K.

The need to make accurate and timely VAT recovery claims is more important than ever, in light of the U.K.’s impending Brexit. What should businesses do now?

We're already two months into 2018. The deadline for businesses to submit claims for VAT incurred in other EU member states during 2016 passed at the end of September last year (or June for non-EU businesses). (The only exception to this is the U.K., where claims made by non-EU businesses will be for VAT incurred in the 12-month period July–June. As a result, claims must be submitted by the end of the following December.)

The deadline to make claims for 2017 isn't until June/September this year. So, you might think that there is no pressure to prepare or make any claims now. In fact, the opposite is the case, particularly for U.K. businesses managing the journey to Brexit.

A VAT recovery claim is the request for repayment of VAT incurred in EU member states where a business is not established nor undertakes any activity where it is liable to be VAT registered. VAT is not supposed to be a cost to business; these claims are the mechanism for recovering VAT where no VAT returns are submitted. Claims can be made for a spectrum of costs: from hotel bills to exhibition stands, right through to hundreds of thousands of euros on manufacturers' warranties.

Businesses within the EU make EU Refund Directive claims; those from outside make 13th Directive claims. In either case though, the same processes must be undertaken to have a successful claim. If not followed properly then a business risks not recovering the VAT it has incurred and (to make the whole process a little more nerve wracking!) the possibility of incurring penalties from tax authorities for making false claims.

During a recent webinar Accordance held to discuss VAT recovery, 55 percent of respondents stated that they are not confident or don't know if they are claiming all the VAT they are entitled to. Accordance works with many clients assisting them to recover VAT: this involves us always reviewing all the VAT incurred to ensure that it has been correctly charged. If it has been incorrectly charged, we advise clients to not try and recover it. Instead, we help clients to approach their suppliers and obtain credit notes, which results in the VAT being refunded. Identifying such errors has benefits going forward, because it should prevent VAT being paid in the future when it is not due, which helps with cash flow.

During the recent webinar, over 50 percent of respondents admitted that they don't undertake this review of VAT costs. Not doing this is likely to make their claim process much more difficult and subject to risk than it could be. This is because tax authorities will issue penalties if businesses make claims for VAT that is not recoverable. Undertaking the preparation and making of a claim in the right way is, therefore, a very important stage of the refund claim process. It is critical to understand from a VAT point of view the nature of the activity that has led to the claim. Tax authorities are all too happy to reject claims that don't meet complex criteria.

However, even when the claim has been made, attention still needs to be paid to ensure a successful outcome. In nearly all instances a tax authority will ask some questions about the claim and that request will be made in the local language. So, if a U.K. business makes a claim for Latvian VAT and can't speak or understand the local language, it will have a major problem in securing a successful claim. The webinar identified that 41 percent of participants found that corresponding in foreign languages was one of the biggest challenges they faced when trying to reclaim their VAT.

Brexit

The need to make accurate and timely claims is currently more important than ever, due to the U.K.’s impending Brexit from the EU. Currently U.K. businesses can make EU Refund Directive claims, which compared to 13th Directive ones, are relatively straightforward because they are submitted to HM Revenue & Customs and not directly to the local tax authority. In addition, 13th Directive claims rely on the refunding country accepting “reciprocity” from the claimant's country—if, say, Spain, refunds U.K. businesses then it will expect the U.K. to refund Spanish businesses with U.K. VAT. The use of Spain as an example is relevant because Spain doesn't refund American businesses because the U.S. doesn't offer reciprocity (there is no VAT equivalent). Given that we don't currently know what Brexit will look like and whether all EU member states will identify/accept U.K. reciprocity, U.K. businesses should be looking to protect and recover as much VAT as possible while the current rules remain in place.

Planning Points

  •  Firstly, claims for VAT in the calendar year 2017 can be made now, there is no need to wait for the deadlines later in the year.
  •  Secondly, claims for 2018 can be made on a quarterly basis in 2018 (i.e., Q1 2018 claims can be submitted at the end of March 2018).
  •  Finally, the sooner claims are made the sooner they are looked at and dealt with by the tax authorities. This means there is an opportunity to “wrap up” claims before March 29, 2019 and Brexit, which should enable businesses to have more certainty than might occur if claims are still outstanding at the end of March 2019.

Rob Janering is Associate Director at Accordance, U.K.Accordance specializes in the analysis of cross-border VAT. Our consultants lead the company's compliance and reporting processes, as well as delivering cross-border VAT projects for international businesses. Accordance's compliance team consists of staff who speak all the major EU languages. If you have any questions regarding VAT recovery, please email vatreclaim@accordancevat.com.

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