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Billions In VAT Refunds Go Unclaimed Across The EU

by Robert Lee,, London

29 December 2005

Lowendal UK, a cost reduction consultancy, said last week that businesses throughout Europe are missing out on millions of pounds worth of reclaimable VAT incurred in cross-border transactions.

Ann Jones, Lowendal’s MD, says: ‘A recent study of the 15 member states of the old European Union showed that 53.4% of all cross-border VAT which could be recovered is not being claimed.

‘In the 15 states, cross-border transaction VAT payments amount to about 10bn euros (£6.8bn). Only 4.5bn (euros) is being reclaimed – and 2.5bn of that is in the Netherlands. This means that vast numbers of companies across Europe are not reclaiming cross-border VAT.’

Ms Jones, who specialises in recovery of VAT for companies, says that if businesses planned their approaches to this it would pay them handsomely, despite difficulties such as linguistic complications, bureaucratic obfuscation and the lack of resources.

According to the Financial Times, Robert Crooks, head of indirect taxation at the Big Four accounting firm Ernst & Young, these problems have "unquestionably increased" in recent years, and he estimated that UK firms alone are forgoing claims totalling between GBP100 million and GBP300 million annually as a result.

This is hardly a new problem: the European Commission has been slaving away for years to try to get Member States to agree to a move towards origin-charging, which would largely solve the problem. Since national treasuries are getting away with so many billions of foreign companies money, it is hardly likely they are going to agree.

In July, the European Parliament voted in favour of the Commission’s one stop shop proposal under which a business could comply with all its EU-wide VAT obligation through a single Member State registration. But to become law the proposal requires the unanimous approval of the Governments of the EU Member States - a pipedream!

The Eighth Directive on VAT Reclaim sets out to ameliorate the problem, but it is complex. The Directive allows businesses to reclaim VAT incurred by submitting a claim, together with the original supporting invoices. Claims have to be made to a designated office in each member state, using a common EU form.

The claim for VAT incurred in any calendar year has to be received at the tax office by 30 June in the following year, at the latest. In most countries, this time limit is strictly applied, but a few Member States allow later claims.

In theory, all VAT incurred for business purposes can be recovered. However, each member state has its own rules, and restrictions are applied to the recovery of VAT on certain categories of expenditure.

Despite the European Commission’s best efforts, Member States have been allowed to keep these restrictions if they were in existence in 1977.

Businesses often have difficulties with Eighth Directive claims if they have income in the member state where the VAT is
incurred, because this mechanism is not a substitute for VAT registration. Where a business makes any supplies in a Member State and the liability to account for output VAT is not transferred to the customer, the Eighth Directive mechanism cannot be used and claims for VAT to be refunded are rejected. In these circumstances, VAT registration in the country concerned may be the only way to obtain a refund of the VAT incurred.

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