VAT Reclaim and International Business Travel After Brexit

Many aspects of our business and personal lives have changed in the aftermath of Brexit. From new European Health Insurance cards when going to the EU, and changing rights around living and working in various EU countries, through to value-added tax (VAT) reclaim, the regulatory environment we face differs considerably.

The same can be said for international business travel. Brexit is certainly playing a role in limiting international travel, coupled with the effects of Covid-19, which have included worldwide border closures. We have not been able to see the full consequences of what international business travel will look like following Brexit, as the travel industry has been stopped in its tracks since the new laws came into effect.

However, it is clear that the appetite for travel is there, with recent YouGov research showing that 70% of those surveyed agree that traveling for work and conducting face-to-face meetings will help strengthen business relationships, and over half (54%) of respondents maintaining they are looking forward to getting back to business travel.

VAT reclaim is another area impacted by Brexit. This includes both VAT reclaim by British travelers across the world and those claiming VAT from travel within the U.K. As businesses switch tack to adhere to various government and authority rule changes, it is clear that the effects of Brexit on business travel will be widely felt.

VAT Reclaim Across the World

In the past, U.K. business travelers could move around freely and the VAT incurred on expenses could be reclaimed. However, the U.K. is not the first country that needs to set VAT reclaim protocols in place with the EU. Some countries outside of the EU, such as the U.S., Japan, and South Africa, have reciprocity with countries all over the world, meaning that businesses can claim back their VAT on goods and services purchased in the relevant country. Reciprocity is a bilateral mechanism between countries that allows for VAT recovery on expenses between those countries.

Before Brexit, the U.K. and other countries could reclaim VAT interchangeably within the EU: Now, only a handful of countries have reciprocity with each other. Businesses within the EU and the U.K. had hoped that VAT reclaim reciprocity rules would roll over and continue as before Brexit, but that is not what has happened, despite lengthy debates in the lead-up to Article 50 being triggered, and subsequently after the Free Trade Agreement was reached.

However, there is hope that reciprocity will be announced with all EU countries so that this will not be an issue moving forward.

The technicalities for claiming VAT arise from the fact that each member state of the EU will now be free to set their own VAT policy with the U.K. The minimum required standard VAT rate is 15%, but countries in the EU can choose to set their own rates, meaning that realistically the lowest rate is 17% in Luxembourg, and reaches a high of 27% in Hungary, resulting in very high VAT reclaim opportunity.

The VAT reclaim legislation in each country states how claims should be submitted, including deadlines, and where claims should be submitted. All processes for VAT reclaim are legislated for each country, with EU laws and directives governing this for foreign cross-border VAT recovery, including deadlines.

Domestically, each individual country has specific requirements for what needs to be included on the invoices, and their format; this should not result in change for U.K. businesses reclaiming their VAT post-Brexit, as this has always been a key stipulation. It is a process, and now that the U.K. is no longer part of the EU, VAT reclaim will likely take longer.

Claiming VAT From the U.K.

In reverse, when it comes to reclaiming business VAT from the U.K. authorities, the U.K. has a good track record of around three–four months for the process, with the general consensus being that the U.K. tax authorities and systems work well and efficiently for overseas claims, although it may now take longer for refunds to be issued.

Pre-Brexit, the EU wanted to be easy to do business with, so every EU country could make a claim into each other via an online portal. This removed the need to send original documents and instead enabled everything to be uploaded and accessed electronically, which also lent itself to quicker acceptance and as a result, allowed more cases to be approved.

However, EU companies seeking a cross-border VAT refund from the U.K. may now have to apply via a mechanism similar to the EU 13th Directive, as the EU refund 8th Directive will no longer apply. This will mean that electronic submissions will not be applicable and paper documents will have to be submitted instead. Ultimately, this means it takes longer to prepare a claim and submit it, along with a requirement for manual checking to ensure all information is included.

Reclaiming VAT at the standard 20% U.K. rate can deliver significant financial benefits, which is why expense management systems are increasingly important for streamlining the process. Businesses seeking to boost cash flow in the current environment stand to lose out and reduce their profit and loss statement should they not seek to reclaim their VAT on expenses.

Businesses having the ability to digitize parts of VAT reclaim means that confusion and mistakes are minimized. Having a single source of all information required to submit to VAT authorities saves businesses time and money, avoiding problems from finance teams and preventing issues. The alternative to expense management systems in this area is not pretty: stacks of paper, human error and time-consuming tick-box exercises.

Automation for Compliance

The existing post-Brexit reclaim process is paper submission only, meaning it is up to governments and tax authorities to implement electronic processes and start to incorporate them into VAT reclaim procedures. It is likely that in the next 12–24 months reclaims will resemble the pre-Brexit era—fully digital. But in order to drive electronic change, businesses need to be leading from the front and pushing VAT authorities to embrace digital transformation across the board.

We have seen this pressure work, with France already announcing its intentions to overhaul its systems and simplify areas such as VAT reclaim in a post-Brexit world. Globally, sweeping changes in digital tax mandates continue to appear, following the widespread introduction of continuous tax controls (CTCs) which allow tax administrations to capture and process invoice data in real or near-real time; France’s plans have been on the cards for a while now, even if the mandate is being delayed.

This is where expense management and accounts payable automation solutions come in to help businesses improve their record keeping. The better these records are kept, the easier it is for specialist VAT claim organizations to submit claims and manage the process. Incorporating tax reclaim parameters within spend management solutions also enables employees to understand exactly what can be reclaimed.

For example, when traveling for business, hotels, cars, subsistence, marketing costs and rental cars are all included in VAT reclaim, whereas globally, flights are never eligible for VAT reclaim (one exception being for domestic flights in Germany).

From a compliance perspective, enabling electronic documentation for VAT reclaim encourages employees to get the right information together—be that electronic receipts or PDF booking confirmations. The issue of needing original (physical) copies of receipts will force governments to take advantage of electronic submission systems, as EU countries’ existing reclaim portals will no longer allow U.K. companies to submit VAT reclaims electronically.

Companies with expenditure on travel and accounts payable, as well as the VAT reclaim industry, need to lead from the front and push for VAT reclaim to be made easier digitally, putting pressure on other countries to follow in France’s digital footsteps.

Impact on Businesses

For now, it is important to know which EU countries have reciprocity; then, when there is travel or expenditure, VAT can be recovered swiftly.

A key factor will also be ensuring that employees are fully trained in what is required of them for VAT purposes—for instance, obtaining invoices from hotels so that businesses can then reclaim the VAT. Best practice and processes need to be in place so that employees know what they need to supply, such as writing into policy controls that employees need VAT receipts before submitting claims.

U.K. businesses will need to investigate where they may require fiscal representation to maintain tax compliance within the EU. Ultimately, businesses need to stay nimble and on top of legislation. Whereas the EU had one set of rules to follow, it will be down to individual entities to stay in line with changing processes and legislation.

Leaning on professional services that can navigate these waters may be advisable, as this will ensure that automation processes are in place to minimize resources spent on time-intensive administration, for which in-house finance teams often do not have capacity.

As reciprocity continues to roll out between U.K. and EU countries, Brexit should not cost businesses more, at least not in terms of VAT.

It is clear that business trips are steadily returning to the agenda, however, overseas travel has changed profoundly in the last 18 months. The legal landscape of business travel is now very different. With this in mind, travel managers must review existing policies and monitor opportunities to reap the rewards that VAT reclaim on travel expenses can bring—and avoid tripping up on the technicalities at all costs.

Planning Points

• Identify which countries have reciprocity, then when there is travel or expenditure there, VAT can be recovered swiftly on eligible expenses.
• Ensure employees are fully trained in what is required from them for VAT purposes.
• Identify where automation can assist finance teams in their day-to-day expense management and tax recovery process.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Kenny Eon is GM and SVP EMEA at Emburse, and Marc Sevitz is MD U.K. & Ireland, VAT IT.

The authors may be contacted at: kenny.eon@emburse.com; marcs@vatit.com