Following the end of the Brexit transition period on 1 January 2021 new rules apply for UK businesses that seek to claim a refund of VAT incurred in the EU, and vice versa. Whilst the UK-EU Trade and Cooperation agreement provided a reciprocal arrangement for UK and EU businesses to reclaim VAT incurred overseas, such claims must now be submitted directly to the tax authority in the territory the VAT is incurred (in the local language and according to particular local requirements). Previously a business was able to submit a far more straightforward claim in its own language and to its local tax authority who would collect the VAT from other EU countries. Therefore, claims submitted post-Brexit are going to be far more challenging not least because they will require negotiation directly with the local tax authority.
For EU busineses claiming a refund of VAT in countries within the EU, the existing mechanism remains applicable with claims submitted to a claimant’s local tax authority.
In order for an overseas VAT claim to be valid, the expenses incurred must directly relate to business activity. A claim is also only possible when a business does not have an obligation or entitlement to be registered for VAT where the VAT is incurred. If such an obligation exists it would be necessary to register for VAT locally and to obtain the refund via a VAT return filing.
Typical VAT-bearing expenses may include incidental costs whilst on business in other countries such as in respect of hotels, trade shows, or seminars, but there can also be potentially more significant costs incurred such as for certain ‘land related’ services like architect fees. It should be noted that in most circumstances services supplied to a business established outside the local territory will not be subject to local VAT, and it is important to ensure that refund claims are only submitted where VAT has been correctly charged in order to avoid potential penalties.
In making a refund claim it is necessary to include documentation from a business’s local tax authority certifying that the claimant is in business. Appropriate records of costs incurred such as VAT invoices should be retained and included with the claim submitted. Furthermore, there is a strict claim deadline of 31 December for VAT incurred in the 12 months to 30 June of that same year. Given that it can take some time to obtain the relevant certification of business status a claim should be prepared at the earliest opportunity.
A claim is also only valid if the claimant’s activities would ordinarily give it entitlement to the recovery of VAT incurred in its own territory, and therefore a VAT exempt business such as an insurance company incurring VAT in another state would not be eligible for a refund. If a business is ‘partially exempt’ (where it undertakes both taxable and exempt activities) only a proportion of the VAT incurred will be refundable.
Both HMRC and EU tax authorities have the ability to levy penalties for claims made incorrectly. In addition, submission of claims may have the potential to raise queries with the tax authority as to whether a business is obligated to be VAT registered in that territory. As such, it is important to carefully review the specific circumstances of a potential claim and to determine whether such a claim would be valid. Specialist advice should be sought. We are in the enviable position of being able to call upon our Kreston Global associates in each country to assist in submitting and negotiating claims.