The Unique Challenges of T&E VAT Recovery for Professional Services
Foreign VAT reclaim is never simple, but when you’re running a business that delivers professional services, like an accountancy company or solicitors’ firm, it comes with unique challenges.
Like all businesses, you typically need to decipher VAT receipts and invoices that may be in a foreign language and/or currency, and formatted in unfamiliar and inconsistent ways. If you’re one of the many companies that lifts data from the expense management software (EMS) to complete your VAT return, you face the added challenge of ensuring that none of your employees make mistakes or deliberate changes to the amount of VAT they enter into the system.
The impact of expense fraud for your VAT return
Generally, these employees commit fraud by adjusting their expense reports by only small amounts – under £40 ($50) each time, often feeling that it’s just a harmless white lie. But if you’re using expense reports data to complete your VAT refund request, the size of the fraud is not your biggest problem. Your problem is that the accuracy of your VAT return depends upon the accuracy of your employees’ self-reported expenses.
Employees tend to think that expense fraud is close to a victimless crime. Nearly half say that they do it do make up for other expenses that they couldn’t submit. But when it comes to VAT reclaim, that expense fraud can come back to bite your company hard.
HMRC and tax authorities in other countries are not known for being understanding or sympathetic. If there are discrepancies or anomalies in your VAT return, it won’t make a difference if they are due to deliberate fraud on your part, a slip of the finger when typing a 9 instead of a 0, or were copied over from a fraudulent expense entry. The tax authorities are likely to flag it, and put your business through an exhausting and expensive audit. Instead of getting a VAT refund, you could end up having to pay punitive fines – all because an employee felt that they deserved an extra £10 on their expenses report.
But unlike companies in other sectors, you also have to grapple with questions about what defines a business cost, whether or not a recharge or disbursement can legally be recovered, and nebulous ethical issues around requesting a VAT refund for tax that you’ve already passed on in full to the client. We take a closer look at the challenges of VAT reclaim for professional services industries.
1. Deciphering EMS entries
When it comes to entering VAT expenses into an EMS, you’re relying entirely on your employees. It’s up to each one of them to note whether a given expense is:
- Billable to the customer
- Accompanied by a tax document (ie. a valid VAT invoice or receipt)
- Eligible for VAT reclaim
- The VAT rate
The consequences of making a mistake on your VAT return are immense; you could end up facing an expensive and time-consuming VAT audit, and/or punitive fines, even if an employee made an innocent mistake.
2. Disbursements and recharges
A further challenge for professional services industries is defining when it’s permissible to request a VAT refund on expenses, and when you’re dealing with disbursements and/or recharges.
What is a disbursement?
A disbursement is when you incur an expense on behalf of your client. For example, a firm of solicitors pays a Land Registry fee for the client who is buying a house. Your company paid VAT on the expense, but then you passed on that VAT in full to the client as part of your professional invoice.
With a disbursement, ultimately, the goods or services are supplied to the end user (your client), so the payee in the middle (your company) cannot account for the VAT. On the invoice from the payee, each charge should be itemised and not included in the VAT calculation.
If there is VAT on the underlying item, that VAT can be divided out and specified on the invoice. However, for the end user (your client) to recover the VAT, they will need a valid VAT invoice from the supplier. So, as the middle party, it’s beneficial to your company to ensure that all customer details are documented by the supplier and show in a valid format on the invoice.
What is a recharge?
A recharge is when your business pays for goods or services that you need in order to serve your clients. It means that you paid for and used certain items or services, and then charged your client for the cost of using those services, your billable hours, and VAT on the total amount. For example, if your employee travelled internationally to onboard a new client, and incurred hotel expenses on that trip, when you invoice the client, you include your billable hours, the hotel charges, and 20% VAT on the total.
Your firm can’t claim VAT incurred on disbursements because your firm is not the legal recipient of those goods or services. Your client can, however, claim a VAT refund on a disbursement. Your firm can recover VAT on recharges, although there is an industry-wide ethical debate surrounding this topic and we’d be happy to discuss solutions with you.
Sometimes, it’s difficult to define whether you’re dealing with a simple business expense, which you can include on your own VAT return, or a disbursement or recharge.
Between the risk of employee errors and the confusion around disbursements and recharges, most partner VAT reclaim solutions insist on using a manual process to check all VAT refund amounts. As a result, they typically discard invoices for smaller amounts as not being worth the effort, and will only agree to process those invoices that they feel are guaranteed to be reimbursed.
The end result is that the vast majority of professional service companies are sacrificing a combined £20 billion of reclaimable VAT every year.
Why the Way2VAT solution is different
Unlike other VAT processing solutions, Way2VAT uses patented machine learning technology to solve all of these challenges without using time-consuming and unreliable manual processing. With our AIA system, we can fully automate VAT recovery, reducing reliance on a shared service or processing centre to capture information from receipts or EMS software.
Our deep learning software quickly spots anomalies and discrepancies in your VAT return data, highlighting issues that could have unnoticed and reducing the risk of VAT audits. At the same time, our automated VAT reclaim process enables you to include every single VAT invoice on your VAT return, regardless of value, because you no longer need to justify using up finite employee work hours.
With Way2VAT, you can increase your VAT refund while freeing up employee time for other tasks.
Foreign VAT reclaim is particularly challenging for professional service businesses, but you can smooth the way when you use the right tools. For all the details about filing successful VAT returns in the EU and other countries around the world, download our eBook.