VAT\GST Recovery – Disbursements Vs. Recharges
Reclaiming VAT\GST from European countries can be a complicated process under the best of circumstances. After all, every country in the European Union has its own set of the guidelines. The variance can be dramatic sometimes, as no EU states have exactly the same VAT\GST policy. Some might allow VAT\GST return on cars, phones, and even conferences. Others might include food and even laundry services. Others have a completely different idea of what qualifies for VAT\GST return for those who are based abroad but come to Europe for business.
If keeping the policies straight were not enough, there’s more. The type of business you’re in, or more specifically, the primary revenue stream for your business, could add another layer of complexity. If your company earns most of its money through services that are charged by the hour, the various VAT\GST return claims could be tricky.
These types of businesses include accountancy, architects, consultants, IT, legal, surveyors, etc… These businesses perform services to clients that vary in cost by the amount of time that was devoted to client. Most consulting businesses are also run on this model. They have rates that they charge that are calculated by the hour.
Disbursement – Getting the Invoice Right
What makes the issue tricky is that the hours billed can fall into categories with more complicated invoicing. Take the process of disbursement, for example.
With disbursement, a payment is made by one party for the benefit of another party, but the invoice is issued in the name of the first party, which made the payment.
A practical example is when a house purchaser uses a lawyer to acquire a property. The lawyer will use the Land Registry to make searches, register documents etc. and the charges from them will be paid by the solicitor. However, these charges really are for the sole use of the house purchaser.
The name on the invoice is that of the lawyer. And the invoice is a crucial tax document, particularly when it comes to VAT\GST return. Should the tax return go to the party that made the payment, or the one for whom the payment was made?
The answer? The VAT\GST return should go to the end user.
As the supply is to the end user, the payee in the middle cannot account for the VAT\GST. On the invoice from the payee, the charge should be itemized and not included in the VAT\GST calculation of the usual supplies.
However, for the end user to recover the VAT\GST, they will need a valid VAT\GST invoice from the supplier. So, it’s always ideal for the middle party to ensure they have their customers details and ensure the supplier is provided them and finally that the invoice to them is correct.
Recharge – Which Party Benefits
A second complicating element is the process called recharge. Recharges are costs that a business incurs in the course of providing goods or services to a customer. They are standard items that although may be required for the particular client are for their own use and for the furtherance of their business.
The key difference between a disbursement and a recharge is that in a recharge, the recipient of those goods or services is the business and not the end user.
Therefore, the recipient of the goods or services is company that organized them. As long as you have a correct invoice, the VAT\GST is subject to usual rules and the VAT\GST recoverable for the company that benefited from them, in this case, the company that served as the service provider.
Rising Above the Complexity
When it comes to VAT\GST reclaim, nothing is simple. That’s why some $50 million are left unclaimed each year. The process of manually filling out the forms, providing receipts and invoices, and accounting for payments is time consuming and challenging. It’s not surprising many companies simply choose to leave the money on the table.
But with an Expense Management System for travel expenses, nearly all of the accounting and reporting is done through the software and apps. That takes the headache out of VAT\GST reclaim and turns VAT\GST reclaim from a sunk cost to a source of revenue.
Make sure your company gets all of the VAT\GST returns it deserves. For the complete story on recovering VAT\GST in EU countries, download our eBook.