Why has my 13th directive claim been refused? – Part 1
Many will recognise the following scenario – you have worked hard gathering together invoices from overseas business trips, such as hotel bills, taxi receipts, conference invoices etc. You have completed endless forms and submitted your claim to the relevant European Union (“EU”) tax authority to get a refund of VAT. You wait half a year only to be greeted by an outright refusal from the tax authority to refund the VAT.
This is a familiar story we hear all too often and apart from it being frustrating, countless hours and cost have been wasted collating information for the now non-existent VAT claim.
We thought it would be helpful to share our experiences in submitting claims, specifically including why certain claims are refused.
Unsurprisingly, the main reasons for refusal of VAT claims are invoice related issues which most people are familiar with. Common issues involve invoices being out of date and addressed to the wrong entity.
However, there are many other reasons why a 13th Directive claim may be refused. We will explore these in this post and future posts.
The first category of claim refusals impact businesses which carry out activities which would be exempt from VAT if the business activity was carried out in the EU. Such businesses cannot ordinarily reclaim VAT. Common VAT exempt businesses include those in the Financial services, Insurance, Health and Welfare, Education, Charitable and Betting and gaming industries.
A non-EU business in one of the above industries which incurs costs in the EU, would be unable to recover VAT under the 13th Directive. As a result, many claims submitted by businesses operating in these industries are refused.
In practice, many businesses make a mixture of supplies some of which are exempt, and some are subject to VAT. In such a case, the tax authorities will allow the claimant to recover a proportion of the VAT that would be recoverable if the claimant was in an EU country. In practice this leads to all sorts of arguments as to how to calculate the recoverable percentage.
A further complexity specifically arises in the financial services and insurance sectors. This is a result of the way VAT works in these industries. Where an EU financial services or insurance business makes supplies to a non-EU customer or client in most cases the supply is no longer treated as exempt – rather VAT recovery is available – in other words the supply is treated similar to a zero-rated supply giving rise to VAT recovery.
With this in mind let’s imagine a US financial services business which grants loans to US customers was located in the EU where it continued to lend to US customers. Such a business would be able to recover VAT in full.
It follows that if a non-EU financial services or insurance business incurred VAT in the EU when its staff attended an EU conference etc., such VAT should be recoverable. To disallow VAT recovery would be treating EU and non-EU businesses differently which is clearly unfair. In VAT speak this offends “fiscal neutrality” and time after time the European Court and domestic Courts have ruled that fiscal neutrality cannot be breached.
While this grandiose legal argument is fine in a Court of law, the key question remains will the VAT claim be repaid? EU law clearly states that it should, the reality is that different EU jurisdictions seem to adopt varying views.
Sounds complex? – it is! If you think you may be affected by this we would love to hear from you.