Why We’re Waiting for the EU’s VAT Reforms
VAT affairs are rarely simple. When your employees travel, they get charged foreign and local VAT on their business travel expenses. It’s up to your organization to prepare a VAT return so that your business can claim a VAT refund on the goods and services your employee purchased on his or her trip.
Your business also has to keep track of your cross-border transactions so that you can submit a list of them (the “recapitulative statement”) to your government body each year. VAT reclaim involves a lot of paperwork, sometimes just for small amounts each time.
The Drawbacks of the Current EU VAT System
As you know already, making a VAT reclaim can be time-consuming, complicated, and confusing, especially when you’re dealing with a foreign VAT refund.
Your organization needs to gather valid VAT invoices that are written in a language, currency, and format that’s not familiar to you. Then, the business needs to complete a VAT return according to the rules of the country where these purchases were made, but each country has different rules and regulations for VAT refunds. What’s more, each member state charges different rates of VAT, so you have to check the foreign VAT rate before you start on your VAT return.
It’s little wonder that over £15 billion of VAT goes unclaimed every year.
The Scourge of VAT Fraud
But that’s not the worst of it. The current, complex system for foreign VAT reclaim in the EU also makes it easy for fraudsters to flourish. Unscrupulous businesses buy goods across EU borders to take advantage of the foreign VAT exemption on cross-border transactions. Then they charge full local VAT when they sell the same goods within their member state, pocket the difference, and disappear too fast to be audited.
The same goods keep getting passed across borders between different fraudulent businesses set up by the same shady characters. It’s called Carousel Fraud.
As much as €150 billion in unpaid VAT is lost every year, much of it to carousel and other VAT fraud. The money should be spent on resources for each country’s citizens. Instead, it is often used to finance crime and terrorism. Honest businesses which are just trying to complete their foreign VAT reclaim and claim their VAT refund end up losing out through government attempts to crack down on foreign and local VAT fraud.
Overview of EU VAT Reforms
That’s why we’re eager to see the EU introduce their local and foreign VAT reforms. Under the new rules, there will be:
- No more foreign VAT exemptions for cross-border transactions – instead, there will be a single VAT area for all EU member states
- A ‘one stop shop’ portal so that businesses can pay foreign VAT online, in their own language
- Simplified foreign VAT reclaim system that allows businesses to prepare a VAT return according to the rules of their own member state
- You’ll pay foreign VAT at the same rate as local VAT
- Simpler VAT invoices
The Benefits of EU VAT Reforms
The EU’s proposed VAT reforms will bring many improvements for businesses and citizens of the EU.
1. Foreign VAT Returns will be Easier to Handle
With a simpler streamlined VAT process, foreign VAT reclaim will become as easy as local VAT returns. Your business will pay all your VAT at the same local VAT rate, complete your VAT return according to the same local VAT rules, and your staff won’t have to prepare a ‘recapitulative statement’ that lists all your cross-border transactions.
2. VAT Fraud will Drop
With better information sharing between EU member states and a more streamlined system for paying foreign VAT, it will be harder for VAT fraudsters to get away with their crimes. A less complicated system offers fewer places for shady businesses to hide their foreign and local VAT obligations.
3. More VAT Revenue for EU Citizens
The new EU VAT reforms could reduce VAT fraud by up to 80%. That means more tax revenue for EU member states, and more capital for them to spend on building hospitals, sports centers, roads, and other resources for their citizens. That’s good for everybody.
For the moment, preparing your foreign VAT refund request is still a challenge, but all that could be changing very soon! For all the details about filing successful VAT returns in the EU and other countries around the world, both before and after the EU VAT reforms, download our eBook.