Maximising Cross-Border VAT Efficiency Now
Thursday January 14, 2010
Andy Spencer, formerly VAT Director at Baker Tilly UK, joined Accordance in October. We spoke to Andy (full text below the video) about the problems businesses face in optimising their cross-border VAT positions.
Here is an edited version of our discussion with Andy.
ACC: Andy, what would you say is the biggest single problem for companies trying to recover cross-border VAT?
AS: In my experience, the major difficultly for businesses making claims is being sure that VAT has been correctly charged on foreign invoices. If VAT has been charged when it should not have been then the member state will not make the refund and it could be difficult and time consuming to get the supplier to revise the invoice. It is also important to remember that incorrect applications may be subject to penalties and interest.
ACC: Is this an issue companies look at closely enough?
AS: Unfortunately, it is very common for firms not to challenge overseas suppliers when VAT is charged ? something which often causes serious cash flow disadvantages. The payment of VAT incorrectly charged is one of the things I’ve always looked for on reviews – and it becomes even more important after 1st January. From Jan 1, the default position is that VAT should not be charged by the supplier on cross border services. This means that the business should not pay VAT on the supplier’s invoice but account for the VAT using reverse charge procedures.
ACC: How do you feel European businesses have been supported by advisers in dealing with this problem?
AS: Well, I think as far as Big-4 goes it’s been a neglected area, because the focus for the large practices is very much on problems within countries, rather than cross-border. In general Big-4 have looked at cross-border VAT recovery (and incorrectly-charged foreign VAT) as a compliance issue, and left it for specialist providers to deal with. Having said that, incorrectly charged VAT actually seems to have presented a conflict of interest for the VAT recovery providers.
The basic problem is that because they’ve normally been paid on a commission basis, it’s been to their advantage to submit claims ? even when they realised that the claims would fail because the VAT ought not to have been charged in the first place ? and then charge commission for obtaining credit notes. Best practice ought to mean advising clients to make (sometimes very small) systemic changes in order to eliminate payment of incorrect VAT in the first place. I’m afraid to say we’ve seen companies pay out millions of euros of unnecessary commission, year after year, as a result of a lack of appropriate information.
My own practice, and the practice of Accordance as a firm, has always been to look at the structural position of the client, with a view to eliminating the need to make claims in the first place. It’s a way of making an immediate cashflow improvement and also saves commission costs. The key thing is to get incorrect VAT charging and reverse charge issues out into the open; the savings are there; and it’s even more important with the changes coming in on Jan 1st.
ACC: Are there other ways that a stronger focus on compliance could lead to savings?
AS: I’ve noticed that many companies don’t realise when a registration ? rather than an attempt at a cross-border refund ? would actually be an appropriate and cost-effective course of action. There again, you have to be careful. I’ve seen cases where firms have allowed themselves to be registered overseas ? and then charged commission on overseas input tax! One client we saw recently had been paying a provider ?100K a year to manage a single registration ? that is, submit just four VAT returns! My advice is that people should pay attention to the detail of their contracts ? particularly at a time when reverse charge rules mean that providers will be earning less commission through 8th directive claims.
ACC: Are you hopeful that the new rules will lead to improvements for businesses?
AS: Very much so. The old system was immensely slow and cumbersome. It’s particularly good that there will be an established timeframe for getting claims settled ? with automatic interest payments when that doesn’t happen. Of course, many countries operate an interest system now, and it’s clear that there are thousands of companies already owed large amounts of interest. We’re entering a new framework, and now is a great time to audit 8th directive positions. You could get a nice surprise! I’d definitely recommend that all companies take the opportunity to get a full breakdown from the tax authorities of all the claims they’ve submitted historically, and a report on the status of those claims. If you have a provider, you should ask them for the same thing. If there are problems with claims, you want to know about them now.
Click here for details of Accordance’s specialist Cross-Border VAT Management programmes.
For a discussion of the principles of electronic filing, please click here.
For an overview of tax authority implementation schedules, please click here.