Unlocking input VAT recoverability with AvaTax VAT determination capabilities

Input VAT recoverability is anything but straightforward. The primary challenge is the varying regulations across jurisdictions. Every country has its own specific rules and definitions of a recoverable expense, and these rules change frequently, leaving businesses struggling to keep up.

Another important complication is the issue of partial and full recoverability. Depending on the nature of the purchase, type of good or service, and usage, an expense can be either partially or fully recoverable. Misclassifying these expenses can lead to overclaims or underclaims, exposing businesses to financial risk.

Manual errors further complicate the problem of recovery. Tax teams often rely on spreadsheets to determine recoverability, which could lead to errors and inconsistencies. Further, aligning internal processes with local tax laws can be a significant challenge for tax teams working with disconnected systems.

This feature is designed for businesses operating in multiple jurisdictions and needing to manage complex VAT recoverability workflows with more accuracy and efficiency. It is useful for:

• Multinational and enterprise-level businesses: Organizations operating in the EU or other VAT jurisdictions where rules vary by country and recovery conditions are often complex. For businesses, staying compliant while maximizing recovery — especially in cases involving partial exemption — can be challenging and resource-intensive. This feature provides a centralized framework to automate both full, partial and non-recovery recovery workflows, including support for applying custom rules for both global and local regulations.
• Tax teams: Responsible for compliance management, partial and full recoverability, and preparing for audits, the tax team benefits from an automated recovery workflow, regular updates to country-specific rules, and configurable settings tailored to business requirements.
• Finance and accounts payable teams: Tasked with processing invoices and applying recovery logic, the team benefits from reduced manual effort and consistent application of recovery rules through this feature.

Avalara VAT Reporting enhancements have been created to simplify and optimize compliance for a diverse range of businesses. Here’s how the solutions will benefit different types of customers:

Ecommerce and online retailers: With thousands of VAT transactions occurring daily, it can be a tedious task to accurately track and report each transaction. The VAT Reporting enhancements simplify this with a one-time setup that automatically extracts VAT data into VAT reporting systems, reducing manual effort and ensuring accurate reporting.

Businesses subject to e-invoicing mandates: As countries continue to introduce e-invoicing mandates, Avalara’s VAT Reporting and ELR integration allows businesses to automate e-invoicing status reports for all transactions in VAT Reporting.

Digital service providers: Businesses offering digital services, such as software, streaming, and online subscriptions, often have to navigate varying VAT laws across jurisdictions. With the latest enhancements, VAT calculation, data extraction, and live reporting can be managed with ease.

Input VAT recoverability determines whether a business can reclaim the tax on an expense — either fully, partially, or not at all. Applying the correct local rules, determining the nature of expense, and understanding usage make recoverability complex. Our feature automates the process through built-in country-specific rules, real-time VAT determination, and configurable rules to enhance compliance and accuracy. To better understand how the feature works in practice, it’s helpful to first distinguish between full and partial recoverability.

Full recoverability

Purchases that are used entirely for business purposes and meet local tax authority criteria may qualify for 100% VAT recoverability. For example, a U.K.-based company purchasing a laptop for an employee to be used exclusively for business-related purposes. The tax paid on this purchase is eligible for 100% recovery.

Partial recoverability

Some purchases qualify for partial recoverability depending on the business use and the local regulations. Avalara AvaTax currently supports partial VAT recovery across 27 EU member states, the U.K., Norway, Switzerland, Mexico, Japan, Australia, New Zealand, Singapore, the UAE, Saudi Arabia, the Philippines, and Turkey.

Here are some examples of partial recoverability based on local rules:

• Austria: VAT recovery is restricted for home office furnishings unless strictly business-related. 
• Belgium: VAT on hotel stays is non-recoverable, but in Germany, partial recovery is allowed for business-related stays.
• France: Passenger vehicles used for business are not eligible for VAT recovery, but commercial vehicles are.
• Ireland: VAT on company cars is 20% recoverable.

To understand the process, consider a scenario where a business in the EU makes a purchase that qualifies for partial recovery.

1. Select document type
   Input VAT recoverability applies only to purchase invoices, so begin by selecting that document type.
   
   
2. Set shipping locations
   For this example, choose the same country for both the “Ship From” and “Ship To” locations to reflect a domestic transaction.
   
   
3. Choose the tax code
   Select the tax code corresponding to the good or service being purchased. 
   
   
4. Add attribute for usage type
   Some goods and services require additional attributes to determine recoverability. In our example, recoverability depends on intended usage. Add the attribute “Type of Use” and set the value to “Business.”
   
   
5. Calculate tax
   Click “Calculate Tax.” AvaTax will determine:

a. The percentage of input tax recoverable
b. The recoverable and non-recoverable amounts
c. The VAT code, where the last two digits reflect the    recoverable percentage. These two digits help report input VAT recoverability to the correct boxes within the VAT return, as supported through Avalara VAT Reporting.

Now let’s look at a purchase where 100% VAT is recoverable, such as tangible personal property (TPP).

1. Select document type
   Input VAT recoverability applies only to purchase invoices, so begin by selecting that document type.
   
   
2. Set shipping locations
   Set the “Ship From” and “Ship To” locations within the same country to reflect a domestic transaction.
   
   
3. Choose the tax code
   Select the tax code for TPP — an item that qualifies for full recovery under the local tax law.
   
   
4. No attribute required
   Since this item qualifies for full recovery by default, no additional attribute (like usage type) is needed.
   
   
5. Calculate tax
   Click “Calculate Tax.” AvaTax will return:

a. A recoverable percentage of 100% 
b. The full recoverable amount (with no non-recoverable portion)
c. The VAT code, where the last two digits are not shown — indicating full recoverability

Getting started with input VAT recoverability is simple, whether you are already using AvaTax or planning to explore it.

For existing AvaTax users: The feature is enabled for AvaTax users by default. You can start leveraging the automated VAT determination, country-specific rules, configurable settings, and audit-ready reports for full visibility into recoverable and non-recoverable amounts. If you need help with setting custom rules or understanding advanced use cases, please contact your Avalara account representative or support team.

If you aren’t using AvaTax, you can explore how the solution automates compliance, helping reduce manual effort, improve accuracy, and provide greater visibility into VAT obligations. Visit the AvaTax product page to learn more. 

Note: Avalara has you covered for full support of international tax calculations. In addition to VAT determination, AvaTax also provides GST determination — making it a comprehensive solution for businesses operating across multiple tax regimes.