European Union VAT recovery problems

The postponed deadline of 31 March 2011 has now passed for the filing of European Union VAT recovery claims for the year ending 2009. This covers the reclaim of foreign VAT by companies doing business across the EU.

At any one time, there is around €7 billion of recoverable VAT outstanding. Following the introduction of a new simplified electronic system at the start of 2010, this filing deadline had been postponed once by the European Commission at the end of last year. However, despite this extra breathing space, many countries have still failed to fully implement the new system. This is hitting businesses across the region that depend on the speedy refund of foreign VAT due to them. In particular, the haulage industry has been hit hardest.

Companies doing business across Europe often incur foreign VAT on expenses, capital equipment and certain services. Since the EU-wide VAT system has not been integrated, companies cannot recover this VAT through their domestic VAT returns. Instead, they must go through a separate VAT recovery application process.

Until 2010, this was a paper-based procedure, requiring companies to complete VAT refund applications in the relevant local language for each State where they had incurred the foreign VAT. This huge bureaucratic burden meant that there was up to €8 billion worth of unclaimed VAT in the system, or simply ignored.

Following years of lobbying by business, the EU imposed an electronic filing system on all Member States. This required them to develop a single web-based portal for their domestic companies through which they could file VAT recovery claims for all Member States in their native language.

The Member States were then responsible for coordinating the refunds with the relevant states. The initial annual deadline for the new system was set for the end of September 2010 – for claims covering 2009. However, since many countries still had not yet setup their systems, or were not fully functional, the EU intervened to reset the deadline to 31 March 2011. Problems and cash flow delays persist. While last year’s deadline helped many countries sort their affairs out, there still remain many problems and delays. Many thousands of claims have gone missing, and the ability to follow up with individual tax authorities is limited by language barriers.

Also, several countries have an arbitrary interpretation of the governing VAT Directive.

• Luxembourg VAT: is still struggling with the rollout of its automated procedures. Claims which took four to six months under the old system now take one year+. There is no announced date for resolution of these difficulties. This is important for the hard-hit European transport industry, which uses Luxembourg as its regional fuelling station. With its minimum VAT rate (15%) and ultra low fuel duty of €0.23 per litre (20% VAT and €0.51 in the UK), Luxembourg has always attracted haulage business, which then must attempt to recover the VAT back through reclaims.

• Netherlands VAT: The UK’s HMRC are reporting that the messaging system is not fully working, and while claims can be submitted, there can be no confirmation of receipt and foreign companies still have to approach the Dutch tax authorities. The Dutch authorities recently offered to pay late interest to over 8,000 companies because of delays in payments. They had to close their portal for the first week of April to try and rectify the problem.

• France VAT: has improved since last year, but is still mostly paper-based for confirmations of claims processing. Larger refunds, above €5,000, are probably six months behind where they were. Where claims may be submitted electronically, they are often limited to only 100 invoices per registered company.

• Belgium VAT: is still not issuing receipt notices for claims, and is only partially running. From a technical prospective, there are also many problems with the IT systems being used. These include: no save function while submitting claims, meaning all invoices must be filed in one sitting; the ability to file invoices for VAT groups is mixed, meaning VAT may not be properly offset; many countries are not using standard expense codes for filing, meaning confusion on allowable versus non-allowable claims; and some countries’ portals do not provide a Total claim amount, making checks on completeness difficult.