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Published:January 14, 2022

A Guide on How to Pay Less VAT As a Business

A Guide on How to Pay Less VAT As a Business

VAT is the largest source of consumption tax in the world. VAT is ubiquitous and applies to the great majority of transactions. If your business operates in one or more countries that have a VAT regime in place, you must expect to pay and account for valued added tax.

Whether you call it VAT, GST, or HST, this indirect sales tax applies to the majority of goods and services. Fortunately, you can, in many cases, reclaim the value added tax incurred in the course of doing business. In addition, there are advanced VAT strategies that will improve your cash flow and ensure you optimize the way your business manages each VAT payment. That means more cash for operational expenses when you need it and lower overall costs of doing business. 

However, VAT compliance and recovery are complex. The regulations and recovery process are different in every country. Effective VAT recovery is therefore a specialized tax revenue process that many businesses fail to fully optimise. For that reason, outsourcing VAT recovery to a specialist is often the first, and most effective, step towards ultimately paying a lower VAT amount as a business. 

How can I legally pay less VAT: A fine balancing act

Businesses must pay a VAT amount on nearly all goods and services. This is the case even when the goods in question are to be directly used for business purposes. However, that VAT number can be claimed back at regular intervals (as specified by the relevant country).

That’s simple enough in theory. In practice, reclaiming VAT is a fine balancing act. A company should ideally reclaim as much VAT credit as it is entitled to without overclaiming or submitting erroneous VAT returns. 

However, keeping track of all employees’ expenses, collating and collecting all relevant expenses, and ensuring supporting documentation are in order is time-consuming and prone to error. It’s no wonder, therefore, that many businesses err on the side of reclaiming too little in a VAT refund. That’s understandable. Without an effective VAT refund and reclaim process in place, the risk of erroneous claims is high. And that could have severe consequences, from fines and interest charges to extended audits and even the risk of being banned from operating in a market. 

The right VAT partner should work to secure that balance for your business: maximizing VAT returns and reclaim opportunities while ensuring all claims are complete, accurate, and lawful. 

Why does my business need to pay VAT in the first place?

So, what types of businesses need to pay VAT? Do small businesses pay VAT? In places where the VAT rate applies, the consumption tax is levied on most goods and services. VAT is automatically included in the cost of such goods and services. Therefore, a business will incur VAT simply in the course of its ordinary business operations.   

In other words, when you pay for goods or services, the VAT rate is by default included in the cost of those items, regardless of who is purchasing them. Simply by buying office supplies or renting a vehicle, or contracting a cleaning service, a business will end up paying a VAT bill. 

However, in many cases, companies can reclaim the VAT they incur in the course of doing business. That is, while businesses are not exempt from paying VAT upfront, they can ultimately reclaim that VAT if they follow the proper procedures. (Note that there are special circumstances in which a business can legally avoid paying VAT upfront, such as with deferring import VAT. We will discuss these advanced VAT mechanisms later in this post.)

What goes in …

At the same time, it’s important to recognize that most companies don’t just pay VAT––they also receive it. After all, VAT must by default be included in the cost of goods and services sold in a jurisdiction in which VAT applies. Except for in very limited cases, such as where a business makes zero rated supplies, or the reverse charge mechanism applies, a business is obliged to charge VAT on its supplies. 

This balance of VAT payments - in accounting terms, the input VAT vs output VAT - is an important consideration when it comes to claiming back VAT. Because while a company can claim back the total VAT, it outlays on business expenditure, that amount is determined according to the VAT it paid balanced against the VAT received. For this reason, it’s critical to ensure you can provide the relevant tax authority with all applicable invoices and documentation to fully and accurately account for the VAT you wish to reclaim.

Are there ways to offset VAT? 

In principle, then, we can see clearly how a business can offset its VAT and ultimately recover a significant amount of cash, lowering the cost of doing business. And, indeed, there are a number of highly effective ways to offset VAT.

In practice, however, actually accounting for the VAT expended is often complex. Businesses need both a comprehensive understanding of the relevant VAT rules and effective systems to manage the administrative burden of VAT compliance and recovery. 

Let’s consider some real world examples to understand how businesses can reduce their overall VAT burden.

Domestic VAT reclaim

For many companies, domestic expenditure is an excellent place to begin optimizing VAT recovery. By effectively tracking and documenting domestic input VAT, a business can often reclaim a substantial amount of VAT. 

However, keeping track of all the relevant receipts and documents can be extremely administratively intensive and error-prone, especially if a company relies on manual processes.

For example, recovering the VAT on domestic travel and entertainment is a significant source of potential savings but is often overlooked by businesses. Fortunately, powerful automated domestic VAT solutions make the process much simpler and more efficient.

VAT Reclaim on cross-border T&E and A/P costs

VAT reclaim opportunities are not limited to local expenditure. Many companies incur VAT when paying foreign suppliers or in the form of foreign travel and entertainment expenses. Participating in trade shows or conferences abroad also leads to significant foreign VAT expenditure (and commensurate reclaim opportunities). When you consider that up to 25% of foreign T&E expenses can be reclaimed, you can understand just how much VAT businesses can potentially save.

However, cross-border reclaim introduces another layer of complexity. In addition to systematically accounting for all expenditure, it’s critical to understand the VAT regulations and reclaim procedures in every relevant foreign jurisdiction. That’s why companies rely on specialist outsourced foreign VAT reclaim services to maximize recovery and reduce their total VAT burden.

Import VAT

Import VAT is a significant additional cost of international trade. Fortunately, import VAT is fully recoverable. Unfortunately, too many importers neglect to recover their import VAT. This is in part because the logistic teams that manage importation often lack the expertise and experience to manage the tax component of the process, which consequently means that import VAT leakage goes unnoticed. 

Ensuring you effectively recover import VAT is a clear and effective way to pay less VAT when importing. However, you need to ensure you have an effective process to claim the import VAT to which you are entitled in all the relevant countries, such as through the 13th Directive (in the EU) or equivalent mechanism. 

Take advantage of deferments

As discussed above, recovering import VAT is a critical part of managing the costs of trade. However, the upfront cost of import VAT and customs duties can place a severe strain on a company’s cash flow, even if the import VAT is ultimately recoverable. 

The good news is that there’s a way to overcome the cash flow crunch. Some countries enable you to defer your import VAT and customs duties payments, so you do not have to pay the cash upfront at the point of import. 

If you are registered for VAT in the country in which import VAT is payable, you can generally account for import VAT when you submit your VAT return. In this case, the input VAT (here, your import VAT) effectively balances output VAT. In other words, the import VAT is technically ‘paid’ without a cash transaction taking place. The cash flow benefit is thus considerable, freeing cash for operational purposes.

See related: ​​Benefits of Vat Registration

As many reclaim opportunities as there are ways to pay VAT

As should be clear by now, VAT is everywhere. From tooling VAT to mineral oil tax to the specific VAT opportunities that apply to supply & install projects, there is a myriad of ways to optimize VAT compliance to ultimately pay less VAT on business expenses. 

In order to most effectively pay less VAT and maximize savings opportunities, businesses need a holistic approach to VAT management. To appreciate the scope for saving on cross-border VAT, check out more on foreign VAT page to learn how your company can reduce the cost of doing business abroad.

Why businesses need an end-to-end VAT solution

Each business is different operationally, they supply different product lines, and they operate in different markets. As businesses expand or change product lines or enter new markets, their VAT requirements change, too. 

That’s why you need a complete VAT reclaim solution that assesses your entire value chain, while also providing the deep knowledge and technology that makes the entire VAT compliance and recovery process more efficient and cost-effective. 

That’s why leading businesses rely on VAT IT to save them money, now and in the future. 

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