VAT, or value-added tax, is a tax levied on goods on services, which exists in almost all jurisdictions throughout the world. Depending on the country, the VAT percentage differs, though it’s usually at around 15%. The EU, for example, has a VAT rate of 20%, while Australia’s is 10%. If your business qualifies for VAT (the criteria are different in different countries), you’ll have to pay this rate on all of your products and services.
As you can already guess, VAT costs businesses a lot of money. However, the truth is that the majority of registered businesses that pay VAT are occasionally entitled to VAT refunds, allowing them to reclaim a part of the taxes they paid. Still, the truth is that VAT recovery is quite complex, and the criteria for getting a refund might be difficult to fulfill. This is why you should consider using an automated solution to increase your VAT recovery potential. With an automated solution, you’ll have an in-depth breakdown of how much VAT you’ve paid over the years and whether or not you’re eligible for a refund.
Now, with the basics of VAT and VAT recovery out of the way, let’s dive deeper and uncover how VAT recovery works.
Explaining How VAT Recovery Works
The first thing you need to know is that reclaiming VAT is not an automatic process – businesses need to apply for a refund, and the application needs to be approved by the authorities. There are two different types of VAT refunds: those received from other countries (foreign VAT refunds) and those received from your own country (domestic VAT refunds).
Namely, the process of reclaiming foreign VAT is a lot more complicated than domestic VAT. This is because businesses need to comply with the rules and regulations of both their own country and the country they’re claiming the refund from.
Another important thing to note here is that businesses can only claim a refund for foreign VAT if they don’t reside in the country where the purchase was made. So, if you’re a business based in the UK, but you made a purchase from a German company, you can apply for a foreign VAT refund.
Although it’s difficult to get, VAT recovery is almost always worth it. Let’s go over the benefits VAT recovery offers.
Benefits of VAT Recovery
There are numerous benefits that businesses can reap by reclaiming VAT:
Improved cash flow
This is probably the biggest benefit of reclaiming VAT. By getting a refund on the taxes you’ve already paid, you’ll have more money available to invest back into your business. If you live in a country with a 20% VAT rate, getting a portion of the VAT you paid back can drastically improve the state of your budget.
Enhanced competitiveness
In many industries, being able to offer lower prices than your competitors can be the key to success. By reclaiming VAT, you’ll have more leeway to reduce your prices and compete with other businesses in your industry. Without VAT recovery, you’ll have to calculate the value of the VAT and put it in all of your products and services. Having lower prices than your competitors while offering the same quality will drive a lot of clients in your direction.
Improved relations with suppliers
When claiming foreign VAT, you may need to provide proof of purchase to the authorities. If you have a good relationship with your supplier, they may be more willing to provide you with the necessary documentation. This, in turn, can result in more favorable terms and conditions in the future.
A simpler tax structure
If your business reclaims VAT on a regular basis with an automated solution, you’ll effectively be able to reduce the overall complexity of your tax structure. This is because you won’t have to deal with all the different VAT rates – you’ll only need to focus on your business. Additionally, you’ll have a better understanding of your VAT position and how much you can reclaim each year.
Conclusion
As you can see, there are many different benefits that businesses can reap by reclaiming VAT. However, the process of reclaiming VAT can be quite complicated, which is why more and more businesses are starting to use automated solutions. If you’re managing a business and would like to enjoy the benefits of VAT recovery, consider trying out a good automated solution.
Also Read: What Is Tax in India: Everything You Need to Know
