[Kevin-Hall]

Binman62 – This is definitely not tax avoidance. It is how the EC VAT system is supposed to work!

EC businesses reclaim VAT, non-EC businesses recaim VAT, (nearly) all businesses reclaim VAT. The system is designed this way so that the VAT does not build up in the supply-chain as the product is passed from business to business. The VAT is only supposed to be charged on the full sales price to the final consumer, unless they are exporting the goods (in which case no VAT is charged).

For example, if EC Company A charges £100 (plus £20 VAT) to EC Company B; and if Company B cannot recover this £20 VAT, it would have to charge £132 (plus £26 VAT) in order to make just a 10% margin. The larger the supply chain, the more VAT would accumulate, forcing supply chains to become “in-house” to prevent excessive inter-company VAT charges accumulating.

EC VAT rules are deliberately set up to ensure that there is no double-taxation (which would inflate the cost for the final consumer), so that VAT is charged only the once at the point of sale to the final consumer. In other words, the intention of the VAT authorities is that EC Company A charges £100 (plus £20 VAT) to EC Company B, which reclaims the £20 VAT. EC Company B then charges £110 (plus £22 VAT).

It is a complex system to administer, but the EC VAT authorities (rightly or wrongly) believe this helps reduce VAT fraud. They also insist that non-EC businesses have the same rights as EC businesses, so that non-EC company B could also reclaim the VAT charged by EC company A. This is what we are discussing in this thread; and the fact that very few non-EC businesses operate the EC VAT system in the way the VAT authorities intended it to work.

Hope that helps?

[IanFromHKG]

There seems to be some confusion here between tax avoidance and tax evasion, The former – structuring your affairs so as legitimately to minimise tax paid – is perfectly legal, acceptable, and in many instances positively encouraged by government – an example being the ISAs that Hippocampus referred to. No-one should feel any shame at engaging in tax avoidance. Tax evasion, on the other hand, is the use of dishonest (and generally illegal) practices in order to escape payment of tax which should legitimately be paid.

So any non-EU business that is incurring VAT in circumstances where it doesn’t need to, and reclaims that VAT, is engaging in (perfectly legitimate) tax avoidance, just as they are by claiming all appropriate tax deductions, allowances and (in this particular case) refunds.

[NTarrant]

Kevin – I totally agree with you in your example, but it does depend on the country and how much you spend. For example some years ago we did some work in the Netherlands. VAT on hotel accomodation was 5% at the time, it was a one off peice of work and our expenses for hotels came to I think around £800 in total. When we looked at reclaiming the VAT the minimum charge commission was more than the total amount due back.

So in the case of small amounts it is not worth it. That was what I was saying

[Kevin-Hall]

NTarrant – a fair point, agreed!

HongKongIan – I agree that your conclusions follow from the definitions. But these days, in practice, HMRC seem to use “tax avoidance” to mean tax/VAT planning which is not in the spirit of the law, although within the letter of the law. Binman62 seems to use it in the same sense. I object to this, because the spirit of VAT law is that businesses ought to reclaim the VAT on all purchases in order not to inflate/double-tax the price charged to the customer. Does that make sense?

[IanFromHKG]

I don’t want to speculate on what Binman meant, Kevin-Hall, but re-reading his post it still doesn’t seem to me that he was using the phrase in the sense that you suggest, since he seemed (to me) to be saying that reclaiming VAT in these circumstances is “legal but it is not right”. Perhaps he was addressing some other aspect, though. I would welcome clarification from him! My knowledge of the particular VAT issue in question has all been from this thread, so I claim no expertise and confess to ample ignorance, but from what I have seen it doesn’t seem to me that reclaiming VAT in these circumstances is against the spirit of the law. If anyone can educate me otherwise, I would welcome it, but until then I will stick with my perspective that such a reclaim is legitimate.

Even if it is against the spirit of the law, in the absence of artificial or sham structures or steps in business practices which are there purely for tax reduction and without any commercial benefit, I see nothing wrong with businesses (or individuals) reclaiming taxes which they are not legally required to bear. Laws in most countries I have come across tend to be rule-based, rather than principle-based. So stepping outside the spirit of the law but complying with the letter is still permitted (contrast, for example, the UK Takeover Code which is principle-based and drafted in such a way that compliance with the spirit, and not just the letter, is expected). Treating rule-based laws as if they were principle-based is a minefield and not something I want to encourage (it causes uncertainty as to the scope of the law, and too much scope for abuse by governments).

[Kevin-Hall]

HongKongIan – I think you are agreeing with me! There is strong congruance between “legal but not right” (your paraphrase of Binman62) and “in the spirit of the law, but not the letter of the law” (my paraphrase of Binman62). If this is not what Binman62 meant, I would be interested to hear why (s)he believes businesses should not recover VAT on purchases: there is a way to operate a VAT system this way (called “Margin Scheme” VAT, charging VAT only on the value added, not on the full sales price), but the EC VAT authorities do not operate this type of system. Perhaps they should!

Nevertheless, under the current EC VAT system, the recovery of VAT on purchases is BOTH within the letter of the law AND within the spirit of the law. It should be encouraged, in order to ensure that retail prices are not over-inflated due to double-taxation within the supply-chain.

I will not comment on tax avoidance which is within the letter of the law, but NOT within the spirit of the law. But I will note the fact that, due to a VAT case known as “Halifax”, the European VAT authorities can now rely on the spirit of the law to prevent such abuses from occurring, though it does lead to uncertainty even for the honest trader!

Hope it helps?

[althani]

dear all,

yes i am a businessman from Qatar Doha, I use a company in the UK with offices all around the middlle east to reclaim any vat on my hotel stay and others for my stay in UK and Europe while on business trip
http://www.uturntaxrefund.com
http://www.uturntaxrefund.co.uk

I will recommmend this company to all businesses very good service.

good luck /..

[CEGould]

The process of recovering foreign incurred VAT is essentailly a manual process hence the costly processing fees.

Automating the collection of the VAT invoices/receipts will lead to lower process costs, optimum VAT refund levels and expand the facility into the SME and Mid-market sector.

[VintageKrug]

Non-EU Overseas residents can reclaim the 20% VAT at the Travelex Bureau opposite Mappin & Webb in T5. Some quite long queues, though, so plan ahead.

[RichHI1]

VK does use of the LHR office apply to services or is it only relating to products that are being exported?

[CEGould]

My comment refers to VAT incurred on business travel related purchases

[VintageKrug]

Is it possible to reclaim tax on stays within the UAE?

[Author]

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