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The VAT Refund Directive: Recovering from reform

MAJOR tax reform is a hazardous – and largely thankless – enterprise for the authorities that embark upon it. As George Osborne is currently re-discovering with his plans for changes to the tax rules around buy-to-let mortgages, you are sure to antagonise at least one vocal section of the population, whatever you do.

Even when you’re certain you’ve got it right, there will be someone to tell you just how wrong you are. The European Commission, for example, has been so pleased by the rollout of the VAT Mini-One-Stop-Shop for electronic services that it intends, as part of the long march towards a ‘definitive’ VAT system for the EU, to extend the MOSS to cover all e-commerce distance sales transactions in the EU. At conferences where the MOSS is discussed (and acclaimed), officials from the commission and member state tax authorities acknowledge that there have been a few teething problems, but the sounds of backs being slapped for a job well done echo long into the night.

Enter John O’Nolan, founder of digital platform Ghost, who earlier this week furiously announced that his company was shifting its centre of operations from the UK to Singapore because of its endless struggles with MOSS and HMRC. Ghost have given up:

“…We’ve wasted tens of thousands of dollars and months of development time [on implementing VAT MOSS] when we should have been making the products we set out to build. It’s slowed down our roadmap, allowed some of our competitors to get ahead and caused untold amounts of stress… HMRC is unequivocally the most incompetent organisation in the world.”

Whether or not his complaints are entirely justified – and it is questionable whether moving operations to Singapore will allow him to escape the clutches of the MOSS – it is impossible not to sympathise with O’Nolan’s efforts to try and be compliant. Nevertheless, it is also true and must be acknowledged, that in the run up to the 2015 rollout, HMRC (now undone by unintended consequences, the plague of tax reform) took more care, and were strikingly more serious, about the implementation of the MOSS than any other EU tax authority. For once, the commission was pleased with the UK and its efforts to simplify and support (as far as possible) a technically difficult implementation.

The commission was desperate for the MOSS to be a success partly to exorcise another embarrassing ghost: the botched implementation of the cross-border VAT refund directive in 2010. The idea had been to take advantage of contemporaneous changes to the VAT rules around ‘place of supply’ and replace the cumbersome and inefficient paper-based cross-border VAT recovery system with an up to date online mechanism. The new framework was supposed to be a victory for the single market, and demonstrate definitively that VAT, technology and different member states could be brought into happy alignment under the wise guidance of the European Commission.

You can guess the rest. Member states failed to meet deadlines for introducing the technology; systems that were introduced didn’t work; the overall result was an impossible mish-mash of creaking automation and obscure manual process. Mr O’Nolan notwithstanding, the EU brass consider the recent MOSS a technical achievement on a par with the moon landings when comparing the implementation to the refund fiasco.

How is the refund directive doing now? Do these reforms just take time to bed in? Will we one day love the MOSS?

There is no doubt that many of the original technological problems confronted by users of the system have been dealt with. There are portals for member states, and it is (usually) possible to file claims through them. As is generally the case with automation, the simpler the nature of the process to be automated, the more effective the mechanical solution can be. For that reason, there seems to be a consensus that the filing and recovery of straightforward cross-border travel and expense claims has improved as a consequence of the directive. When linked to OCR technology, T&E claim processes really can be streamlined.

Even here, though, the system is not perfect. Tax authority systems may, for example, demand electronic copies of invoices for claims to be valid, but not offer enough capacity for all copies to be attached (Germany is frequently criticised for this).

From a process point of view, it is after submission that the difficulties really start. A UK-based claimant, having filed in English, may suddenly find herself inundated with requests for information from foreign tax authorities in foreign languages. There are, for instance, Eastern European authorities that will demand a response to a query within seven days – or reject the claim out of hand. That’s not long to master the relevant technical and linguistic conundrums.

Some authorities will reject large claims on the basis of a misstated postcode; others will reject claims for non-responses to queries even if correspondence has gone to the wrong address. The refund directive has matured during Europe’s age of austerity, and it shows. Tax authorities are desperate to hang onto whatever revenue they can.

As a result, there are serious risks are around larger accounts payable refunds: tooling; warranties; supply and install; land related services; events: in these areas, to take a few examples, complexity is the challenge. A technical misstep when making a large claim can provide a fatal opportunity for the tax authority.

What is the nature of the transaction? Ought VAT to have been charged at all? Would a registration actually be the appropriate solution? What do the underpinning sales contracts imply? Will suppliers provide credit notes if they have got it wrong?

Authorities pounce on misunderstandings; the right to recover is easily lost; thus VAT becomes a cost. Indeed, some authorities additionally penalise claimants for making technically incorrect claims.

The best advice for when filing cross-border VAT claims? Get it right first time.

Nicholas Hallam is chief executive of VAT consultancy Accordance

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