Plan to reform legislation on refunding VAT

Date: 18/12/1997

By Chris Johnstone

PROPOSALS for a wholesale shake-up of creaking EU tax rules, which are supposed to allow companies to reclaim value added tax when it is paid in other countries, will be made next year by the European Commission.

Reform of the current Eighth Tax Directive, which sets out the formula for refunding tax across borders, has been highlighted as an urgent necessity by a working group of national experts, companies and the Commission.

They found that procedures are so cumbersome that hardly anyone is able to recover the money they are due.

Most firms argue that the current system for VAT recovery is a huge obstacle to the proper functioning of the single market. In addition, recent judgements by the European Court of Justice have reprimanded governments for failing to apply the eighth directive correctly.

Investigations by the Commission found that only 2% to 3% of possible claims for VAT recovery were successfully completed in other countries.

Those suffering most from the present system are transport companies and small businesses. Larger firms are usually able to pay for a foreign-based tax expert who can pursue their claims for them. "In some cases, firms are discouraged from carrying out business because of the obstacles to recovery," said one Commission official.

Haulage companies, for example, can recover VAT on fuel and repairs. In common with other firms, it can also be clawed back on other types of spending linked to foreign business such as hotel expenses.

But under the current system, firms must make their demand for VAT recovery in the country where the payment was made, frequently in the local language, with a deadline often fixed for the demand to be made. Governments are sometimes so slow in making the payments that companies can end up being owed substantial sums.

The proposal being worked on by Commission tax officials would radically transform the current structure, allowing firms to make their recovery claims in their home countries. In turn, national tax authorities would make a claim for repayment to the country where the original payment was made.

This would involve the creation of a type of clearing system for payments between governments. "The proposal is radical, but will perhaps be difficult to pass," said an official.

For this restructuring to work effectively, the Commission would also like to push through a harmonisation of VAT rates on some of the items which are most often the subject of recovery claims, such as diesel.

But this will be hard to sell to national governments.

The UK, which takes over the EU presidency in January, said that it expected the Commission proposals in the first half of the year, but was unsure whether it would have enough time to push them forward.

European Commission intends to reform the 8th Tax Directive.