When TravelPerk unveiled a 'Value Added Tax Solution' last week, it
became the latest in a long line of service and technology companies aspiring
to unlock one of the biggest jackpots in managed travel: a slick way to recover
VAT on business trips.
The savings at stake are substantial. “If you recover all your VAT, you will reduce your travel
expenses by around ten per cent,” says Marcel DeWit, vice-president global tax
& treasury for BCD Travel.
In the present
coronavirus crisis, this percentage will likely be lower, as many countries
have reduced their VAT rates to help stricken travel and hospitality suppliers.
Belgium, for example, has reduced VAT for the hospitality sector from 21 per
cent to 6 per cent until the end of 2020.
With travel
expenditure greatly suppressed anyway, finding improved methods to recover VAT
may seem a low priority right now, but that could change quickly once European companies
are on the move again.
Indeed, the need could become urgent: some countries,
including the UK, are considering raising VAT above pre-Covid levels to boost
exchequers depleted by fighting the virus.
Yet recovering VAT is
far easier said than done. Various specialists estimate around €20 billion of
VAT incurred on business travel goes unreclaimed in a normal year.
And that
figure, says Martin Biermann, chief product officer for HRS Group, does not
take into account another huge chunk unrecovered on meeting and events
expenditure. All in all, estimates Jean-Michel Kadaner, partner with Areka
Consulting, “Companies only
recover 60 per cent of their potential VAT reclaim on average.”
The reason so much VAT
stays on the table is complexity. All European Union countries are obliged to
impose this tax, and make it recoverable for businesses, but the rules each
member state applies vary enormously.
The standard rate ranges from 17 per cent
in Luxembourg to 27 per cent in Hungary, but countries often set different
rates for different types of travel-related service. In Germany, for example,
accommodation is seven per cent while restaurants are 19 per cent. Conferences
are also 19 per cent, as is car rental, but fuel is zero per cent. Public
transport and taxis are 7 or 19 per cent depending on circumstances.
Nor do the
inconsistencies end there. “Each country has different rules for what is
recoverable and when you can recover it,” says DeWit. In the UK, if an employee
takes a client to lunch, VAT can be reclaimed on the employee’s meal but not
the guest’s.
“You also
have different deadlines to make the reports to each national fiscal authority,”
adds Kadaner. “It takes a long time to gather and submit and a long time to get
your money back.”
On top of all that is
the frequent rejection of claims, which need to be accompanied by valid VAT
invoices. Correct invoices must include the supplier’s VAT number, the amount
of VAT applied, and the name and address of the legal entity of travellers’
employers, not of the travellers
themselves. “21 per cent of VAT receipts are invalid,” says Biermann.
Yet another complication
besets VAT applied to reservations made through TMCs and other third party
booking services. Many booking providers work within the Tour Operators’ Margin
Scheme, which applies when an agency pays a supplier itself and then recharges
the corporate client.
“If you purchase through a third party that operates to
TOMS rules, it means you are not able to recover VAT,” says Robbie Falkenthal,
director of tax for TravelPerk. “You’d be shocked how many service providers
aren’t fully aware of this issue or haven’t addressed it.”
Fortunately, there are
solutions to these many challenges. According to Biermann, 25 per cent of
companies outsource VAT recovery to specialists on a gainshare basis. These
providers prepare the recovery claims, chasing hotels and other suppliers for
corrected receipts if the original is deemed invalid.
Savings vary. Kadaner
says one of his clients, a large automotive company with annual T&E spend
of €94 million, recovers €300,000 annually through a VAT specialist.
Results are improving
thanks to increased automation and fuller integration between VAT specialists,
expense management suppliers and booking service providers.
BCD, for example,
allows clients to plug in VAT and expense providers to its SolutionSource
management platform. As a result, a traveller can scan a restaurant receipt on
their phone and the data will be sucked not only into their expense claim but
also from there into the VAT report.
At the same time, BCD feeds in the
relevant invoices it receives from suppliers. BCD is urging more hotels to issue
their invoices electronically. “We are working to get more and more
integrated,” says DeWit.
Some booking providers
have taken this idea even further. “You have to do much more at the beginning
of the process,” says Biermann. One of the big problems in corporate travel is
that global distribution systems do not include a standardised reservation field
for entering the legal entity name of the corporate client that is required for
valid VAT receipts.
HRS solves the problem by operating direct connections to
80,000 hotels that account for more than 99 per cent of the bookings it
handles. Under a process it calls Invisible Pay, HRS sends reservation, payment
and invoicing instructions to the hotel simultaneously. The invoice is returned
via the same channel at the time that the payment is taken.
Biermann claims that as
a result HRS receives VAT-compliant invoices on day one of check-out for 88 per
cent of the reservations it makes. By sending reminders to errant hotels, it
claims to push that figure up to 98 per cent by day three.
TravelPerk’s newly
announced VAT solution works on a similar principle, but with car rental, air
and rail suppliers as well as hotels. In certain cases, TravelPerk can raise an
invoice on behalf of suppliers; failing that, it collects the invoice from the
supplier.
The beauty of the idea,
according to Falkenthal, is that, by cutting the traveller out of the process
completely, “this can
drive savings for the travel programme without having to change travellers’
behaviour.”
However, travellers do have the option to collect an invoice at
check-out for hotels stays, in which case TravelPerk sends the property the
name of the correct legal entity for invoicing purposes, and follows up with
reminders to both hotel and traveller.
Travel managers can
play their part in accelerating the digitisation of VAT recovery. “Make sure
that preferred suppliers provide VAT-compliant invoices as part of your
agreement with them,” says DeWit, ideally committing to issuing electronic invoices.
Change is finally coming to
the handling of VAT. It just needs a little encouragement.