Are you overpaying in foreign VAT to overseas suppliers?

August 30, 2023
Neeraj Nagarkatti

Associate Operating Partner

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Many medium to large multinational corporations in the UK encounter a specific challenge: the inadvertent overpayment of foreign VAT to overseas suppliers. In this article, we delve into the issues and propose practical solutions for multinationals to effectively mitigate this problem.

What is the situation?

This issue arises when businesses end up paying more VAT to their overseas suppliers than necessary, due to a series of avoidable errors and miscommunications.

To illustrate, let’s take the case of a German service business, like a translation agency, which charges their local VAT at 19% to a UK customer. Ideally, no local VAT should apply as the business customer is UK-based. Nevertheless, this scenario can occur due to various factors:

– The German translation business might lack experience in dealing with UK business clients, causing them to inadvertently apply German VAT by default.

– The German business might have unintentionally failed to input the UK business’s VAT in their purchase accounting system. Consequently, the German supplier might mistakenly categorize the UK business as an individual client instead of a business entity, leading to the incorrect application of German VAT.

As a result, the German supplier might inadvertently apply their country’s local VAT rate, resulting in substantial overcharges over time.

Furthermore, the UK client might remain unaware of the incorrect application of German VAT on their invoice. Given the high volume of invoices to process, such errors can easily go unnoticed.

Although you could reclaim some VAT using a country’s official VAT refund process, this may take several months to recover. Additionally, the purchase might not meet the requirements for a VAT refund.

What action can you take?

If you oversee the budget or manage the department’s finances, it’s advisable to review whether there are any costs exceeding the budget by approximately 20%.

Ensure that the person responsible for preparing the UK VAT return is reviewing purchase invoices with foreign VAT during the process.

Lastly, it’s essential to confirm the correct application of VAT with the foreign supplier. If they agree, ensure you receive a credit note and a cash refund for the foreign VAT amount.

How can you stop this from happening again?

You can be proactive. For instance, before placing an order, ask the foreign supplier how they will apply local VAT to your purchase. Also, give them full company details, including your UK VAT number. If required, provide proof of export to make sure you get an invoice without VAT.

How can we help?
If the overseas supplier remains uncooperative, we offer support through our UK VAT review service or as a standalone service.

Our assistance includes:

– Reviewing your billing documents and export records to strengthen your case for VAT-free billing from the overseas supplier

– Liaising with the overseas tax authority on your behalf to reinforce your position

– Engaging with overseas businesses to help get your VAT back

Contact us to learn more about how we can help you: