Everything you need to know about VAT and expense reports

Although VAT is a common expense topic, few finance teams know precisely what it is or how to approach recovery for the maximum benefit. Here are the answers to your most pressing questions. The key lies in artificial intelligence (AI) for finance.

The struggle is real

With average value-added tax (VAT) rates as high as 28% in some countries, reclaiming this expense is essential to a healthy bottom line. So why do so many companies struggle with VAT compliance and recovery? If this is you, rest assured you're not alone.

What is VAT? Is it a type of international sales tax?

VAT is a system of taxation employed by 166 countries, though not by the United States. It's different from sales tax, as it spreads taxation across the many layers of production, not just the end consumer.

For example, if you purchase a cotton t-shirt from a US retailer for $10 dollars, you will pay all the sales tax for that transaction. Depending on which US state you’re in, the sales tax could be as much as a dollar for that $10 purchase from the retailer.

With the VAT system, that dollar of tax is sprinkled throughout the chain of t-shirt production. The textile company might pay a farmer 20 cents of VAT for the 2 dollars of cotton it buys to create the fabric. The t-shirt manufacturer would then pay 20 cents of VAT for the 2 dollars of cotton fabric it subsequently buys from the textile company, and so on up the supply chain. The shopper only pays 20 cents of tax for the two dollars of retail profit margin.

Theoretically, a lower sales tax burden is placed on the consumer, who is already paying income tax.

Should my company allow employees to expense VAT?

Almost always, yes. If sales tax reimbursement is company policy, then employees paying VAT expenses for the company should be reimbursed.

It gets more complicated for multinational companies when mid-chain buyers and suppliers enter into the VAT system for the first time; your company might see tax charges on B2B transactions that it’s not used to seeing. In those cases, companies should fall back on accepted best practices for helping employees expense VAT charges.

Why is VAT a challenge for employees and finance teams?

VAT reclamation can be time-consuming. Roughly 85% of companies handle the paperwork manually. If your expense management software isn’t fully automating your VAT recovery, you may be struggling to keep up with this compliance task. When finance teams become overloaded due to staffing changes, rapid growth, or other factors, company employees may have to pick up the slack.

Employees may be asked to do more of the paperwork and keep very detailed records to prove their VAT expenses, spending time on a task that normally falls within the accountant's responsibilities. This can lead to increased error, waste, and the risk of fraud. Frustrated employees may resentfully decide to let the company bear the cost rather than lose time on their primary job or personal responsibilities.

What sort of VAT misconduct should employers look for on expense reports?

One common scam is double-billing, expensing both sales tax and VAT. An example would be an employee enjoying a $30 dinner and claiming they spent $3 dollars on sales tax and another $2 on VAT, when only one of those taxes was actually assessed. Those numbers can quickly scale up for larger bills.

VAT, by its multinational nature, is also inherently less easy to police. It can also be used as a bargaining chip by opportunistic elements of the supply chain. As an incentive to do business, a vendor could offer to reduce or eliminate the VAT as part of a discounted total. Employees might mistakenly expense the full amount plus VAT. Or they may be purposefully opaque about its presence in the transaction while reporting full costs and taxes.

Conceptually, VAT is a small tax break for citizens, shifting some of the financial burden of sales tax to companies and corporations throughout the production cycle. Despite its good intentions, it adds a layer of complexity to financial reporting that may manifest itself in employee fraud, usually as a tool for extracting more money from employers via expense reports.

What is the best way to solve your VAT compliance problems?

Thankfully, finance AI can automatically handle VAT and other tax expenses for you, saving time, money, and headaches. 

All of AppZen’s AI-driven finance solutions autonomously solve a number of your spend and compliance challenges, and VAT checks are just one of the many benefits. Using AI to automate human-centric processes, like VAT reclamation tasks, means you won’t have to shoulder the burden or pay for an outside agency to handle the paperwork. You lower the risk of employee fraud and policy non-compliance. And the company can more easily recover the full amount of the VAT it's owed, significantly benefitting your bottom line.

Want to find more expense compliance risks you may not even know you have? Don’t wait until it’s too late. Take our quiz and get your risk assessment score now.