Although VAT is a common expense topic, few finance teams know precisely what it is or how to approach recovery for maximum benefit. Here are the answers to your most pressing questions—and how AI-powered expense report auditing can help.

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 because 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, you pay all the sales tax for that transaction. Depending on which state you're in, that could be as much as a dollar.

With VAT, that dollar of tax is distributed throughout the production chain. The textile company pays VAT on the cotton it buys from a farmer. The t-shirt manufacturer pays VAT on the fabric it buys from the textile company. And so on up the supply chain. The shopper only pays VAT on the retail profit margin—theoretically placing a lower tax burden on consumers who are 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 the VAT system for the first time. Your company might see tax charges on B2B transactions 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 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, employees may be asked to do more paperwork and keep detailed records to prove their VAT expenses. This can lead to increased error, waste, and the risk of fraud. Frustrated employees may decide to let the company bear the cost rather than lose time on their primary responsibilities.

What sort of VAT misconduct should employers look for?

One common scam is double-billing—expensing both sales tax and VAT. For example, an employee enjoying a $30 dinner might claim $3 in sales tax and another $2 in VAT, when only one tax was actually assessed. Those numbers scale quickly for larger bills.

VAT, by its multinational nature, is also inherently harder to police. It can be used as a bargaining chip by opportunistic vendors who offer to reduce or eliminate VAT as part of a discount. Employees might mistakenly expense the full amount plus VAT—or purposefully be opaque about its presence while reporting full costs and taxes.

Despite VAT's good intentions as a consumer-friendly tax structure, it adds complexity to financial reporting that can manifest as employee fraud, usually as a tool for extracting more money from employers via expense reports.

How to solve your VAT compliance problems

AI-powered expense audit software can automatically handle VAT and other tax expenses, saving time, money, and headaches.

AppZen's AI-driven solutions autonomously solve spend and compliance challenges—and VAT checks are just one of many benefits. Using AI to automate human-centric processes like VAT reclamation means you won't have to shoulder the burden or pay an outside agency to handle paperwork. You'll:

  • Lower the risk of employee fraud and policy non-compliance
  • Recover the full amount of VAT your company is owed
  • Free up finance team bandwidth for higher-value work

 

Want to find expense compliance risks you may not even know you have? Learn how AppZen Expense Audit automatically catches VAT fraud and compliance issues.