European Countries Raising VAT Tax Rates

Increases in the standard value added tax rates of several European countries have intensified the need to recover VAT incurred by employees on foreign trips, according to the VAT recovery specialist Meridian Global Services.

The latest country to announce a standard rate rise is the Czech Republic. On Nov. 3, it said it would move the rate up from 19 percent to 20 percent on Jan. 1, 2010. Also in the past five months, Lithuania has increased its standard VAT rate from 19 percent to 21 percent and Hungary from 20 percent to 25 percent. In September, Spain announced it would raise its standard rate from 16 percent to 18 percent on July 1, 2010, and Switzerland said in October that its standard rate would rise from 7.6 percent to 8 percent in January 2011. The United Kingdom's standard rate returns to 17.5 percent on Jan. 1, 2010, after a temporary reduction to 15 percent.

Companies are entitled to recover much of the foreign VAT incurred by their travelers, but three years ago the European Commission estimated that more than half of large corporations fail to do so. The main reason for this neglect is that the recovery process is time-consuming and highly detailed, which means that even larger businesses usually lack the resource to handle it in-house.

Dublin-based Meridian, which claims to handle more than €300 million in recovery claims annually, said it is experiencing increased interest in its services from companies that previously neglected to recover their foreign VAT. "Generally, half of a company's travel expenses are VAT-able, so even a 1 percent increase in the VAT rates equates to a 0.5 percent increase in your travel budget," said chief executive Mark O'Riordan.

O'Riordan attributed the recent standard rate increases across Europe to both a long-term and a short-term trend. In the short term, he said, governments prefer raising revenue through VAT to corporation tax because it is collected quarterly, giving them quicker access to cash at a time of crisis. In the longer term, governments are finding VAT appealing as a stealth tax. "Governments see it as a hidden way of increasing revenues," said O'Riordan. "It doesn't show in pay packets, but it can be a significant cost to companies unless they take steps to recover it."

European countries have standard VAT rates ranging from 5 to 25 percent. The United States does not have VAT, but over the past couple of months leading Democrats have floated the idea of introducing it.