What is VAT, and how do you get your maximum VAT refund?

While a European vacation is undoubtedly an unforgettable experience, it can be expensive.

That’s why savvy travelers have various strategies in place to save money on flights, hotels and rental cars (hopefully by reading some of TPG’s great money-saving advice).

One of the most overlooked ways travelers miss out on saving money is by forgetting to apply for a VAT refund.

VAT is a Value Added Tax. Let’s say, for example, you just went on a shopping spree in Rome or splurged on gifts at the El Corte Ingles department store near Las Ramblas in Barcelona. You more than likely paid VAT on your purchases, but the good news is that visitors to the European Union can often get a refund on that tax. Think of it as the traveler’s tax break.

Despite the obvious savings that can come with VAT refunds, the amount of money Americans leave on the table each year in unclaimed refunds is estimated to be in the billions. Don’t be one of those travelers.

Getting your VAT refund is worth the time and effort it takes, especially if you’re traveling within the EU.

The rules surrounding VAT refunds have somewhat changed in recent years, so it’s important to read up on the latest rules (including the U.K.’s discontinuation of VAT refunds for international visitors since Brexit). Here’s everything you need to know about getting your maximum VAT refund when traveling in Europe.

What is a VAT?

VATs and goods and services taxes (GSTs) are common worldwide; more than 160 countries have them.

In the EU, the VAT is similar to the sales taxes imposed in the U.S., but there are also some big differences. One of the biggest: VAT rates are much higher than those you pay in state and local sales taxes in the U.S.

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The EU’s minimum standard VAT rate is 15% — far more than the combined state and local sales tax rates you’ll find anywhere in the U.S. However, the average standard VAT rate in the EU currently sits around 21%. All EU countries have standard VAT rates above the 15% threshold; Luxembourg has the lowest rate at 16%, and Hungary has the highest at 27%.

“The VAT is a major income revenue for the tax authorities in Europe,” said Britta Eriksson, a VAT expert and CEO of Euro VAT Refund, a Los Angeles-based company that helps companies manage VAT in their overseas operations. “[VAT] represents almost as much as the income tax in terms of revenue for the government.”

Many EU countries offer lower VAT rates on certain goods. Sweden, for example, has a standard VAT rate of 25%. However, for some food items, restaurant services and even hotels, a reduced VAT of 12% is offered.

France has reduced the VAT on certain agricultural products and even some cultural events to 5.5%. In other nations, items such as books, newspapers, and bike and shoe repairs receive a reduced VAT rate of only 6%.

As you can see, these “special rates” vary from country to country, so make sure you do your homework before your trip. The EU also exempts some goods and services from VAT; some exemptions include educational services, financial services and medical care.

Many stores work with third-party agencies, such as Global Blue or Planet, to process VAT refunds, and these agencies usually have facilities in major cities where you can take your completed forms and get your refund.

When purchasing your items, check to see if your merchant is partnered with these agencies.

On departure day, be sure to take your receipts, the refund forms the shops filled out, the items you bought and all your other travel documents with you to the airport so that you can present everything to customs.

If you’re touring multiple EU countries during your trip, you’ll complete this process at the last EU country you visit. That means if you visit France and Italy before ending your trip in Spain, you will apply for the VAT refund on your purchases in Spain.

Customs may inspect your purchases, so make sure they’re available and not in your checked baggage. Also, make sure the goods are unused and unworn.

If all goes well, the customs office will stamp your refund forms. If either the store or one of the third-party refund agencies has already given you your refund, you’ll have to mail this stamped form back to them to prove you left Europe within the mandated three-month period. Otherwise, you risk having your refund canceled and your credit card charged for the VAT you owe.

If you haven’t done so already, you can also get your refund at the airport. The big refund agencies have facilities at all the major EU airports, sometimes at a currency exchange. Just show them your stamped customs forms and your passport to get your refund, minus a fee.

Although there’s some optimism that VAT refunds could return to Britain in the future — the U.K.’s tourism industry is lobbying for its return — it’s not an option for now.

While VAT refunds are no longer available in England, Scotland and Wales, you can still claim refunds if you’re visiting Northern Ireland. There are also several exceptions and rules to know; for example, it doesn’t apply to services like hotel bills. You can find the list of restrictions here. You should also be aware that some merchants and refund companies in Northern Ireland charge a fee for using tax-free shopping. Still, if you’re planning a visit, you could save some money on your shopping.

Before your trip, look up the VAT rules for the country you’re visiting and check the standard and reduced VAT rates, as well as the minimum purchase points.

As we mentioned earlier, the rates and rules of what qualifies for a VAT refund can vary depending on where you visit, so make sure you’re aware before you get there.

Remember that many countries outside the EU also charge a VAT, and their refund policies can differ greatly from what you’ll find in Europe.

Research the store

Stores aren’t required to provide VAT refund assistance of any kind.

“If you have a store that doesn’t have this program, then getting a refund is very complicated,” Eriksson warned.

Keep an eye out for stores displaying “tax-free” or “VAT-free” signs. Ask the store employees which third-party agencies they partner with for refunds. Also, ask how they process refunds and what fees they charge. As we noted above, some retailers in some countries may charge a fee to visitors using tax-free shopping.

Allow extra airport time for your refunds

Don’t expect to be the only traveler at the airport seeking a VAT refund before heading home. Expect to wait in line for a bit. Plan ahead and give yourself extra time at the airport, as the line can be long.

If you’re strapped for time after leaving customs, some agencies will let you drop your stamped forms in one of their mailboxes, and they’ll issue your refund later.

Consider shipping your purchases home to avoid VAT entirely

If you don’t want to deal with any of this stuff, Eriksson suggests another option.

“You can also have the store ship [your items] to you directly,” she said. “Then, they won’t charge you VAT.”

But there’s a catch.

“You still have to pay for the freight,” Erikkson added.

Shipping costs from Europe to anywhere in the U.S. can get wildly expensive. So, you have to weigh that shipping cost against the VAT and the time and effort it would take to get your refund to decide if it’s worth it.

Make sure the refund is worth the trouble

“If you buy expensive clothing and china, then it’s absolutely worth it,” Eriksson said.

While many VAT countries have purchase minimums for refunds, in others, any purchase a visitor makes qualifies, no matter how small. So, you should ask yourself if it’s worth applying for a VAT refund for that cheap tchotchke you bought as a souvenir.