Do you know the difference between deductible, incurred and settled VAT? Take your doubts and learn to do the math for each one.
It is usually the companies that usually do the accounts at the deductible VAT. But this, and other associated concepts, are becoming increasingly familiar to other economic agents such as self-employed workers and small individual entrepreneurs.
Mastering the smallest details of VAT is essential so that, at the end of the month, the accounts are right. Here you will find a basic guide with everything you need to know.
VAT incurred and VAT deductible
O VAT supported is the tax that companies pay when purchasing a product or service.
Whenever they buy raw materials or fuel, for example, companies pay VAT. However, as they are goods (or services) used in the exercise of their activity, the State allows them to deduct a part of this value.
In the case of self-employed workers, VAT deduction is possible if they are covered by the organized accounting or, if under the simplified regime, exceed the value of 12,500 euros/year (entering the normal VAT regime). That is, they begin to deduct and settle VAT.
O deductible VAT it is, therefore, the amount of tax that economic agents can recover. Do you still feel confused? So let’s go to an example.
Imagine that a textile company buys fabric for the production of clothing. At the time of the transaction, you will pay VAT to the supplier (VAT supported), but the entirety of this VAT is deductible because it is a raw material. Thus, when, at the end of the month or quarter, the company settles accounts with the State, this amount will be returned to it.
It should be noted, however, that VAT is not always 100% deductible, that is, the State does not always return everything that the company has paid in tax. For example, if a company purchases diesel to fuel a service car, it pays 23% VAT (VAT supported), but the State will only refund half of that amount (VAT deductible).
Do not confuse the deductible VAT of companies with the VAT deduction by invoice requirement that is allowed to individual taxpayers, because they are different things.
The purpose of deductible VAT is to eliminate the overlapping of the tax, that is, to prevent various economic agents and the final consumer from all paying the same tax on the same product or service.
The VAT deduction by invoice requirement is related to the deductions to the IRS collection. In this case, it is an incentive for taxpayers to request invoices with the associated Tax Identification Number (NIF), and can then deduct these expenses from their IRS.
Therefore, we have already seen the concept of input VAT (what the company pays when it buys the product or service) and deductible VAT (the part of the tax that the State will return to the company). But there are more concepts to retain. It’s time to talk about paid VAT.
We know, at this point, that companies pay VAT for raw materials and for the goods and services necessary for the exercise of the activity and that the State undertakes to return part of this VAT.
But, as an attentive reader, you will be wondering why these same companies charge VAT when they sell their products and services to the final consumer.
The truth is that the VAT charged to the final consumer is not for the company’s accounts. The latter only receives the tax from the consumer to later hand it over to the State, acting as an intermediary.
So, going back to the example of our textile factory, we are at the point where:
- The company paid VAT for the fabric it purchased (VAT supported);
- The state undertakes to return the full amount of that VAT to you (VAT deductible);
- The company has to deliver to the State the VAT that it has charged to the final consumer (VAT paid).
Having clarified these concepts, we are now in a position to pick up the pencil and do the math for the final tax.
How are the accounts calculated and when is VAT payable?
With all the elements on the table, the math is easier to do. When delivering the VAT paid to the State, the deductible VAT is deducted (the part of the tax that the State has undertaken to return), and only the difference is delivered.
If the amount of VAT paid is greater than the VAT deductible, we are faced with a situation where there is VAT payable.
- VAT paid – VAT deducted = VAT payable
Let us return, one last time, to our example. Let’s imagine that the textile company we talked about above is included in the quarterly VAT regime, since it has a turnover of less than 650 thousand euros. In the last quarter, the company paid 10 thousand euros of VAT on its purchases from suppliers, of which half refers to deductible VAT.
In sales to the final consumer, carried out in the same period, the company charged 8 thousand euros of VAT which it will now have to transfer to the State.
So we have a scenario where:
- 8,000 euros – 5,000 euros = 3,000 euros
In this case, and taking into account that the amount of VAT paid exceeds the amount of VAT deductible, the company will have to pay three thousand euros of VAT when settling accounts with the State in the quarter following the operations.
How to fill in the periodic VAT return step by step