The VAT also known on its long form which is the "Value Added Tax" is an indirect levy on consumption. It is perceived by professionals and entrepreneurs as expensive and costly for the company. In reality, however, this is not the case, because the person who pays it is none other than the final consumer. The role of the company is to pay the State the VAT surcharges arising from its current purchasing and sales operations. In order to be able to manage its own VAT, it is first necessary to know how it works and the different methods of calculation.

How VAT works

The VAT return is an obligation which the business must make periodically if it is subject to either the simplified or the normal real time system. In the former case, the declaration is made every six months and in the latter case every month. Firms registered under the VAT-based franchise system are not concerned, since they do not charge VAT on their sales and treat VAT on purchases directly as an expense. In order to manage its VAT, the business must be subject to one of the two schemes mentioned above. The change of regime is possible according to a few criteria and may be more advantageous for the company.

Calculation of VAT payable

The applicable VAT rate is 20%, which can usually be found on invoices. To determine the VAT payable in a period known as the reference period, the formula is quite simple: VAT payable = output tax - input tax. The company only pays the difference between the VAT it has collected on all its sales during a period and the VAT it has paid on its various purchases and external services during the same period. It can happen that the input tax is higher than the output tax collected in a period. In this case, there will be no payment to be made. This is a VAT credit that can be deducted on the next return or claimed as a refund, under certain conditions.

Rules to remember

Not all VAT on purchases and services is deductible. For example, tax on fuel for gasoline vehicles is not deductible. Self-supply transactions are subject to certain conditions. Different scales and conditions have to be considered. For all information and details, please refer to the online user guides, the general tax code, or contact a chartered accountant or tax professional directly.