Input VAT: Which VAT Is Deductible on Business Purchases and Which Is Not

The Basic Principle: Output VAT minus Input VAT

VAT works as a value-added tax: the business collects VAT from its customers (output VAT) and pays VAT to its suppliers (input VAT). In the VAT return it remits to the tax authority only the difference. The more input VAT is deductible, the less VAT is paid. When input VAT exceeds output VAT, a credit balance arises, which can be carried forward or claimed as a refund.

The Conditions for Deduction

For the VAT on a purchase to be deductible, the following conditions must be met:

• There must be a lawful document (invoice) in the name of the business, correctly recorded in the books
• The goods or services must be used for the taxable transactions of the business, and only to the extent they are used for them
• The expense must not fall within the exceptions expressly defined by law
• The right to deduct arises at the time the tax becomes chargeable, in accordance with Articles 16, 17 and 18 of the VAT Code

A business that issues and receives documents electronically must also transmit and classify them correctly in myDATA, so that discrepancies are avoided.

The VAT That Is Not Deductible: The List in the Law

Article 30 of the Value Added Tax Code lists a limited number of cases where no right of deduction is granted, even if the expense was incurred for the business:

• Expenses for entertainment, amusement and hospitality in general
• Expenses for accommodation, food, drinks, travel and entertainment for staff or representatives of the business
• The purchase, import or intra-community acquisition of private passenger cars of up to nine seats, as well as motorcycles and mopeds
• Private boats and aircraft intended for recreation or sport
• Expenses for fuel, repair, maintenance, leasing and circulation of the above vehicles
• Certain tobacco and alcoholic products, under the conditions set by law

Anything not expressly included in this list, and at the same time connected with the taxable transactions of the business, is deductible as normal.

Passenger Car or Van: The Difference That Costs

The most common point of error is vehicles. The restriction concerns private passenger cars of up to nine seats, and covers not only the purchase, but also leasing, fuel, maintenance, repairs and circulation taxes. By contrast, the VAT on trucks and commercial vehicles is deductible as normal. The exception for passenger cars intended for resale, rental or passenger transport (e.g. taxis, driving schools) applies depending on the activity. A proposal has been put forward for a special regime of partial VAT deduction for purely electric company vehicles, but, according to a recent publication, it has not yet been legislated and the general rule applies.

Mixed Activities and Apportionment (Pro-Rata)

If a business carries out both taxable and exempt transactions, the input VAT that concerns both categories is deductible only to the extent that it corresponds to the taxable transactions. Similarly, when a good or service is used for both business and personal purposes, only the business part is deductible. Businesses that belong to the special exemption regime for small businesses do not charge VAT on their sales, but also do not deduct input VAT. The calculation of the proportion depends on the data of each business and must be done with the help of an accountant.

VAT and Income Tax: Two Different Rules

One of the most common points of confusion is that VAT and income tax have separate deduction rules. An expense may be deductible from taxable profit while its VAT is not deductible, and vice versa. For example, for passenger cars the VAT is not deductible, but the total cost of the expense (net amount and VAT) is recorded as an expense and may reduce taxable profit, provided it meets the income tax conditions. By contrast, for entertainment expenses, in general neither the VAT nor the expense itself is deductible from income. This is why every expense must be checked separately for both taxes.

Two Calculation Examples

The amounts are hypothetical and are used only to show the logic of the calculation.

The Most Common Mistakes

1. Deducting the VAT on a passenger car, fuel or maintenance in the VAT return
2. Deducting VAT on entertainment, hospitality and amusement expenses
3. Deducting VAT from a document that is not in the name of the business or has not been recorded correctly
4. Failing to apportion VAT on mixed-use purchases, business and personal
5. Confusing the deduction of VAT with the deduction of the expense from income
6. Failing to record input VAT on services from abroad (reverse charge), with the result that a deduction right is lost or a discrepancy is created

6 Practical Tips

1. Always ask for a lawful document in the name and with the correct details of your business.
2. Before every vehicle purchase or leasing, check whether it is a passenger or commercial vehicle and calculate the VAT that will not be deductible.
3. Separate hospitality and entertainment expenses from the other expenses in your books.
4. For mixed-use purchases, record the percentage of business use, so that the VAT is deducted correctly.
5. Check that documents are transmitted and classified correctly in myDATA before filing the VAT return.
6. Ask your accountant for a periodic review of the expenses included in the VAT return, especially before filing a refund claim.