Offsetting VAT credits: everything you need to know about this procedure

Offsetting of VAT credits: if you are a VAT number holder, you have surely already heard about it, but do you really know everything about the subject?

Offsetting VAT credits turns out to be a very useful practice, to be included within the annual tax return to offset debts from other taxes.

But in order to really take full advantage of the benefits, you need to know the different types of offsets, the deadlines for making the request and the precise limits of this practice.

If we have succeeded in arousing your curiosity, then continue reading our article to find the answers that interest you.

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VAT credit offset: definition

At the time you make a purchase of a good, the seller issues an invoice equal to the cost of the purchased good. Within this cost, you will find included the value-added tax, or VAT. In this case, therefore, at the time of purchase, the VAT item is said to be in a credit situation.

The accumulated credit at the end of the year,therefore, turns out to be the difference between the revenue produced by the VAT holder and the VAT payable.

How is it calculated?

To better understand the concept, we will provide a quick practical example in which we demonstrate the calculation of the VAT credit.

A seller buys goods in bulk for an amount of 7,000 and resells them to his customers for a total of 5,000. In both transactions, a 22 percent VAT is included.

The debit VAT will correspond to 1100 (22% of 5,000); the credit VAT, on the other hand, is 1540 (22% of 7,000). In this example, the credit is greater than the debit, so the merchant is in a credit position. The VAT credit will be 440 euros and can be used to offset tax debts belonging to other categories.

Difference between horizontal and vertical compensation

There are two types of vat compensation: horizontal compensation and vertical compensation.

In the case of vertical offsetting, a credit in one category must be offset by the credit in the same category. So a vat credit can be used to pay the debt of the same tax, namely vat.

In the case of horizontal offsetting, on the other hand, a VAT credit can be used to offset the debt that is part of another category of taxes, different from VAT.

The other major difference between the two types of offsetting lies in the fact that the former has no limit in terms of amount. The second, on the other hand, has a ceiling of 700,000 euros, established by Article 9 paragraph 2 of I.D. 35/2013 and entered into force in 2014. This limit has been increased from the previous limit of 516,546.90 euros.

Therefore, whenever reference is made to the limits of VAT compensation, it will always refer to horizontal compensation, as vertical compensation does not provide for any.

The rules for VAT compensation

Amount of less than 5,000 euros

If the VAT credit has an amount that does not exceed 5,000 euros, it can be offset by filling out the relevant F24 form without any other requirement. You must, of course, use tax code 6099, also indicating the reference year.

Amount of less than 5,000 euros

In this case, in addition to filling out the F24 form, the following document must be provided to obtain the offset:

• the annual declaration for the year in question correlated with compliance visa

You will be able to proceed with offsetting 10 days after sending the above-mentioned declaration electronically.

If you are not able to obtain the compliance visa, there is another solution: the supervisory body in charge of the statutory audit (auditor, auditing company or board of statutory auditors if this body also performs the audit functions) will have to sign the VAT form in question.

Filling out the F24 form

Regardless of the type of amount, the F24 form must be filled out in order to recover the offset of VAT credits. We would like to remind you, therefore, that as a VAT holder you must comply with the following rules, which have undergone changes as a result of D.I. 50/2017:

• if you have to submit an F24 form with compensation, you must use the telematic services found on the website of the Internal Revenue Service, regardless of the amount of compensation;
• if you have to submit an F24 form without compensation, you have two channels available to you: the telematic services of the Internal Revenue Service or those of the collection intermediaries (remote/home banking).

In addition, for VAT holders requesting a VAT credit offset of an amount exceeding 5,000 euros, it is no longer mandatory to submit the F24 form exclusively through the telematic services available on the website of the Revenue Agency.

Possibility of suspension of the F24 form

The 2018 Budget Law added a new rule in favor of the Internal Revenue Service. The latter has the right to suspend, up to a total duration of 30 days, the payment of VAT offsets that may give rise to suspicion or fall under risk profiles.

If the analysis of these suspicious models ensures that the credit has been properly accounted for, or 30 days have passed since the models were submitted, the payment is validated and the offsets made are recorded on the date of payment.

If the forms are considered fraudulent or untrue, the payment will not be made and offsets will not be recorded with the Internal Revenue Service.

Is there a limit number of vat offsets per year?

Article 34, paragraph 1, Law No. 388/2001 states that, for credit offsets, the limit for each calendar year corresponds to 700,000, as we have seen. This ceiling includes the maximum amount that can be used for horizontal credit offsets and simplified refunds of accrued VAT credits.

Within the calculation, one must consider the year in which the credit is used and not the year in which it was accrued. For example, when calculating 2020 credits, 2019 credits that were used in January or February 2021 must be included.

Interim VAT refunds are not calculated within the limit computation, since the refund practice is not the simplified one. In fact, the tax payment in this case is decided by the Internal Revenue Service.

What about the offsetting of quarterly VAT credits?

In the case of quarterly offsets, the same rules apply as for offsetting annual VAT credits for amounts exceeding 5,000 euros. Thus, for quarterly offsets exceeding the amount of 5,000 euros, the endorsement of the compliance visa is required on the tax return, quarterly VAT form.

It should be added that the rule regarding the €5,000 threshold applies uniformly to all VAT returns filed during the course of the year.

This means that if the first quarterly VAT model submitted for compensation exceeds 5,000 euros, this limit applies to all subsequent models. Therefore, even if the amount is less than 5,000 euros in the next returns, the procedure regarding amounts over 5,000 euros must be followed.

This includes that the offsetting of quarterly credits, even those that are less than 5,000 euros, must be accompanied by the completion and telematic submission of the quarterly form.

The only difference is in the terms for obtaining the offset. For credits with amounts over 5,000, offsetting will be done from the tenth day following the submission of the quarterly form. For credits of less than 5,000, offsetting can take place as early as the next day following the submission of the quarterly return.

Relationship between annual and quarterly VAT credit

The Internal Revenue Service has set guidelines regarding the ratio of annual VAT credit to quarterly VAT credit:

• If the ceiling of 5,000 euros concerning annual "n" credit is reached, any offsets concerning the first 3 quarters of the same year are not taken into account.
• Offsets that were made through quarterly VAT forms must be submitted as part of the same year "n".
• The 5,000 euro threshold is calculated based on the year the credit accrues and accounted for based on the different type of VAT credit (annual or interim). This makes it possible to make offsets in the amount of 5,000 euros even before having filed the annual return. In fact, the annual credit shown in the "n+1" VAT return that refers to year "n" has a ceiling of 5,000.
• Equivalently, the 5,000 euro ceiling also remains valid for quarterly credits shown in the quarterly forms to be submitted during year "n+1." The rule applies to all quarters that are submitted during year "n+1."

Deadlines for sending the application for VAT compensation

To submit the application for offsetting VAT credits, there are two time windows depending on the amount of the VAT credit:

• for amounts less than or equal to €5,000, from the first day after sending the return to which the offset is linked and until the date of sending the next return
• for amounts greater than 5,000 euros, from the tenth day after sending the annual VAT return, equipped with a compliance visa. Only by sending the VAT return, in fact, is there proof that there is a credit to be offset.

This additional measure was chosen to limit the number of people who declared nonexistent credits and at the same time ensure a standard of rigor to tax offsetting.

Practical example

If your business activity generated in the year 2019 a VAT credit of an amount equivalent to 20,000 euros, you can apply for simplified offsetting without declaration up to the amount of 5,000 euros.

Thereafter, the rest of the amount will have to be offset through the model that provides for the VAT declaration. Bearing in mind that the submission of this declaration must be made between February 1 and April 30, 2020, the first available day is February 1. Offsetting for amounts exceeding 5,000 euros, therefore, can be made no earlier than Feb. 11, 2020.

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New regulations from the year 2020

If in 2019 you have accrued a VAT credit that can be offset, but you have not used it during the set-off scheduled for the year 2020, you will be entitled to continue the use of this credit in the year 2021. You will only need to indicate the right tax code, accompanied by the year of reference, which is 2019. In this way, in the annual VAT return for 2020, the 2019 credit will be incorporated and will be added to the VAT credits accrued in 2020.

Within the 2017 Budget Law, Law No. 225/2016 was passed, which changed the maximum amount of excess VAT credit that can be claimed for reimbursement, without the obligation to provide a guarantee or asseveration. Thus, it was increased from 15,000 to 30,000. This limit affects only the option of VAT credit refund and not its offset.