VAT liquidation: what you need to know about your quarterly return

"The date of the VAT liquidation has arrived" those words that every three months remind us that, as Benjamin Franklin said, there is nothing so certain in life as death and taxes.

Self-employed, owner of an SME or a large company, everyone must comply with this obligation and for this it is necessary to have a reliable and rigorous accounting system that supports the operations you perform daily, both buying and selling.

Whether or not these operations are subject to VAT payment, it is necessary to keep the supports, since this is the only way to achieve a clear closing of accounts and to facilitate the tax liquidation procedure.

This tax, which, just as it arrives in your hands, goes out every time you make a purchase, is part of your life and you must understand it: what VAT is about, how it is calculated and when the liquidation is made and which accounts are charged. Below, we will clarify many of these doubts, let's start!

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What is VAT?

VAT, or Value Added Tax, is an indirect tax levied on certain domestic or imported products and services.

Depending on the position you are in: who pays it or who collects it, it will have a different name and different characteristics.

1. Output VAT

This is the VAT invoiced by businessmen or self-employed persons for the provision of their service or the sale of their product. That is to say, it is the one that is reflected in the invoice at the time of payment and is made on the taxable base:

For example: company ABC provides a consultancy service for €500. The invoice shows the following:

Taxable base = 500

VAT + 21% = 105

INCOME TAX -15% = 75

TOTAL = 530

The amount corresponding to VAT (105€) is the output VAT, since it is the customer who has paid it. However, this money does not belong to the service provider. This money will have to be paid to the Treasury in the quarterly return.

💡 In a way, the businessman is a kind of VAT collector for his customers.

2. Input VAT

Now, if we switch roles and look at it from the customer or consumer's side, input VAT is the tax that you must pay when you acquire a good or service to develop your economic activity.

This tax can be deducted from the periodic liquidations if it meets certain requirements:

• Verify that the expenses are associated with the activity of the company (purchase of work materials, per diems and travel during working hours, tax advice, etc.).
• Justify such expenses by means of the original invoice.

On the other hand, they cannot be deducted from the settlements:

• Simplified or incomplete invoices ,
• simplified or incomplete invoices, supports submitted after the deadline or incomplete,
• expenses not recorded in the accounting ledger.

💡 In short, both output VAT and input VAT are two sides of the same coin: your output VAT will be your customer's input VAT.

What is the quarterly VAT settlement?

Now, the Value Added Tax settlement refers to the process that must be carried out once the difference between output VAT and input VAT is known. It is the moment to corroborate, by means of different types of entries, that this tax has been correctly paid and collected.

In Spain it is carried out every three months, with some exceptions.

In each liquidation, the VAT charged to customers is declared, subtracting from this the input VAT on purchases and acquisitions from suppliers, the result being either positive or negative.

Agencia Tributaria

VAT payable = output VAT - input VAT

In this sense, if the result is negative, it must be paid to the Treasury. If the result were positive, it could be offset against the following quarter's payment.

✋ It is very unlikely that there will be a neutral result when calculating the VAT payable.

How to calculate the VAT liquidation?

1. Preparation of Forms 303 and 390

The settlement of Value Added Tax is made by filing the self-assessment form (form 303), the filing of which is mandatory for businessmen and self-employed persons. This form is available at the electronic headquarters of the Tax Agency.

The result after completing the form 303 can be:

• Positive = we have to pay the Treasury,
• negative = balance in our favor for the next quarter.

We can request the credit balance ONLY for the last quarter of the fiscal year.

Form 303 is filed in one of the following ways:

• Paper: it must be filled in on the website of the State Tax Administration Agency (AEAT), downloaded and printed and then taken to the AEAT office.
• Electronic :
  • Pre-declaration filing or use of Cl@ve PIN: for individuals or entities that do not require an electronic certificate.
  • Electronic signature or identification and authentication system.

On the other hand, there is Form 390 or Annual VAT Summary Form , which is filed from January 1 to January 30 of the following year and reflects the totals of input and output VAT bases and quotas.

❗ The summary presented in form 390 must coincide with the amounts presented in the forms 303 of the previous liquidations.

2. Calculation of VAT settlement entries

In order to make VAT entries , it is necessary to know which accounts should be used to post and subsequently settle VAT:

• To post VAT:
  • Account 472 "Inland Revenue, Input VAT" (H.P. Input VAT).
  • Account 477 "Inland Revenue, Output VAT" (H.P. Output VAT).

• To make the settlement entry:
  • Account 4700 - Tax Authorities VAT debtor: settlement to be offset or refunded.
  • Account 4750 - Tax Authorities VAT creditor: settlement to be paid.

1. VAT settlement entry to be paid:

2. VAT settlement entry to be offset:

3. VAT payment entry:

3. VAT Settlement - Dates

The quarterly liquidation must be submitted between the 1st and 20th of the following month of the liquidation period.

📆 That is to say:

• From 1 to 20 April → the settlement corresponding to the first quarter of the year.
• From 1 to 20 July → the settlement corresponding to the second quarter of the year.
• From 1 to 20 October → the settlement corresponding to the third quarter of the year.
• From January 1 to January 20 of the following year → the settlement corresponding to the fourth quarter of the year.

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Avoid penalties and keep up to date

There are many penalties for not paying VAT on time, or even worse, for not paying it at all.

These penalties can range from a 5% surcharge on the amount, up to 100%. The percentage will depend on the time of delay incurred at the time of liquidation. These penalties apply to all types of entrepreneurs and self-employed.

👆 Even if there is an invoice that has not been collected because the customer has not paid, this VAT must be settled to the tax authorities.

Avoid penalties by relying on an accounting tool that allows you to automate the calculations. Because you can't live in anxiety from quarter to quarter!