How to calculate input and output VAT?
In the world of business, sales and purchases, it is important to know all the amounts that you have to pay as an entrepreneur or professional and that allow you to make an accurate estimate of your expenses.
In this regard, input and output VAT: are they the same? In the course of your economic activity, you are obliged to settle VAT on your commercial transactions on a quarterly basis. But when is VAT deductible?
In this article, Appvizer reviews the concepts and explains how to calculate VAT using some exercises and tools.
What is VAT?
VAT (Value Added Tax) is a tax applicable to the goods or services we consume, which goes to the State's coffers. In other words, it is an amount or percentage that is applied to activities that involve the sale and purchase of any product or service.
Both end consumers and entrepreneurs or self-employed are liable to make this payment.
VAT Rates
Let's think of VAT as a coin with two sides. That is, depending on the role you are playing (buyer or seller), the VAT payable is called by a different name. From a company's point of view, this means the following:
- Input VAT: This is the value paid by the company when acquiring a product or service.
- Output VAT: This is the value charged by the company to its customers for the sale of products or the provision of services. This collection will be the one that will be paid to the Treasury later on.
Input VAT
The input VAT (if you are the one who pays it) or output VAT (if you are the one who collects it), is the indirect tax that is applied to products and services that have been generated both in Spain and abroad. For its collection, companies and self-employed act as intermediaries for the Treasury.
Not all input VAT is deductible. Let's see this in detail:
- Deductible input VAT: This is the VAT paid by the self-employed or the company at the time of the acquisition of goods and services and which can be subtracted from the output VAT, at the time of filling in the form 303 of the liquidation. There are two requirements to be fulfilled for this VAT to be deductible:
- Proof that the expenses are associated with the company's activity (purchase of work materials, per diems and travel during working hours, tax consultancy, etc.).
- That these expenses must be duly justified, by means of the original invoice.
- Non-deductible input VAT: In practice, there are expenses that even without benefiting the businessman personally and being for the benefit of the business activity, cannot be considered as deductible, as they do not meet the necessary requirements. Common causes for not complying with the requirements include:
- Simplified or incomplete invoices,
- support submitted after the deadline,
- expenses not recorded in the accounting books.
Output VAT
As we have already seen, output VAT is the name given to VAT when it is charged by companies or professionals to their customers during the transaction. It is calculated on the taxable amount shown on the invoices.
Calculation of VAT payable
The indirect nature of this tax, unlike personal income tax, seeks to avoid double taxation (when applied to the seller and the buyer), since it is paid during all stages of the production of a good or service.
Due to the above, it is necessary to deduct the input VAT from the output VAT in order to know exactly how much should be paid to the Tax Agency.
Therefore, translating the above concepts in formulas, we have:
| Input VAT = (purchase price * input VAT on each invoice received for purchases and expenses) |
| output VAT = (sales price * output VAT on each invoice issued) |
| VAT payable = output VAT - input VAT |
Form 303: how to declare VAT
Having clear in which cases the VAT can be deductible, we can review what is the Model 303 that collects it.
This model is the official format provided by the Spanish Tax Agency, in which the quarterly declaration is made and within which both the output VAT and the deductible VAT are included.
In this way, you return to the Treasury the VAT that you have charged to your clients and that does not belong to you.
Input and output VAT: exercises
First of all, it must be made clear that each amount must be debited to the corresponding account of the Inland Revenue, depending on whether it is output or input VAT, and two situations may arise:
- If output VAT > input VAT → the debt with the tax authorities must be recognized.
- If output VAT < input VAT → the receivable must be recognized which will be recoverable from the Inland Revenue.
🔵 Exercise:
A company selling sweaters sets a price of €25 per unit. When setting the price, the company has had to consider the cost of raw materials provided by each supplier. An outline of the relationship between input VAT and output VAT for this company would be as follows:
| Input VAT | Product | Output VAT |
| Wool | Open sweaters in wool | Actual product price |
| Buttons | + | |
| Yarn | VAT | |
| Labels | Total price of the product | |
| Total VAT that the company pays for the raw material | VAT added to the product by the company and paid by the customer |
At the end of the fiscal year, the Government will return the input VAT to the company, after it makes the corresponding declaration, together with the respective supports.
🔵 F iscal year:
A Spanish company presents the following data for its fiscal year:
Total sales = 40 300€.
Acquisitions related to exports = 12 100€.
Total imports = 13 500€.
To calculate the amount of the VAT return, we perform the following operation:
Output VAT = 40 300 * 0.21 = 8 463 €.
Input VAT deduction for exports = 12 100 * 0.21 = 2 541 €.
Input VAT on imports = 13 500 * 0.21 = 2 835 €.
Subtract the input VAT from the output VAT to find out what must be declared to the tax authorities:
| output VAT - deductible input VAT: 8,463 - 2,541 - 2,835 = 3,087 €. |
He who pays what he owes, knows what he has
Nowadays, many companies choose to simplify their accounting management with tools that automate calculations. There is a wide variety of invoicing and accounting programs whose implementation ensures compliance with tax obligations, without the need to make a large investment.
SeniorConta, for example, is a free accounting software, ideal for freelancers and SMEs, which allows you to effectively manage the accounting of a business. With analytical accounting functionalities, it offers the possibility of calculating and managing taxes, complying with the provisions of the Tax Agency.
Now that you know how to easily calculate what you'll earn at the end of the month, depending on how much you'll have to pay and collect in taxes from your clients, you're ready⋅a to stop your accounting management from being evasive 😉 .
Article translated from Spanish