What is VAT in accounting and how does it work on a day-to-day basis?

You see it every day in your invoices. It is reflected in each and every purchase you make, but do you really know what VAT is in accounting?

This tax, created in France in 1930, is part of our daily lives, either as consumers or as entrepreneurs and freelancers. Now, as an entrepreneur and business owner, it is necessary to know more in depth what it is, and for that Appvizer gives you the information you need.

In this article we will see what VAT is in its broadest sense: what it is for, the rates that exist in Spain and information about how to calculate it. Without further ado, let's get started!

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What is VAT in accounting? Definition

Value Added Tax, whose acronym VAT we all know, is the tax or levy charged on certain products and services.

It is an indirect tax, since it is not levied on income but on consumption. In other words, it is financed by the end consumer and depends on the amount of products consumed. Likewise, its indirect nature means that it is not paid directly to the Tax Agency, but through the companies. In a way, the company helps in the collection of this tax.

As its name indicates, this tax is only applied to the value that the last seller has added to the product.

What is VAT used for?

In principle, VAT is used to tax both the supply of goods and services by professionals and intra-Community transactions.

At the same time, VAT is one of the main sources of financing for the State and, since it is paid from the beginning of the value chain, the Treasury does not have to wait until the end of the year to collect it in full.

Characteristics

• Flat and mandatory: it is the same percentage for everyone equally. It does not depend on the taxpayer's income.
• Proportional: the same tax rate applies to all products and services in the sector.
• Neutral (in the case of companies): for companies, VAT is neither an expense nor a profit; they only serve as a tax collection agency.

Types of VAT

Each country has its own regulations and tax rates. In the case of Spain, there are three types of VAT depending on the activity or product:

1. general VAT

This is the tax rate corresponding to 21% of the transaction. It is, by default, the tax that applies to all transactions.

2. Reduced VAT

It is equal to 10% of the transaction and is applied in cases such as the following:

• Food intended for human or animal consumption (except alcoholic beverages).
• Agricultural, forestry or livestock products(fertilizers, insecticides, seeds, etc.).
• Consumption of water, whether for humans, animals or irrigation.
• Sanitary products and instruments or those intended to make up for physical deficiencies (glasses, contact lenses, etc.).
• Sales of homes, parking spaces, annexes.

Regarding services such as:

• Transportation of passengers and their luggage.
• Hotel services, restaurants and food consumption on the spot.
• Services in favor of holders of agricultural, forest or cattle operations.
• Cleaning services of public roads.
• Sanitary and dental assistance and thermal cures that are not exempted.
• Repair and repair of dwellings.
• Leases with option to buy housing, parking spaces and annexes.
• Imports of antiques, art and collector's items.

☝ In 2018, VAT on tickets to cinemas, theaters, concerts and sporting or cultural events went from 21% to 10%.

3. Super-reduced VAT.

With a tax rate of 4%, this is the tax applied to cases such as:

• Sale of unprocessed food (vegetables, cereals, flour, bread, eggs, cheese, etc.).
• Sale of books and magazines that do not contain whose content is not mainly advertising.
• Sale of medicines.
• Vehicles for people with reduced mobility.
• Sale of prosthesis or implants.
• Public housing (when the delivery is made by its promoters).
• Telecare services, home help, day and night center and residential care.

VAT in the world

As mentioned above, the value added tax varies according to the country and local laws. In English, this tax is known as VAT (Value Added Tax).

Let's take a look at some of the tax rates around the world:

Output VAT vs. input VAT

Depending on the position of the seller or buyer of the product or service, the tax will have a different denomination:

1. Input VAT: The amount paid by the company at the time of acquiring a product or service.
2. Output VAT: Corresponds to the tax you charge a customer after providing a service or selling a product.

💬 In other words, both input and output VAT rates are the two sides of the same coin, it only varies depending on the position you are in.

Let's say, for example, that for the operation of your company you need to buy raw materials, which you will then transform into a final product that will go to market. At the time you buy raw materials, you must pay the appropriate tax (that is your input VAT). Once you sell the final product, your customer/buyer must pay an amount corresponding to VAT, this will be your output VAT.

Who collects VAT?

Two people are involved in the value added tax collection process:

• Taxpayers: This is any individual who pays this tax out of his or her own pocket every time he or she purchases a product.
• Taxpayers: This is the individual or legal entity that collects the tax and then pays it to the Treasury in compliance with its tax obligations.

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How is VAT declared?

In Spain, Value Added Tax is usually settled quarterly (with few exceptions). This declaration is made by means of the presentation of the form 303 in which the calculation is made thanks to the difference between the VAT charged and the VAT borne. This is part of the fiscal obligations of companies and self-employed.

Failure to declare this tax can result in administrative penalties that can affect your business. Avoid this type of inconvenience and arm yourself with the right accounting tools to deal with this liability without wasting time and money.