VAT (Value Added Tax) is a type of tax charged on the consumption of goods and services. The Tax Agency defines it as "an indirect tax charged on consumption that applies to deliveries of goods and services provided by business operators and professionals, intra-community acquisitions and imports".
It is one of the main sources of financing for Governments as it constitutes a significant percentage of the national budget due to the revenue collected through this tax. The percentage of VAT is different in every country and also depends on the type of product or service, as the figure will change based on this element.
How VAT works
VAT is applied to any purchases made by private individuals and to the amounts charged for services provided by professionals, self-employed workers, and companies, all of which are required to declare and pay this tax according to the invoices they send to clients. For example, a person visiting a restaurant will notice that an additional and proportional amount will be added to the items they consume for VAT purposes.
The concept is the same for everyone. However, certain features apply in different cases. Therefore, a distinction must be made between accrued or output VAT and input VAT. The first is what professionals, the self-employed and companies charge their customers for a product or service. However, this amount does not form part of the profit generated on the transaction and must be subsequently paid by the company to the Tax Office, which acts as the Government's tax collection unit.
Input VAT is what professionals and business operators pay for receiving goods or services and which may be recovered if the goods or services acquired are exclusively used for their activity. For example, a self-employed plumber can deduct VAT from the tools they buy to perform their work and companies that manufacture furniture can deduct VAT from the wood they buy.
However, sometimes input tax is not deductible and must be borne by the business operator or professional.
How VAT is paid
VAT is paid to the Tax Agency on a quarterly basis. However, there is also the option to pay it every month. Only large companies are required to declare VAT every month. The total amount payable is the result of subtracting deductible VAT (the amount paid for goods or services associated with a professional activity) from accrued VAT (the amount included on customer invoices). In other words, only the VAT resulting from the added value of sales is payable.
If in one quarter deductible VAT is greater than accrued VAT, this difference can be used to offset the VAT amount for the next month. However, the Tax Agency will only reimburse the amount at issue at year-end when a final tax return for the past 12 months is submitted, provided a return is necessary based on the result for the entire year (unless, VAT is declared monthly, in which case reimbursements will be performed from month to month). In order for deductible VAT to be considered valid, it must be justified by means of complete invoices including the Tax ID and Company Tax Code, corporate name, tax residence and the accrued amount, which must be itemized. Similarly, expenses must be properly recorded and recognized in the VAT registration book.
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