How to calculate the VAT of a taxable good or service
You will certainly have happened to buy a product and find the words 'VAT included' on the label. In fact, you will no doubt be aware that for every good or service, a specific percentage value is included, which is known as VAT.
But what is the process by which VAT is produced? Or rather, how is VAT calculated?
If you are wondering how to calculate VAT, you have come to the right place! In the following article, you will find the information you need to perform a correct VAT calculation.
What is VAT: definition and characteristics
To begin with, let's look at what VAT is.
VAT is an acronym that stands for Value Added Tax. It corresponds to a compulsory contribution applied on value added, i.e. a tax levied on goods and services.
VAT is applied to numerous transactions, such as:
- Taxable transactions;
- Non-taxable transactions;
- Exempt transactions pursuant to Article 10 of Presidential Decree 633/1972;
- Excluded transactions pursuant to Article 15 of Presidential Decree 633/1972.
In Italy, there is a VAT settlement obligation for all VAT holders. This means that these professional persons are de facto obliged to calculate and pay VAT.
VAT must be settled periodically; in fact, we speak of periodic VAT settlement . This, in fact, must take place:
- Either monthly,
- Or on a quarterly basis.
VAT settlement, and therefore VAT payments, must be made by completing the F24 form. This consists of a specific form made available and downloadable from the Inland Revenue website.
The F24 form must necessarily be submitted electronically via the online services of the Revenue Office.
How is VAT calculated? All the steps to follow
The calculation of the VAT payable is carried out by implementing the difference between the tax generated by the invoices issued to customers and the invoices received from suppliers.
This calculation actually consists of subtracting the VAT on purchases from the VAT on sales, i.e:
VAT relating to sales (invoices issued or receipts of taxable transactions)* - VAT relating to purchases (invoices received) = VAT amount payable*.
*VAT due in the month or quarter
* = any tax credits and debits for the previous period;
☝ For the calculation of VAT, only the amounts of deductible transactions need to be taken into account.
Depending on the type of difference obtained, i.e. whether it is positive or negative, the VAT amount can be of two different types:
- If the difference is positive, we speak of VAT payable, which corresponds to the VAT to be paid to the Treasury. This coincides with all the amounts collected as tax.
Caution! The debit amount must be EUR 25.82 or less. It may not exceed this maximum threshold. If it is exceeded, it must be carried over to the next period.
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If the difference is negative, it is referred to as input VAT. This corresponds to all amounts paid to suppliers.
👀 When reference is made to VAT values, entries such as: 10% VAT. Or, in reference to the VAT increase, one speaks, for example, of a 1% increase or a 2% or 3% reduction.
This is because VAT is a proportional tax. This means that its value is dependent on the price of the good multiplied by the reference rate.
☝ A rate is a certain percentage value applied to a given taxable value. The currently valid reference rates are:
- 4%: minimum rate applied to basic necessities;
- 10%: reduced rate applied to tourism, food and construction services;
- 22%: ordinary rate applied in all other cases;
To say that VAT is a proportional tax is to imply that it expresses a percentage calculation. This means that VAT expresses a calculation in which part of the total is expressed in cents and whose fractions are expressed by a whole number or decimal. This number is, therefore, followed by the percentage symbol: %.
How is a percentage calculation carried out?
Are you wondering how to calculate the percentage of a given numerical value? The method is very simple. Simply take the value of the percentage that you want to calculate to one side. Then consider the number taken as a reference on which you want to calculate the given percentage on the other.
Taking these two values, the following simple calculation must be performed between them:
Percentage value of the number taken as reference = percentage value x number taken as reference : 100
For example:
→ If 30% of 900 is to be calculated, the following calculation is to be carried out:
30 x 900 : 100 = 270
Percentage calculation of VAT
The percentage calculation steps described above also apply to the calculation of the VAT percentage. It follows from the above that:
→ If a VAT rate of 22% is taken as a reference, the VAT calculation will be carried out as follows:
VAT = value of the taxable good x 22 : 100
From here, if you then wish to calculate the final price of the taxable good (or service), you must carry out the following operation:
Total of the value of the given taxable good including the relative percentage of VAT = value of the taxable good without VAT + value of the VAT just calculated
☝ The final price of the good corresponds to the value of the taxable good including VAT (= including the relative percentage calculated).
For example:
→ If we take a value of the taxable good (excluding VAT) = 2000 and a VAT rate of 22%, the VAT calculation will be as follows:
2000 x 22 : 100 = 440
while the calculation of the final value of the good will be:
2000 + 440 = 2440 ( = total price of the taxable good)
👉 In the case of post-processing, the starting value of the good may be increased. In this case, it is important to remember that the good will be sold by calculating the VAT percentage at the reference rate from the increased good price. That is:
For example:
→ If the value of the taxable good undergoes, as a result of any kind of treatment, an increase from 2000 to 2400 euros, for a calculation of VAT on the new value at a rate of 22% we will have:
2400 x 22 : 100 = 528
while the calculation to obtain the final value of the good will be:
2400 + 528 = 2928
Thus, in conclusion, the good will be sold for 2928 euros. The seller will then pay the difference to the Treasury. In this case, this will amount to: 528 - 440 = EUR 88 (i.e. the net VAT received by the seller from the buyer).
The VAT Disparagement
Speaking of the way in which VAT is calculated, one cannot fail to refer to the concept of the VAT disjunction.
Decoupling is a special type of calculation by which the gross price of a taxable good is broken down into the components of:
- Net amount of the taxable good,
- Value of VAT.
Carrying out VAT unbundling, therefore, means separating the taxable base from the VAT rate.
This is an important operation, since it makes it possible to determine the real and effective amount of receivables from and payables to customers and suppliers. Furthermore, this calculation is essential for the correct preparation of the VAT report.
The calculation of the VAT disjunction can be carried out using the following formula:
100 : VAT rate = value of taxable goods : gross amount (the amount actually paid)*.
* net + VAT
Although all calculations to derive VAT are generally relatively simple, they take time and are subject to calculation errors. For this reason, you can avoid any hiccups by using accounting tools to help you automate these calculations. Sometimes, avoiding errors is important, as these could result in penalties.
Article translated from Italian