Offsetting VAT credits: everything you need to know about this procedure
Offsetting VAT credits: if you are a VAT holder, you will certainly have already heard of it, but do you really know everything about the subject?
The offsetting of VAT credits is a very useful practice, to be included in the annual tax return to offset debts from other taxes.
But in order to really take full advantage of the benefits, you need to know the different types of offsetting, the deadlines for submitting the request, and the precise limits of this practice.
If we have succeeded in arousing your curiosity, then continue reading our article to find the answers that interest you.
Offsetting VAT credits: definition
When you make a purchase of goods, the seller issues an invoice equal to the cost of the goods purchased. Within this cost, the value added tax, i.e. VAT, is included. In this case, therefore, VAT is said to be in a credit situation at the time of purchase.
The credit accumulated at the end of the year is therefore the difference between the revenue generated by the VAT holder and the VAT payable.
How is it calculated?
To better understand the concept, we will provide a quick practical example in which we will demonstrate the calculation of the VAT credit.
A seller buys goods in bulk for an amount of EUR 7,000 and resells them to his customers for a total of EUR 5,000. In both transactions, VAT at 22% is included.
The VAT payable is 1100 (22% of 5,000), the VAT credit is 1540 (22% of 7,000). In this example, the credit is greater than the debit, so the trader is in a credit position. The VAT credit will be EUR 440 and can be used to offset tax debts belonging to other categories.
Difference between horizontal and vertical compensation
There are two types of VAT compensation: horizontal compensation and vertical compensation.
In the case of vertical compensation, a credit in one category must be offset against a credit in the same category. Thus, a VAT credit can be used to pay the debt of the same tax, i.e. VAT.
In the case of horizontal offsetting, on the other hand, a VAT credit can be used to offset a debt belonging to another tax category, other than VAT.
The other major difference between the two types of compensation lies in the fact that the former has no limit in terms of amount. The second, on the other hand, has a ceiling of EUR 700,000, established by Article 9 paragraph 2 of I.D. 35/2013 and entered into force in 2014. This limit has been increased from the previous one of EUR 516,546.90.
Therefore, whenever reference is made to the limits for VAT compensation, reference will always be made to horizontal compensation, as vertical compensation does not.
The rules for VAT compensation
Amount of less than €5,000
If the VAT credit is for an amount not exceeding €5,000, it can be offset by filling out the relevant F24 form without any other request. You must of course use tax code 6099, also indicating the year of reference.
Amount of less than €5,000
In this case, in addition to completing the F24 form, the following document must be provided in order to obtain the offsetting:
- the annual declaration for the year in question accompanied by a compliance visa
You may proceed with the offsetting 10 days after the above-mentioned declaration has been sent electronically.
If you are unable to obtain the conformity stamp, there is another solution: the control body responsible for the statutory audit of the accounts (auditor, auditing company or board of auditors if this body also performs auditing functions) must sign the VAT form in question.
Filling out the F24 form
Irrespective of the type of amount, the F24 form must be filled in to recover VAT credits. We therefore remind you that, as a VAT holder, you must comply with the following rules, which have been amended following D.I. 50/2017:
- if you must submit an F24 form with offsetting, you must use the telematic services that you can find on the Agenzia delle Entrate website, regardless of the amount of the offset
- if you have to submit an F24 form without offsetting, you have two channels available to you: the telematic services of the Revenue Agency or those of the collection intermediaries (remote/home banking).
In addition, for VAT holders requesting a VAT credit offset of more than €5,000, it is no longer compulsory to submit the F24 form exclusively via the telematic services available on the Agenzia delle Entrate website.
Possibility of suspending the F24 form
The Budget Act 2018 added a new rule in favour of the Agenzia delle Entrate. The latter has the right to suspend, up to a total duration of 30 days, the payment of VAT offsets that may give rise to suspicion or fall within risk profiles.
If the analysis of these suspicious models ensures that the credit has been correctly accounted for, or the 30 days have elapsed since the models were submitted, the payment is validated and the offsets made are recorded on the date of payment.
If the forms are deemed fraudulent or untrue, the payment will not be made and the offsets will not be registered with the Revenue Agency.
Is there a limit to the number of VAT offsets per year?
Article 34(1) of Law No. 388/2001 states that, for credit offsets, the limit for each calendar year is 700,000, as we have seen. This ceiling includes the maximum amount that can be used for horizontal credit offsets and simplified refunds of accrued VAT credits.
In the calculation, the year in which the credit is used and not the year in which it was accrued must be taken into account. For example, in the calculation of 2020 credits, 2019 credits that were used in January or February 2021 must be included.
Interim VAT refunds are not calculated within the limit calculation, as the refund practice is not a simplified one. The tax payment in this case is decided by the Inland Revenue.
What about the offsetting of quarterly VAT credits?
In the case of quarterly offsets, the same rules apply as for annual VAT credit offsets for amounts exceeding EUR 5,000. Thus, for quarterly offsets exceeding the amount of EUR 5,000, the endorsement of the compliance visa is required on the quarterly VAT return.
It should be added that the rule concerning the EUR 5,000 threshold applies equally to all VAT returns filed during the course of the year.
This means that if the first quarterly VAT return submitted for compensation exceeds €5,000, this limit applies to all subsequent returns. Therefore, even if the amount is less than EUR 5,000 in future returns, the procedure for amounts exceeding EUR 5,000 must be followed.
This includes that the offsetting of quarterly credits, even those that are less than €5,000, must be accompanied by the completion and telematic submission of the quarterly form.
The only difference is in the deadline for obtaining the set-off. For credits exceeding €5,000, offsetting will be effected from the tenth day following the submission of the quarterly form. For credits of less than 5,000, offsetting may take place from the day after the quarterly return is sent.
Relationship between annual and quarterly VAT credits
The Inland Revenue has issued guidelines regarding the ratio of annual VAT credit to quarterly VAT credit:
- If the ceiling of €5,000 concerning annual credit 'n' is reached, any compensations concerning the first 3 quarters of the same year are not taken into account.
- Offsets that have been made through quarterly VAT forms must be submitted as part of the same year 'n'.
- The threshold of €5,000 is calculated according to the year in which the credit accrues and accounted for according to the different type of VAT credit (annual or interim). This makes it possible to make offsets in the amount of €5,000 even before the annual declaration has been submitted. In fact, the annual credit indicated in the VAT declaration 'n+1' referring to year 'n' has a ceiling of €5,000.
- Equivalently, the ceiling of €5,000 also applies to quarterly credits indicated in the quarterly forms to be sent in year 'n+1'. The rule applies to all quarters that are submitted during the year 'n+1'.
Deadlines for sending the application for VAT compensation
There are two time windows for transmitting the application for VAT credit compensation, depending on the amount of the VAT credit:
- for amounts less than or equal to €5,000, from the first day after sending the return to which the offsetting is linked and until the date of sending the next return
- for amounts greater than €5,000, from the tenth day following the day on which the annual VAT return is sent, with a compliance certificate. It is only when the VAT return is sent, in fact, that there is proof that there is a credit to be offset.
This additional measure was chosen in order to limit the number of persons declaring non-existent credits and at the same time ensure a strict standard for tax offsetting.
Practical example
If your business activity has generated in the year 2019 a VAT credit equivalent to EUR 20,000, you will be able to apply for simplified offsetting without declaration up to the amount of EUR 5,000.
Thereafter, the remainder of the amount will have to be offset through the model involving the VAT declaration. Bearing in mind that the submission of this declaration must be made between 1 February and 30 April 2020, the first available day is 1 February. Offsetting for amounts in excess of EUR 5,000 may therefore be carried out no earlier than 11 February 2020.
New regulations from the year 2020
If you have accrued a VAT credit in 2019 that can be offset, but have not used it during the offsetting in 2020, you will be entitled to continue using this credit in the year 2021. You only need to indicate the correct tax code, accompanied by the year of reference, i.e. 2019. In this way, in the annual VAT return for 2020, the 2019 credit will be incorporated and added to the VAT credits accrued in 2020.
Within the 2017 Budget Law, Law No. 225/2016 was passed, which changed the maximum amount of excess VAT credit that can be claimed for reimbursement, without the obligation to provide a guarantee or asseveration. Thus, it was increased from 15,000 to 30,000. This limit only concerns the VAT credit refund option and not its compensation.
Article translated from Italian