VAT assessment: what you need to know about your quarterly VAT return
"The date of the VAT settlement has arrived", those words that every three months remind us that, as Benjamin Franklin said, there is nothing so certain in life as death and taxes.
Whether you are self-employed, the owner of an SME or a large company, everyone must comply with this obligation and for this it is necessary to have a reliable and rigorous accounting system that supports the operations you carry out on a daily basis, both in terms of buying and selling.
Whether or not these transactions are subject to VAT, it is necessary to keep the supporting documents, as this is the only way to achieve a clear closure of accounts and facilitate the tax settlement procedure.
This tax, which comes into your hands and goes out every time you make a purchase, is part of your life and you must understand it: what VAT is about, how it is calculated , when it is settled and to which accounts it is charged. Below, we will clear up many of these doubts, so let's get started!
What is VAT?
VAT, or Value Added Tax, is an indirect tax on certain domestic or imported goods and services.
Depending on the position you are in: who pays it or who collects it, it will have a different name and different characteristics.
1. Output VAT
This is the VAT invoiced by entrepreneurs or self-employed persons for the provision of their service or the sale of their product. In other words, it is the VAT that is reflected on the invoice at the time of payment and is charged on the taxable amount:
For example: ABC provides a consultancy service for €500. The invoice shows the following:
Taxable amount = 500
VAT + 21% = 105
INCOME TAX -15% = 75
TOTAL = 530
The amount corresponding to VAT (105€) is the output VAT, as it is the customer who has paid it. However, this money does not belong to the service provider. This money will have to be paid to the treasury in the quarterly return.
💡 In a way, the entrepreneur is a kind of VAT collector for his customers.
2. Input VAT
Now, if we swap roles and look at it from the customer or consumer's side, input VAT is the tax you have to pay when you purchase a good or service to carry out your economic activity.
This tax can be deducted from the periodic settlements if certain requirements are met:
- Check that the expenses are associated with the activity of the company (purchase of work materials, allowances and travel during working hours, tax consultancy, etc.).
- Justify these expenses by means of the original invoice.
On the other hand, they may not be deducted from the tax returns:
- Simplified or incomplete invoices ,
- simplified or incomplete invoices , or incomplete or out-of-date supporting documents ,
- expenses not recorded in the accounting ledger.
In short, output VAT and input VAT are two sides of the same coin: your output VAT will be your customer's input VAT.
What is the quarterly VAT settlement?
Value Added Tax (VAT) settlement refers to the process that must be carried out once the difference between output VAT and input VAT is known. This is the moment to corroborate, by means of different types of entries, that the VAT has been correctly paid and collected.
In Spain it is carried out every three months, with some exceptions.
In each settlement, the VAT charged to customers is declared, subtracting from this the input VAT on purchases and acquisitions from suppliers, and the result may be positive or negative.
Agencia Tributaria
VAT payable = output VAT - input VAT
In this respect, if the result is negative, it must be paid to the tax authorities. If the result is positive, it can be offset against the following quarter's payment.
It is very unlikely that there will be a neutral result when calculating the VAT payable.
How to calculate the VAT settlement?
1. Preparation of Forms 303 and 390
Value Added Tax is settled by filing the self-assessment form (form 303), the filing of which is obligatory for business people and the self-employed. This form is available at the Tax Agency's electronic office.
The result after having completed the 303 form can be:
- Positive = you have to pay the tax authorities,
- negative = balance in our favour for the next quarter.
We can request that the credit balance is paid ONLY in the last quarter of the tax year.
Form 303 is filed in one of the following ways:
- Paper: it must be filled in on the website of the State Tax Administration Agency (AEAT), downloaded and printed and then taken to the AEAT office.
- Electronic :
- Pre-declaration submission or use of Cl@ve PIN: for individuals or entities that do not require an electronic certificate.
- Electronic signature or identification and authentication system.
On the other hand, there is form 390 or Annual VAT Summary Form , which is filed from 1 to 30 January of the following year and reflects the totals of input and output VAT bases and quotas.
The summary presented in form 390 must coincide with the amounts presented in the 303 forms of the previous liquidations.
2. Calculation of VAT accounting entries
In order to make VAT entries , it is necessary to know which accounts should be used to post and subsequently settle VAT:
- To post VAT:
- Account 472 "Inland Revenue, input VAT" (H.P. input VAT).
- Account 477 "Inland Revenue, output VAT" (H.P. output VAT).
- To make the settlement entry:
- Account 4700 - Inland Revenue VAT debtor: settlement to be offset or refunded.
- Account 4750 - Inland Revenue VAT payable: settlement to be paid.
1. VAT settlement entry to be paid:
| Amount of output VAT | (477) | H.P. output VAT | → | (472) | H.P. input VAT | Input VAT amount |
| → | (4700) | H.P. VAT receivable | Balance | |||
| → | (4750) | H.P. VAT payable | Amount payable |
2. Settlement entry of VAT to be offset:
| Amount of output VAT | (477) | H.P. Output VAT | ||||
| Difference between output and input | (4700) | H.P. VAT debtor | → | (472) | Input VAT liability | Input VAT amount |
3. VAT payment entry:
| Amount payable | (4750) | H.P. VAT payable | → | Treasury | (57) | Amount payable |
3. VAT assessment - Dates
The quarterly assessment must be submitted between the 1st and 20th day of the following month of the assessment period.
📆 I.e.:
- From 1 to 20 April → the settlement corresponding to the first quarter of the year.
- From 1 to 20 July → settlement for the second quarter of the year.
- From 1 to 20 October → the settlement for the third quarter of the year.
- From 1 to 20 January of the following year → settlement for the fourth quarter of the year.
Avoid penalties and keep up to date
There are many penalties for not paying VAT on time, or even worse, not paying it at all.
These penalties can range from a surcharge of 5% of the amount, up to 100%. The percentage will depend on the length of delay incurred at the time of assessment. These penalties apply to all types of employers and self-employed persons.
Even if there is an invoice that has not been collected because the customer has not paid, this VAT must be paid to the tax authorities.
Avoid penalties by using an accounting tool that allows you to automate your calculations. Because you can't live in anxiety from quarter to quarter!
Article translated from Spanish