How to calculate input and output VAT?
In the world of business, sales and purchases, it is important to know all the amounts that you have to pay as an entrepreneur or professional and that allow you to make an accurate estimate of your expenses.
In this respect, input and output VAT: are they the same? As part of your business activity, you are obliged to pay VAT on your commercial transactions on a quarterly basis. But when is VAT deductible?
In this article, Appvizer reviews the concepts and explains how to calculate VAT using some exercises and tools.
What is VAT?
VAT (Value Added Tax) is a tax applicable to the goods or services we consume, which is paid into the State's coffers. In other words, it is an amount or percentage that is applied to activities that involve the sale and purchase of any product or service.
Both end consumers and entrepreneurs or the self-employed are liable to pay this tax.
VAT rates
Think of VAT as a coin with two sides. That is, depending on the role you are playing (buyer or seller), the VAT payable is called by a different name. From the point of view of a business, this means the following:
- Input VAT: This is the value paid by the company when purchasing a product or service.
- Output VAT: This is the value charged by the company to its customers for the sale of products or the provision of services. This is the amount that will be paid to the tax authorities at a later date.
Input VAT
Input VAT (if you pay it) or output VAT (if you collect it) is the indirect tax that is applied to products and services that have been generated both in Spain and abroad. To collect it, companies and the self-employed act as intermediaries for the tax authorities.
Not all input VAT is deductible. Let's look at this in detail:
- Deductible input VAT: This is the VAT paid by the self-employed or the company at the time of the acquisition of goods and services and which can be subtracted from the output VAT, at the time of filling in form 303 of the liquidation. There are two requirements to be met for this VAT to be deductible:
- Proof that the expenses are associated with the company's activity (purchase of work materials, per diems and travel during working hours, tax consultancy, etc.).
- These expenses must be duly justified by means of the original invoice.
- Non-deductible input VAT: In practice, there are expenses that even though they do not benefit the entrepreneur personally and are for the benefit of the business activity, they cannot be considered as deductible, as they do not meet the necessary requirements. Common causes for non-compliance include:
- Simplified or incomplete invoices,
- support submitted after the deadline,
- expenses not recorded in the accounting books.
Output VAT
As we have already seen, output VAT is the name given to VAT when it is charged by businesses or professionals to their customers during the transaction. It is calculated on the taxable amount shown on the invoices.
Calculation of VAT payable
The indirect nature of this tax, unlike personal income tax, means that there is no double taxation (when applied to the seller and the buyer), since it is paid during all stages of the production of a good or service.
Due to the above, it is necessary to deduct input VAT from output VAT in order to know exactly how much VAT should be paid to the tax office.
Therefore, translating the above concepts into formulas, we have:
| Input VAT = (purchase price * input VAT on each invoice received for purchases and expenses) |
| output VAT = (sales price * output VAT on each invoice issued) |
| VAT payable = output VAT - input VAT |
Form 303: how to declare VAT
Now that it is clear in which cases VAT can be deductible, we can review what Form 303 consists of.
This form is the official format provided by the Spanish Tax Agency, in which the quarterly return is made and in which both the VAT charged and the deductible VAT is included.
In this way, you return to the Treasury the VAT that you have charged to your customers and that does not belong to you.
Input and output VAT: exercises
First of all, it must be made clear that each amount must be debited to the corresponding account of the tax authorities, depending on whether it is output or input VAT, and two situations may arise:
- If output VAT > input VAT → the debt to the tax authorities must be recognised.
- If output VAT < input VAT → the credit must be recognised, which will be recoverable from the tax authorities.
🔵 Exercise:
A company selling jumpers sets a price of €25 per unit. At the time of setting the price, the company has had to consider the cost of raw materials provided by each supplier. A diagram of the relationship between input VAT and output VAT for this company would be as follows:
| Input VAT | Product | VAT charged |
| Wool | Open jumpers in wool | Actual price of the product |
| Buttons | + | |
| Yarn | VAT | |
| Labels | Total price of the product | |
| Total VAT paid by the company for the raw material | VAT added to the product by the company and paid by the customer |
At the end of the tax year, the Government will refund the input VAT to the company, after the company makes the corresponding declaration, together with the respective supports.
🔵 F iscal year:
A Spanish company submits the following data for its financial year:
Total sales = 40 300€.
Acquisitions related to exports = 12 100€.
Total imports € 13 500
To calculate the amount of the VAT return, we perform the following operation:
Output VAT = 40 300 * 0.21 = 8 463 €.
Deduction of input VAT on exports = 12 100 * 0.21 = 2 541 €.
Input VAT on imports = 13 500 * 0,21 = 2 835 €.
Subtract the input VAT from the output VAT to find out what is to be declared to the tax authorities:
| output VAT - deductible input VAT: 8 463 - 2 541 - 2 835 = 3 087 €. |
He who pays what he owes, knows what he has
Nowadays, many companies choose to simplify their accounting management with tools that automate calculations. There is a wide variety of invoicing and accounting software whose implementation ensures compliance with tax obligations, without the need to make a large investment.
SeniorConta, for example, is a free accounting software, ideal for freelancers and SMEs, which allows you to efficiently manage the accounting of a business. With analytical accounting functionalities, it offers the possibility of calculating and managing taxes, complying with the provisions of the Tax Agency.
Now that you know how to easily calculate how much you will earn at the end of the month, depending on how much you will have to pay and collect in taxes from your clients, you are ready⋅a to take your accounting management away from being evasive 😉 .
Article translated from Spanish