definitive guide to applying this tax benefit

What is deductible VAT?

The Value Added Tax or VAT is one of the most important taxes in Spain and the rest of the world. It taxes all economic transactions involving the purchase or sale of products or services.

Deductible VAT is therefore understood as a tax benefit that allows companies,  self-employed persons and professionals to recover the VAT quotas paid for products directly related to their economic activity.

All of this is regulated by  Law 37/1992, of December 28, on Value Added Tax . It  philippines email list establishes the requirements for deducting VAT during the quarterly tax return, i.e. Form  303 .

What is non-deductible VAT?

We can easily see that non-deductible VAT is the one involved in  memberPress vs wishList member: which is better? the purchase of products or services that are not going to be used for the activity carried out by the company. This tax is part of the fee that you have to submit to the  Tax Agency .

Understanding the difference between deductible VAT and non-deductible VAT is essential, as this can prevent you from incurring penalties on your tax return in the future.

Also considered non-deductible VAT is that which, although involved  telemarketing forum in business activity, does not meet all the requirements established in  Article 93 of Law 37/1992.

Importance of VAT deduction

The main objective of deductible VAT is to neutralize the tax burden on companies and self-employed workers, that is, it seeks to prevent the collection of the tax from affecting the profitability of the business. We can also highlight other benefits such as:

• Avoid double taxation when buying and selling goods and services;
• Helps ensure that VAT collection does not affect companies’ profit margins;
• Promotes the acquisition of new technologies to improve service;
• Promotes business growth and investments;
• It simplifies the tax management of the business a little;
• It requires deductions to be justified and thus reduces the possibility of committing tax fraud.

What types of VAT exist and what are they?

Now that you know what deductible VAT is and its importance, we can talk about the different types of taxes that exist.

In this regard, it is important to mention that not all products or services have the same VAT, since there are some special cases where end consumers can pay a reduced tax. Let’s see what the applicable percentages are according to the type of expenses incurred:

• General rate : This is the rate that taxes the largest number of products, as it includes all those that qualify under the other two types. A tax rate of 21% is applied.
• Reduced rate :  Article 91 of Law 37/1992 establishes a VAT rate of 10% for products such as food for people and animals, water, medical equipment and pharmaceutical products, among others.
• Super-reduced rate : the same article tells us that basic necessities have an even lower tax rate of 4%. These products include common bread, fruit, vegetables, books and services for people with disabilities, among others.

Knowing the tax rate applied to each product or service is essential, as it allows you to correctly calculate the VAT that you have to declare to the Tax Agency, as well as the deductible VAT that you can apply.

Difference between deductible VAT, input VAT and output VAT.

When a customer buys a product or service from your company, the invoice must reflect the VAT bill that the person is paying. This money is collected by the company and then has to be declared to the Treasury. This is known as output VAT.

On the other hand, when you make a purchase of a good or service for your business, you will have to pay VAT. However, if said good will be used as part of your business activity, then the tax can be deducted from the declaration and is known as input VAT .

Deductible VAT is the VAT incurred that can be subtracted from the VAT charged by the company to its customers in the tax return. For the VAT incurred to be deductible, it must meet certain requirements, such as being directly related to the business activity and having the appropriate documentation. Special care must be taken not to deduct VAT on expenses that are not strictly linked to the company’s activity, such as personal expenses disguised as business expenses.

In short, all deductible VAT is input, but not all input VAT can be deducted. Only VAT that meets the conditions established by law is deductible.

Difference between deductible VAT and deductible accrued VAT

It is also important to make a distinction between deductible VAT and deductible accrued VAT. As their names indicate, both can be deducted from the tax return.

The difference lies in the period of time over which the VAT collection is applied. When we talk about deductible accrued VAT, we are referring to the tax that is generally generated every quarter and that can be directly deducted in that same period of time.

Requirements to be able to deduct deductible VAT

Article  93 of Law 37/1992 establishes the minimum requirements that companies must meet to qualify for VAT deduction.

It establishes as a fundamental condition that companies, self-employed persons or professionals must be carrying out their economic activity on a regular basis. Only in this way can the purchases made be supported and have the right to the deduction.

Other fundamental requirements that you have to know are:

• VAT on expenses incurred must be related to the company’s economic activity. This includes the purchase of new machinery, raw materials and basic supplies, among others.
• It is necessary to keep all documentation proving the purchase of goods or services. Therefore, documents such as invoices or any proof of transactions carried out showing the collection of VAT according to the type of expenses must be stored.
• The company, self-employed person or professional must carry out activities that allow VAT to be deducted, such as the sale of goods or services subject to VAT.
• Any purchased goods must be recorded in the company’s accounting books as well as in the VAT book. This is a fundamental step in proving the use of the goods within the business’s operations.
• The right to deduction can only be exercised if no more than 4 years have passed since the purchase.

It is extremely important that you know the applicable regulations for deductible VAT, since this will allow you to obtain this tax benefit and also avoid penalties. It is best to seek a tax advisor who can help you identify the transactions in which the deduction applies and comply with the requirements that we have shown you above.

Expenses that allow for deductible VAT deduction

A deductible expense is one that a company makes to acquire a good or service that is directly related to its economic activity. If this is the case, the VAT can be deducted in the quarterly tax return.

So, for the Tax Agency to consider the expense deductible, these three factors must be met:

• That the good or service is used in your economic activity;
• That the company has the invoices for the goods and any documents that justify their use in the company;
• That the asset is duly recorded in the accounting records and forms part of the business or professional net worth.

Based on these criteria, and those required by  Law 37/1992 in its Article 95 , the following can be considered deductible expenses: the purchase of raw materials for products or services, tools, machinery, furniture, computer equipment, rental payments, advisory services, payment for management programs, maintenance services, water and electricity, among others.

This also includes the purchase of consumer supplies. In this case, it is necessary to prove that the product is related to your economic operations if you want to apply deductible VAT.

Special cases: vehicles and investment assets

Article  95 establishes the rules regarding the acquisition of capital goods and vehicles and their deductions. Both types of goods are deductible, whether they have been acquired, imported or leased.

Cars and their trailers, as well as mopeds and motorcycles, will be considered to affect the development of business or professional activity by 50%.

On the other hand, the vehicles that are considered to be affected in a proportion of 100% are:

• Mixed vehicles used in the transport of goods;
• Those used in the provision of passenger transport services for consideration;
• Those involved in the provision of driver or pilot training services for consideration;
• Cars used by their manufacturers for testing, trials, demonstrations or sales promotion;
• Vehicles used for professional travel by commercial representatives or agents;
• Any vehicle used in surveillance services.

It is also important to note that the legislation allows for deductions for the purchase of accessories and spare parts for vehicles, as well as for fuels, lubricants and other energy products necessary for their operation. In addition, deductions are included for parking services and the use of toll roads, as well as for rehabilitation, renovation and repair.