If you have a business operating in Italy that is subject to VAT, you could find yourself with a VAT credit when filing your VAT return. But what does VAT credit mean? How can you use this credit? In this article, we delve into the meaning of VAT credit, how to use this amount as compensation, and how to request a refund.

What’s in this article?

• What does it mean to have VAT credit?
  
• What is the difference between input VAT and output VAT?
  
• Compensation of VAT credit
  
• VAT refund
  

What does it mean to have VAT credit?

Credit VAT is the amount of VAT a taxable person pays when purchasing a good or service, paying both the cost of the good and the VAT. The VAT paid is considered credit VAT, as the VAT holder has paid it and, therefore, has a credit toward the State.

Here is an example of credit VAT is the following: You purchase a machine for €24,400, of which €4,400 is VAT. You now have a VAT credit of €4,400.

What is the difference between input VAT and output VAT?

While input VAT is the amount of VAT you pay on any purchase invoice, output VAT represents the tax you collect when you sell your goods or services.

For example, if you sell a chest of drawers for €350 plus VAT at 22% (€77) for a total of €427, the €77 VAT represents the VAT due. It is a debt you have toward the State, and you will have to pay that amount to the Treasury.

Compensation of VAT credit

During the VAT declaration phase, you can offset the input VAT by balancing it with the output VAT resulting from your declarations. This way, you reduce the amount you have to pay or, in some cases, get a credit to use. Below, we demonstrate how to calculate a VAT credit.

How is credit VAT calculated?

To calculate credit VAT, you must determine the input and output VAT amounts. For input VAT, you must multiply the total value of the purchases by the relevant VAT rate. If the input VAT is higher than the output VAT, your business is not required to make a payment and can claim a VAT credit to the State equal to the difference of the two amounts. Otherwise, you will have to make a payment.

Here is an example: You purchase goods for a total of €30,000, paying VAT at 22%.

€30,000 x 22% = €6,600

The input VAT is equal to €6,600. In the same period, you sell goods for a total of €15,000, charging VAT at 22%. The output VAT is:

€15,000 x 22% = €3,300

The output VAT, therefore, corresponds to €3,300, while the input VAT is equal to €6,600. In this example, the input is greater than the output, so the business owner is in a credit position.

Total Input VAT – Total Output VAT = VAT Credit

In this example, the VAT credit is €3,300:

€6,600 – €3,300 = €3,300

This amount can be used to offset tax debts.

Horizontal compensation and vertical compensation

There are two methods of VAT compensation: vertical and horizontal.

• Vertical compensation: This occurs when a credit belonging to a specific category is used exclusively to pay off a debt for the same tax. For example, a VAT credit can be used to pay off a VAT debt.

• Horizontal compensation: This allows you to use a VAT credit to offset debts relating to taxes other than VAT, such as personal income tax (IRPEF) or corporate income tax (IRES).

Limits for horizontal compensation

It is important to understand the type of compensation to know whether the VAT credit can be used freely or if it is subject to limitations. Vertical compensation, in fact, is not subject to any limits. With horizontal compensation, the credit can be used freely up to a limit of €5,000. The limit is raised to €50,000 for innovative startups. Beyond this limit, the following rules must be taken into consideration:

• A credit exceeding €5,000 can be used as compensation starting from the 10th day following the submission date of the annual VAT return, only if the declaration is approved by a qualified professional. Alternatively, it is possible to have the declaration signed by the auditing body.

• As established in the 27 April 2023 provision of the Italian Revenue Agency, taxpayers with Summary Reliability Indices (ISA) scores equal to at least 8 calculated for the 2023 tax period (or, alternatively, with a score of 8.5 obtained as the average between the ISA score for the 2023 tax period and the previous one) are exempt from the compliance visa for offset credits up to €50,000. With an ISA score of at least 9, the exemption increases to €70,000, as required by the decree for the simplification of tax compliance (Legislative Decree No. 1, 8 January 2024).

The use of VAT credit in compensation via the F24 form must take place exclusively via the electronic methods provided (i.e. Fisconline, Entratel), while the use of home banking is not permitted.

Here is a summary of how to use the VAT credit compensation:

*Taxpayers with an ISA score of at least 8 or an average between the ISA score for the 2023 tax period and the previous one of 8.5.

**Taxpayers with an ISA score of at least 9.

Annual and quarterly VAT credit compensation

There are two categories of VAT credit that can be used for compensation:

• Annual VAT credit
  
• Quarterly VAT credit
  

The annual VAT credit derives from the VAT return submitted on an annual basis. This can be used to compensate:

• VAT debts accrued in subsequent periods
  
• Other state taxes, such as IRPEF or IRES
  
• Social security and welfare contributions
  

The quarterly VAT credit, however, results from the VAT payment carried out on a quarterly basis. This type of credit can only be used to offset VAT debts accrued in the subsequent months.
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VAT refund

Another way of using VAT credit, instead of compensation, is to request a VAT refund.

Who is entitled to a VAT refund?

Companies that register a VAT credit can submit a VAT refund request, specifically:

• Residents

• Non-residents who have a permanent establishment in Italy, have appointed a tax representative, or are self-identified

Requirements to request a VAT refund

The right to reimbursement of the annual VAT credit is recognised if at least one of the conditions indicated in Article 30, Paragraph 3 of Presidential Decree No. 633/1972 is met:

• Activities with transactions taxed at a lower rate than those applicable to purchases and imports

• Non-taxable transactions more than 25% of the total amount of all transactions

• Import of depreciable goods and services for research and development

• Transactions mainly not subject to VAT due to lack of territoriality, pursuant to Article 7 of Presidential Decree No. 633/1972

How does the VAT credit refund work?

To request a VAT credit refund, you must have a credit of at least €2,582.28. For amounts up to €30,000, there are no specific restrictions. However, for amounts exceeding €30,000, a compliance visa and, in some cases, additional guarantees are required.

It is important to note that the threshold of €30,000 must be calculated separately for compensations and reimbursements. This means that if, for example, the amount of the VAT credit in compensation is €5,000 and the amount requested for reimbursement is €28,500, a visa is not required even though the sum of the two credits exceeds the threshold of €30,000 overall.

VAT credit refunds for amounts exceeding €30,000

First, it is necessary to distinguish between subjects considered at risk and those not at risk. In fact, legislation states that those who fall into the risk situations specified in Article 38-bis of Presidential Decree 26/10/1972, No. 633 are not eligible for compliance visas and, consequently, must provide eligible guarantees. These include:

• Taxable persons who have been carrying out business activities for less than two years (other than innovative startups referred to in Article 25 of Legislative Decree 18/10/2012, No. 179)

• Taxable persons who, in the two years preceding the request for reimbursement, have received notices of assessment or correction with a difference between the amounts assessed and the amounts of tax due or credit declared exceeding:

  • 10% of the amounts declared if these do not exceed €150,000
    
  • 5% of the amounts declared if these exceed €150,000 but do not exceed €1,500,000
    
  • 1% of the declared amounts, or in any case €150,000, if the declared amounts exceed €1,500,000
    

For all other subjects, VAT refunds exceeding €30,000 do not require a guarantee, but a declaration in lieu of an affidavit must be attached to the VAT return (according to Article 47 of Presidential Decree 445/2000). The declaration must certify that certain conditions relating to the taxpayer’s assets and the business operations carried out have not been exceeded, such as:

• The stability of net worth and real estate compared to the last tax period, with a decrease of no more than 40% and no termination or significant reduction in business activity

• The absence of sales of shares or quotas for a value greater than 50% of the share capital in the year preceding the request for unlisted joint-stock companies

• Compliance with the payments of social security and insurance contributions

If the conditions do not exist, a guarantee is necessary. The accepted forms of guarantee include bonds in government or government-guaranteed securities, bank guarantees, or insurance surety policies.

How to request a VAT credit refund

The VAT refund request can be made:

• With the annual VAT return

• With a quarterly application (VAT form TR) for each of the first three quarters of the year

For the refund of the VAT credit, as well as for compensation, it is possible to request without affixing the compliance visa in the following cases:

• Taxpayers with ISA scores equal to at least 8 (or, alternatively, with a score of 8.5 obtained as the average between the ISA score relating to the 2023 tax period and the previous one) are exempt from applying the compliance visa for compensation credits up to €50,000.

• Taxpayers with an ISA score of at least 9 receive an exemption up to €70,000.

You can request a refund by inserting specific information in the appropriate box of the VAT return or the TR form. This information includes, among other things, the amount of the credit, requirements for requesting the refund, and right to exemption from the presentation of the guarantee.

Deadlines for requesting a VAT credit refund

The annual VAT return – in which it is possible to request an annual refund – must be submitted between 1 February and 30 April of each year. Quarterly applications must be submitted by the following deadlines:

• First quarter: From 1 April to 30 April
  
• Second quarter: From 1 July to 31 July
  
• Third quarter: From 1 October to 31 October
  

How is VAT refunded?

After submitting the application, the tax administration is required to make the refund within three months of submitting the VAT return. In case of delay, the taxpayer will be paid interest equal to 2% per year after the 90-day expiry date.