Value-added tax (VAT) prepayment is a portion of the tax certain VAT payers are required to pay annually that is calculated from the previous year’s VAT invoice. This article examines what prepaid VAT is, who is required to pay it, who is exempt, how it is calculated, and how and when it is paid.

What’s in this article?

• What is VAT prepayment?
  
• Who has to prepay VAT?
  
• What are the ways of calculating VAT prepayment?
  
• How and when to prepay VAT
  
• What happens if my VAT prepayment is wrong or late?
  

What is VAT prepayment?

VAT prepayment is a partial advance payment of the VAT due for the following year. Certain categories of taxpayers must make this payment by December 27 each year, calculated on the basis of the previous year’s VAT invoice. It can be calculated using three different methods and was introduced to provide the Italian state with a stable source of revenue and to help combat tax evasion.

Who has to prepay VAT?

The following groups must prepay VAT:

• All taxpayers subject to VAT—both individuals and companies—using the normal or simplified tax regime

• Taxpayers who ceased their activity during the year, in proportion to the period of activity

• Public administration entities

However, the following individuals are exempt from VAT prepayment:

• Taxpayers under the flat-rate regime or minimum regime

• Those required to pay an advance of less than €103.29

• Farmers (pursuant to Article 34, Paragraph 6 of Presidential Decree 633 of 1972)

• Those who have a VAT credit from the previous year

• Those engaged in entertainment and gambling activities under the special regime

• Those who have ceased their activity by November 30 (if they file monthly returns) or by September 30 (if they file quarterly returns) as well as those who have started their activity during the year

• Collectors and dealers of scrap, waste, waste paper, glass, and similar materials who are exempt from the obligation to declare and pay the tax

• Sole proprietors who have leased their sole establishment by September 30 (if they pay quarterly) or by November 30 (if they pay monthly), provided they do not engage in other activities subject to VAT

What are the ways of calculating VAT prepayment?

VAT prepayment can be calculated using one of three methods: historical, forecast, or analytical. Taxpayers can choose the method they prefer, as long as they notify the Italian Revenue Agency (Agenzia delle Entrate) of their decision. If they fail to notify the agency, the historical method is automatically applied.

In any case, the taxpayer must reconcile the VAT through the final balance, which reflects the actual VAT owed for the current year. Here’s what each of the three calculation methods entails:

Historical method

For monthly taxpayers, this method calculates the VAT advance as 88% of the VAT payment made for December of the previous year. For quarterly taxpayers, the VAT advance is calculated as 88% of the VAT owed from the previous year’s annual VAT return, before deducting the advance payment and excluding any interest included in the previous year’s annual VAT return.

For “special” quarterly taxpayers—such as transporters, fuel distributors, and water, gas, and electricity utilities—the 88% is calculated on the basis of the periodic return for the fourth quarter of the previous year.

The historical method is the most commonly used for calculations of VAT prepayment.

Example calculation of VAT prepayment using the historical method

• VAT prepayment 2023: €7,000
  
• Balance of annual VAT return related to 2023: €12,000
  
• Balance of annual VAT return related to 2023: €7,000 + €12,000 = €19,000
  
• VAT prepayment 2024: €19,000 x 88% = €16,720
  

Forecast method

Under the forecast method, the VAT prepayment is calculated on the basis of an estimate of the transactions expected to take place up to December 31. Under this method, the VAT to be paid i advance is 88% of the estimated VAT due for:

• Monthly taxpayers: December
  
• Ordinary quarterly taxpayers: The annual VAT return
  
• Special quarterly taxpayers: The fourth quarter
  

Care must be taken when using this method, as an underestimation of the VAT debt in the final calculation could lead to penalties for nonpayment or underpayment of the VAT prepayment. It’s important to accurately estimate the amount of invoices issued and received during the last part of the current tax period.

Example calculation of VAT prepayment using the forecast method

• Historical data (i.e., VAT settlement December 2023): €3,500
  
• Estimated VAT settlement figure December 2024: €1,800
  
• Advance payment to be made: €1,800 x 88% = €1,584
  
• Actual VAT settlement December 2024 (i.e., checks after payment): €1,700
  

The payment was accurately estimated, as it is not less than 88% of the actual balance from the December settlement:

€1,700 × 88% = €1,496

Analytical method

The analytical method calculates the VAT prepayment on the basis of the transactions carried out until December 20. The advance payment is 100% of the amount determined from an extraordinary VAT settlement, which includes the VAT related to the following transactions:

• Active transactions made December 1–December 20 (if monthly taxpayers) or October 1–December 20 (if quarterly taxpayers)

• Debit transactions made December 1–December 20 (if monthly taxpayers) or October 1–December 20 (if quarterly taxpayers)

• Transactions made—but not yet recorded or invoiced—from November 1–December 20

Example calculation of VAT prepayment using the analytical method

• VAT invoices issued December 1, 2024–December 20, 2024: €12,500
  
• VAT sales invoices issued with deferred invoicing by December: 20, 2024
  
• €1,500
  
• VAT-deductible purchase invoices recorded December 1, 2024–December 20, 2024: €7,000
  
• VAT credit balance for the month of November 2024: €900
  
• VAT prepayment 2024: €12,500 + €1,500 – €7,000 – €900 = €6,100
  

How and when to prepay VAT

The deadline for the prepayment of VAT for the periodic final settlements of the last month or quarter of the year is December 27.

The payment must be made digitally using Form F24. Code 60123 is used for monthly settlements, and code 6035 is used for quarterly settlements. The advance payment can be used to offset any available tax credits.

The taxpayer must indicate the chosen method for calculating the VAT The deadline for the prepayment of VAT for the periodic final settlements of the last month or quarter of the year is December 27. on the LIPE form (i.e., the form for reporting periodic VAT settlements) for the fourth quarter or in section VP (i.e., line VP13) of the annual VAT return, specifying the corresponding code for each calculation method:

• Historical method: Code 1
  
• Forecast method: Code 2
  
• Analytical or transactions performed method: Code 3
  
• Entities operating in the telecommunications, water supply, electricity, waste collection, and disposal sectors: Code 4
  

Unlike periodic settlements, ordinary quarterly taxpayers are not required to apply a 1% interest charge.

The advance payment must be deducted from the VAT due for December (for monthly taxpayers), from the annual VAT return (for quarterly taxpayers) or from the amount due for the fourth quarter settlement (for special quarterly taxpayers).

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What happens if my VAT prepayment is wrong or late?

Failure to pay VAT on account, late payment, or insufficient payment will result in a penalty of 25% of the unpaid amount. By following the voluntary correction process, the taxpayer can regularize omitted payments while benefiting from reduced penalties. In this case, the penalty is reduced to 12.5% if the payment is made within 90 days, while for delays of up to 14 days, the penalty is further reduced to 0.83% for each day of delay.

The tax codes to be used in the F24 form for tax corrections are 8904 for the penalty and 1991 for the interest on the corrected amounts.