Most businesses are subject to value-added tax (VAT). Only microenterprises that are not liable for VAT are exempted from it. That is why it is important to be able to differentiate between the different types of VAT, such as deductible VAT and output VAT, in order to post your purchases in the accounts according to the applicable rules and file an error-free declaration. Discover below what you need to know about deductible VAT: its definition, calculation, excluded operations, and more.

What’s in this article?

• What is deductible VAT and who does it apply to?
  
• How is deductible VAT calculated?
  
• When can VAT be deducted?
  
• Deductible VAT, output VAT, payable VAT: What is the difference?
  
• Which goods and services are excluded from VAT deduction?
  

What is deductible VAT and who does it apply to?

Deductible VAT, also called recoverable VAT, is the VAT that a business pays to its suppliers on purchases of the goods and services required for its operations.

Any business that is liable for VAT is entitled to deduct the VAT paid on business purchases if the VAT fulfills certain criteria. However, microenterprises or businesses under the VAT-exempt regime do not enjoy the same privilege and cannot deduct VAT, since they do not charge it.

How is deductible VAT calculated?

To find out the amount of the deductible VAT, you need to know the applicable VAT rate and the pretax price of the good or service. The deductible price is calculated by multiplying the pretax price by the VAT rate:

Deductible VAT = Pretax Price x VAT Rate

The VAT rate applied varies depending on the services or goods purchased from the supplier. The different VAT rates applicable in France include the normal rate of 20%, the intermediate rate of 10%, the reduced rate of 5.5%, and the super-reduced rate of 2.1%.

For instance, a business buys a new computer for one of its employees at €270 exclusive VAT. With the 20% normal VAT rate applicable to the computer, the deductible VAT is €54:

€270 x 0.20 = €54

Become more familiar with applicable VAT rates, or find additional examples of VAT calculation by reviewing our articles on the subjects.

When can VAT be deducted?

VAT can only be deducted when it becomes payable. VAT on sales of services becomes payable on the date of collection and invoicing. On the other hand, VAT on sales of goods is payable once the delivery is complete or an installment has been paid (where applicable).

VAT is deducted while filing the VAT declaration. The business must clearly indicate the goods or services purchased as part of its operations and the amount of VAT to be deducted. As evidence of the purchase, the business must present the original invoice and enter information relevant to the invoice.

Deductible VAT, output VAT, payable VAT: What is the difference?

Output VAT is the VAT charged by a business on its sales of goods and services to buyers. The VAT paid by a business on its purchases for its operations is called deductible VAT. Payable VAT is the difference between output VAT and deductible VAT, or the amount a business pays to the state when the deductible VAT is less than the output VAT:

Payable VAT = Output VAT - Deductible VAT

Conversely, when the deductible VAT is more than the output VAT, a business can ask for VAT credit from the state. You can either carry the VAT credit forward to the next accounting period or ask for a partial or full VAT refund. In general, the repayment period is two weeks to a month. However, if any VAT billing errors are found, your refund may be delayed by six months.

Learn about how to obtain your VAT credit.

Which goods and services are excluded from VAT deduction?

Note that the VAT on some purchases of goods or services for business purposes, not for personal use, is not deductible. These exceptions include:

• Accommodation provided free of charge to senior officers or employees of the business (however, VAT on housing for security and surveillance personnel is deductible)
  
• Goods offered free of charge or for a price below €73 inclusive
  
• Transport vehicles for business and personal use (unless you operate a passenger transport business, driving school, or vehicle rental business)
  
• Goods and services with personal usage that accounts for more than 90% of their total use
  

In addition, exports, deliveries made within the European Union, teaching, and most banking, financial, and medical services are fully exempt from VAT. As a result, you cannot recover the VAT paid on such operations.

In order to simplify all your tax obligations, you can use an advanced tool such as Stripe Tax, which will automate the calculation of your taxes and take account of your deductions. Stripe also speeds up the completion and submission of your VAT declarations, without you having to write a single line of code. Please contact one of the Stripe experts to get started or get more information.