Deductible VAT and collected VAT: understanding and calculating the difference

The basics: deductible VAT and collected VAT

Deductible VAT

La Deductible VAT corresponds to the amount that businesses pay when making purchases from suppliers. It is relatively simple to manage because the supplier invoices make it clear. This VAT paid on professional purchases can be recovered by the company, provided that these expenses are allocated to taxable activities.

The fundamental principle of VAT deduction isallocation of expenses to taxable activities. For example, a manufacturer who buys materials to produce goods that are sold with VAT can recover VAT on these materials as soon as they sell products that are subject to VAT themselves.

VAT collected

La VAT collected is the one collected when selling to customers. It is the company that collects this tax from its customers on its sales of goods or services, before donating it to thetax administration. This wrongly collected VAT can lead to confusion and requires special attention in its management.

How do I calculate the difference?

The principle is simple, at least on paper. All you have to do is total the tax paid on purchases, expenses and fixed assets, and the tax paid on sales, and then you can tell the difference.

The fundamental rule:

Finally, the company will have to pay the State the Difference between collected VAT and deductible VAT.

Case 1: VAT to be repaid

If the VAT collected is greater than the Deductible VAT, the company must pay the excess to the tax authorities.

Example: A business collects €1,000 in VAT on its sales but pays €600 in VAT on its purchases. She will have to pay €400 to the State.

Case 2: VAT credit

If the amount of Deductible VAT exceeds the VAT collected, the company obtains a VAT credit.

Example: If your organization pays €1,500 in VAT on its purchases but only collects €1,000 in VAT on its sales, it accumulates a tax credit of 500€.

In this case, two options are possible:

• The report (or imputation) : reduce future tax payments over the coming fiscal years
• Reimbursement : ask the tax authorities to refund the difference

This situation offers immediate cash flow benefits of the company.

Deduction coefficients

In some cases, VAT is only partially deductible or is not deductible at all. Les deduction coefficients are crucial for calculating recoverable VAT. They include:

Subjection coefficient

This coefficient reflects the Proportion of use goods or services for carrying out transactions falling within the scope of VAT. It is this coefficient that the administration uses, for example, to prevent the deduction of VAT in the event of personal use of an expense.

Tax coefficient

It represents the relationship between the taxable turnover and the total turnover of the company.

Admission coefficient

This coefficient reflects a limitation imposed by regulations in force. It is 1 when the good or service is deductible and 0 when a legal or regulatory provision prohibits the deduction of the VAT relating to the good or service. This is for example the case for transport expenses or even the accommodation of managers in case of travel.

Each coefficient must be rounded to the second decimal place by excess before being multiplied to obtain the overall deduction coefficient.

Common mistakes to avoid

Applying an incorrect rate

A company applies a Wrong VAT rate on an invoice. For example, by including a standard rate of 20% instead of the applicable reduced rate of 10%. In France, there are several rates ranging from 2.1% to 20%. It is themost common error.

Concrete example: Construction companies must “juggle” several rates depending on the site: new (20%), renovation (5.5%) or intermediate (10%).

When a rate error is detected, it is essential to know How to correct an error quickly to avoid complications during a tax audit.

Poor understanding of tax rules

Various stops of Council of State for example, refused reimbursement by the tax authorities in certain cases. At issue: complicated contexts and conditions in which the reading and analysis of legal texts by the State finally leads to new rules, to the detriment of the company concerned.

Impact of regulatory changes

Les frequent changes tax regulations, such as adjustments to VAT rates or changes in the regimes applicable to services, also cause collection errors. Businesses need to adapt their billing and reporting practices quickly to these changes to avoid mistakes. La electronic invoicing reform represents a major change that requires the foresight and adaptation of internal processes.

The VAT credit: special case

The VAT credit intervenes when a company (SA, SARL, auto-entrepreneur, etc.) deducts more VAT to the State on its purchases than it collects on its sales.

Request from the moment of creation

Namely: The application for a value added tax credit is possible as soon as creation of the company. Even if no sale of goods or services has been carried out, reimbursement will be made for all expenses incurred to start the activity. However, you must be able to demonstrate that the charges have been borne for the purposes of a future activity taxable for VAT.

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Refund procedure

This reporting system includes the possibility of requesting reimbursement directly from your professional space from the impots.gouv.fr site, in the “My services” section, then “Declare” and “VAT”.

Important: The VAT refund is identified by the tax authorities as a “litigation”. She will therefore proceed to numerous verifications including, of course, invoices, receipts of deductible VAT, etc. As many accounting documents which should be available quickly and legible. That's where a reliable audit trail becomes essential to guarantee the traceability of your operations.

In the event of an inspection, benefit from a tax audit assistance specialized can make the difference in securing your positions and responding effectively to administrative requests.

Special cases: fixed assets

La Deductible VAT on the acquisition of fixed assets is not definitively acquired immediately. For the moveable assets, this deduction is subject to a period of five years, and for real estate assets, the period extends to twenty years.

Of regularizations must be made annually if the deduction rights vary by more than 10% per year. These adjustments are calculated annually on the basis of one fifth or one twentieth of the VAT initially deducted, depending on the type of fixed asset concerned.

For businesses carrying out real estate transactions, VAT management is becoming particularly complex and requires specific expertise to optimize deduction rights and avoid costly mistakes.

The main thing to remember

The management of the Deductible VAT And of the VAT collected requires a detailed understanding of regulations and a Continued attention. In accordance with articles 271 and 272 of the General Tax Code (CGI), only VAT duly invoiced can be deducted. Businesses should also refer to article 272 of the CGI to understand the regularization mechanisms and the conditions for recovering VAT returned to the tax authorities by mistake.

In the context of activities outside France, tax rules and laws on deductible and collected VAT immediately become more complex, requiring a specialized support to secure your operations and optimize your cash flow.

Chez Cyplom, we offer solutions forVAT optimization to reduce your costs and recover VAT paid incorrectly, while securing your practices in the face of regulatory changes.