Output VAT and Input VAT: What are their differences and how to calculate them?

There is not just one type of VAT, there are actually two types: input VAT and output VAT. As expected, they are not the same, and you will need to know them well to control your business expenses.

VAT and its variants

First, it is important to define what VAT is. Value Added Tax is an indirect tax and one of the main sources of income for the State. It is applied throughout Spain and in almost all countries on their products and services.

With this tax, the State can collect revenue at each stage of the production chain. And being included in the final price, it is consumers who end up paying it. In other words, companies on behalf of the State become VAT collectors, to later give the collected sums to the tax authorities.

As you know, not all products or services have VAT, there are some that are exempt from this tax. For example, medical services, social services, certain financial operations or education.

Taxpayers need to declare and pay their VAT periodically to the Tax Agency. Here is where the main difference lies - while output VAT is applied to customers, input VAT is that generated by purchases made for the development of economic activity.

What is output VAT?

Output VAT is the tax that a seller or service provider will charge to their customers. This is for the sale of goods or for providing services to a person. This is the VAT that a self-employed person or company would charge to their customers, and which would be added to the taxable base on invoices.

As a taxable person, it is an obligation to pass this on to customers when the commercial transaction takes place. In other words, if you sell a product, the correct amount of VAT must be included in the invoice for this product, and it will be paid by the customer.

Therefore, when making an invoice it is essential to calculate the VAT that will be added later correctly. The calculation of output VAT is as follows if a consulting service is offered for 100 euros:

Remember that once you have collected these amounts, that money is not yours. You must return it to the Treasury in your quarterly declaration, using forms 303 and 390 for the annual declaration.

In summary, the company or self-employed person is an intermediary between the end customer and the tax authorities. Interestingly, output VAT is the basis for input VAT.

What is input VAT?

Input VAT would be what a buyer or recipient of goods pays to acquire services or products with VAT. This would be what you pay when you have to buy products or services necessary for you to develop your business. Here is when self-employed individuals become customers and it is time to pay VAT.

For example, you can differentiate input VAT when you have to pay 21% more than the price of that raw material you need to create your product.

However, the Tax Agency orders that companies and self-employed persons can deduct the input VAT for their activity, and have it subtracted from output VAT.

Differences between output and input VAT

As we have learned, output VAT is applied to customers and input VAT is generated by purchases made for the development of economic activity. But why are there two types of VAT?

This system has been implemented to apply it correctly in the production and distribution chain of a good or service. With these two in effect, you can enjoy a system that taxes the added value at each stage, so that, in the end, it is the final consumer who is intended to pay that tax.

If the deduction of input VAT on output VAT did not exist, end customers would be the most affected because they would have to pay much more. So, if you are self-employed you have to deduct it to avoid double taxation.

However, input VAT is not always deductible. Certain requirements must be met.

When is input VAT deductible?

Not all input VAT is deductible. To be so, the condition must be met that it has been generated by the professional activity you develop. There are also other requirements for this such as:

• Only self-employed and business owners can make this deduction.
• Legal consideration of deductibles will regulate the supported quotas.
• The services and goods must be intended to be used for professional or business activity.
• Accept the exclusions or restrictions on the right to deduct.
• The invoice that justifies the expense must be kept.

If all these conditions are met, the deduction can be obtained in the quarterly VAT declaration. In this way, it could be applied to the purchase of gasoline, internet, tax advice, meals during working hours, work materials such as stationery, etc.

Notable exceptions

There are some exclusions and restrictions imposed by law to prevent the deduction of input VAT. These are:

• Food, beverages or recreational entertainment.
• Jewelry or objects made of gold or platinum.
• Services for travel, hospitality and trips.
• Goods or services intended for third parties, employees and customer service.

How can I calculate the VAT to pay?

You will have to calculate quarterly how much you must pay to the Treasury. You can do this by subtracting input VAT from the total output VAT charged to other customers. Although before doing this operation, you need to determine both output VAT and input VAT.

To determine output VAT you need to multiply the VAT percentage of the product or service offered (4%, 10% or 21%) by its sale price. While to determine input VAT you will have to multiply the percentage that the supplier must apply to the amount paid.

With them ready, add up all the VAT you have charged to your customers. You will have to do the same with input VAT. Then, subtract the total input VAT from the total output VAT. In summary:

For example, think that with all calculations made you have supported VAT of 200 euros, and charged 1,000 euros. You have to pay 800 euros in VAT to the Treasury.

Consider that if input VAT is higher than output VAT, this would result in a refund. Form 303 is used for quarterly declarations to the Tax Agency; and with form 390, at the end of the year a summary of all quarterly declarations is made.

Is it possible to request a VAT refund for expenses if I invoice without it?

You have the right to request a VAT refund when submitting the last quarter of the year. But you would have had to generate amounts in your favor as a taxpayer, a higher tax supported in your expense invoices compared to that charged in income.

It is possible to request accumulated VAT with form 303 in the fourth quarter, not in the annual summary. Keep in mind that if you ceased your activity in the middle of the fiscal year you must still submit in the fourth quarter.

There are some situations where you won't know whether to leave the negative VAT to compensate, or for the Treasury to pay you. One of the most popular are subjects who invoice without VAT, not for an exempt activity, but because of their recipients.

For example, if a self-employed person provides their services to someone outside the European Union. Services outside the European Union are not subject to VAT, and their invoices are issued without it.

For these cases, they would have to register for VAT tax obligations. However, when presenting the quarterly model and the annual taxable base, this will be zero. Although it could be deducted. Here you can request a refund of negative VAT, regardless of whether you have income with VAT.

Don't forget that the Treasury penalizes those taxpayers who request VAT refunds without being entitled to them.

How to request a refund for non-established businesses?

If a business owner is not established in the State where the VAT amounts have been paid, according to Community law they have the option to recover it.

For this, professionals or business owners established in the EU but outside the member state in which the tax has been paid must request the refund. The request is made using form 360.

• 1. Tax ID and electronic certificate.
• 2. Be registered in the census of entrepreneurs and professionals.
• 3. Be subscribed to the Tax Agency's electronic notification service.
• 4. Submit the corresponding form online to the Tax Agency website.
• 5. To request quarterly refund this must be equal to or greater than 400 euros. Annual, should be equal to or greater than 50 euros.

You can request the refund from the day following the end of the quarter or natural year. The Tax Agency will inform the applicant of receipt and will forward it to the member state in which the tax has been paid within 15 days.

It is estimated that the deadline for the state to resolve this type of request is 4 months from receipt. Additional information may be requested or the deadline may be extended up to 8 months. When the refund is recognized, it should be paid within a maximum of 10 days.