What is the VAT apportionment and how is it calculated?
Introduction: Understanding the VAT pro-rata concept
The VAT pro-rata is a mechanism used to determine the percentage of Value Added Tax (VAT) deduction that a company can make on its purchases, based on the proportion of taxed and non-taxed activities it carries out.
The pro-rata is calculated by dividing the total amount of taxed transactions by the total amount of transactions carried out, both taxed and non-taxed. This result is multiplied by 100 to obtain the pro-rata percentage.
This is normal, isn’t it? If you charge VAT you will be able to deduct the VAT you have paid, but if you do not charge VAT you will not be able to deduct the VAT you have paid.
In conclusion, it is not possible to deduct the vat on your purchases if your sales do not include vat. That is why the pro-rata rule is made, to make it more equitable. There are sectors that think that if I can’t charge VAT, why do I have to pay it?
How to calculate the VAT apportionment step by step
Calculating the VAT apportionment is an important process to determine the amount of tax that can be deducted based on the expenses incurred. This calculation is used when a business carries out both VAT taxable activities and VAT exempt or non-taxable activities.
The first step in calculating the VAT apportionment is to determine the taxable amount, which is the total deductible expenses related to taxable activities. These expenses may include purchases of goods or services used directly in the production of goods or services subject to VAT.
Once the taxable base has been determined, the next step is to calculate the deduction coefficient. This ratio represents the percentage of taxable activities in relation to the total activities of the business. To calculate it, the total amount of taxable transactions is divided by the total amount of transactions carried out by the company.
Finally, to obtain the proportional VAT calculation, the deduction coefficient is multiplied by the total amount of input VAT on deductible expenses. This will give the exact amount that can be deducted as a tax credit in relation to the expenses incurred.
Practical examples for understanding how the VAT pro-rata works
A company carries out both VATable and non-VATable activities. During a given period, it has incurred expenditure totalling 10,000 euros, of which 6,000 euros relates to VAT-paid activities and 4,000 euros relates to exempt or non-taxable activities. The general VAT rate is 21%.
To calculate the VAT pro-rata, we must divide the expenses related to taxable activities by the total expenses:
Pro-rata = Taxable expenses / Total expenses.
In this case:
Pro-rata = 6.000 euros / 10.000 euros = 0,6
This means that 60% of the total expenses are related to VAT taxable activities.
Once the VAT pro-rata is obtained, we can apply it to determine the deductible amount of input VAT on each purchase:
Deductible VAT = Invoice amount x Apportionment
Let us assume that an invoice amounting to EUR 500 has been received for an activity subject to VAT. Applying the pro-rata calculated above:
deductible taxable amount = EUR 500 x 0.6 = EUR 300.
Deductible VAT EUR 300 x 21% = EUR 63.
63 can therefore be deducted on this purchase.
Calculation of the final apportionment
During the year, companies apply or not the provisional apportionment in their quarterly returns.
In the last return of the year, your company has to calculate the definitive apportionment and regularise the VAT deducted in previous quarters. Here are some things to bear in mind in these cases.
Definitive VAT apportionment
Your company carries out operations that entitle it to deduct the VAT it bears and others that it does not, paying tax under the general pro-rata system. In this way, each year you can deduct a percentage of the VAT you pay, which is calculated using the formula below.
The percentage obtained must be rounded up to the nearest whole number. Thus, if a percentage of 82.15% is obtained, the applicable apportionment will be 83%.
Percentage of deductible VAT
Sales with right to deduct VAT / Total Sales
Not all
However, in both the numerator and the denominator, only current supplies of goods or services should be taken into account.
Attention! In this respect, you should not include exceptional sales such as the following:
Supplies of capital goods (those which the business uses permanently in its activity, such as premises, machinery, vehicles, furniture, etc.). If your company is in the business of buying and selling these assets, they should be counted, as they are inventories.
Interest received on loans made to other enterprises, provided that this is not a regular activity of the enterprise. For example, interest received by a parent company from its subsidiary on a loan.
Example.
Your company rents premises (an activity that allows you to deduct the VAT you pay) and houses (an activity that does not give you this right), receiving income of 130,000 and 190,000 euros respectively.
Well, if during the year you have sold one of the properties you had rented, the amount of this transfer will not be taken into account when calculating the pro-rata, which will end up being 41%: 130,000 / (130,000 + 190,000).
VAT pro-rata adjustment
As your company does not know the annual amount of its transactions until the last VAT return of the year, it must provisionally apply the pro-rata percentage of the previous year in the previous returns of the year.
When you file the last return of the year, you must replace this provisional pro-rata with the definitive pro-rata, adjusting the deductions made in previous quarters.
Rent
During the first three quarters of the year, your company has had a total input VAT of 61,000 euros and has provisionally applied the previous year’s pro-rata, which was 25%.
See the VAT that you will be able to deduct in the fourth quarter if the input tax in that period was 15,000 euros and the definitive pro-rata percentage for the year is 41%:
Concept Input VAT 4Q Regularisation
Input VAT 15.000 61.000
Deductible VAT (41%) 6.150 25.010
VAT already deducted (25%) – 15,250 (1)
VAT to be deducted 6,150 9,760
VAT deducted during the first three quarters by application of the previous year’s pro-rata (25% x 61,000).
Special pro-rata.
If your company is subject to special pro-rata, you will also have to make these calculations in relation to the common input VAT for the different activities.
When calculating the definitive apportionment for the year, do not include sales of investment goods or interest received. Report the adjustment of the VAT deducted in previous quarters in the corresponding box of form 303.
