What is the VAT pro-rata and who is affected?
The VAT pro-rata is a way of calculating VAT when there are different situations in which VAT can be imputed. Here we explain what it consists of, when and who must apply it and how it is calculated.
VAT pro-rata rule - definition
The VAT pro-rata is the calculation of the average amount of VAT, whether input or output tax, of taxable and non-taxable transactions. When this happens, an average calculation has to be made to find out the deductible amount for companies and professionals, and this is called the pro-rata rule. The result is a percentage that must be applied.
It should also be remembered that VAT in Spain has different rates (general, reduced and super-reduced). When applying the pro-rata, this must also be taken into account.
When should the VAT pro-rata be applied?
The Value Added Tax (VAT) pro-rata is applied whenever companies, individuals, self-employed persons or non-profit organisations acquire deductible goods and services combined with other goods and services that are not deductible. If this is the case, the calculation should be made.
The settlement period for this tax is quarterly, so the calculation of the pro-rata must also be quarterly. At the end of the assessment period, it is necessary to calculate the VAT percentage to be paid in order to know the deduction to be applied. Otherwise, it is more difficult to comply with the accounting principle of being true to the organisation’s reality.
Remember that there is a maximum amount that a company or professional can deduct on exempt transactions. And that is precisely why this rule applies.
Calculation of the pro rata
The calculation of the pro rata has two legally valid formulas, which are the general and the special. Unless the special formula is expressly chosen, it is only compulsory to apply it when the difference in the amount to be deducted for the company is 10% higher than that which would be obtained with the general pro rata.
- General pro-rata: The general rule in this case requires dividing the amount resulting from the transactions eligible for deduction by the total and multiplying the result by 100. In principle, it is simple if you have the information. Most large companies and non-profit organisations of a certain size will have to do it this way.
- Special apportionment: in the special apportionment you have to deduct 100% of the input VAT when purchases are exempt and not deduct the input VAT on purchases that are not exempt. This option can be useful for SMEs or self-employed people who only have occasional exempt purchases.
Pro-rata calculations
So, before filing the last VAT return for 2024, it is a good idea to compare the VAT that could be deducted under the general and special deductible proportion, and to choose whichever is more appropriate. For this purpose, please bear in mind:
- If the business opts for the special apportionment, it will not be able to revoke that scheme (and return to applying the general apportionment) until three years have elapsed (in this case, until 2027).
- The company must also apply the special deductible proportion when the VAT deductible under the general proportion exceeds by more than 10% that which would be deductible under the special proportion.
Example of apportionment
A company is taxed under the general deductible proportion and, with the complete data for 2024, the deductible VAT is 100,000 euros. Well, if, once the VAT that would be deductible under the special deductible proportion has been calculated, it is less than 90,909 euros (100,000 / 1.1), the company must apply the special deductible proportion in 2024.
In these cases, the company does not have to tick the box on form 303 in accordance with the special pro-rata, as its application is compulsory. But neither will it be obliged to apply the special pro-rata for three years, and in 2025 it will be able to apply the general pro-rata regime again (if it complies with the 10% rule).
Obviously, for the calculation to be accurate, it is necessary to have all the accounting information at the quarterly closing.
Pro rata choice
If your company is on a pro-rata basis, in the last VAT return for 2024 to be submitted in January 2025, you can opt for the regime that suits you best…
Last declaration of the year
Your business carries out transactions for which it can deduct input VAT and others for which it cannot, so that the pro-rata rule applies to it.
Well, in the last VAT return for 2024 (the deadline for submission of which is 30 January 2025), you can choose the pro-rata system you want to apply in 2024 itself: the general pro-rata or the special pro-rata system.
Regularisation
So, calculate which system allows you to deduct more VAT in 2024 and opt for it in your tax return, regularising the VAT you have deducted during the year. Attention!
However, please note the following:
If you opt for the special pro-rata, you will not be able to revoke that regime (and go back to applying the general pro-rata) until three years have passed (in this case, until 2027).
You are obliged to apply the special deductible proportion when the VAT deductible under the general proportion is more than 10% higher than the VAT deductible under the special proportion.
Example of the choice of deductible proportion
Your company is taxed under the general deductible proportion and, with the complete data for 2024, you find that the input VAT deductible for the whole year was EUR 200,000.
Well, calculate the amount that would be deductible if you were on the special deductible proportion: if this is less than 181,818 euros (200,000/1.1), you must apply the special deductible proportion in 2024.
Compulsory special apportionment
If the special deductible proportion is applicable to you in 2024 on a compulsory basis, you should not tick the box on form 303 as you opt for this proportion, as in this case the special proportion is not an option.
The good thing is that your company will not be obliged to apply it for three years, and in 2024 you will be able to change the pro-rata regime again.
If you voluntarily opt for the special pro-rata regime, you must apply it for three years. However, if you are obliged to apply the special pro-rata regime, this will not be the case.
In a nutshell
The VAT apportionment can involve a certain complexity, especially because it requires accounting to be up to date. At Asesoría Orihuela Costa we offer a comprehensive consultancy service for the self-employed and SMEs. Get to know us!
