How does VAT work for businesses? Value-added guide!

What is value added tax and how does VAT work for businesses? Appvizer has looked into the matter for you. Rates, schemes, recoverable and non-recoverable VAT, input and output VAT... here's an overview of what you need to know about this tax.

You can also find out about the software tools available in the cloud so that you can outsource VAT management to experts and relieve your accountants.

VAT is a subtle factor in your company's invoicing. Get your calculators ready!

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VAT, a neutral tax for businesses

VAT is a tax on added value, i.e. on the difference between the price of the raw material and the final product. It is paid by individuals and businesses.

But it is the end consumer who really bears the burden. They pay a percentage of the price of the product, excluding VAT, to the company, which pays it to the State on a monthly, quarterly or annual basis.

The company is therefore merely an intermediary between the tax authorities and the customer, a collector. This is why businesses are referred to as VAT neutral.

☝️ For business managers, it is important to project prices excluding VAT that represent what will really be in their pockets, which is why the profit and loss account is prepared exclusive of VAT.

Different VAT rates for different products and services

VAT rates are the same between professionals and between professionals and private individuals. They depend on the type of product or service.

☝️ The rates are different in Corsica and the overseas departments (Martinique, Guadeloupe and Réunion), but Mayotte and French Guiana are exempt.

Tips for calculating VAT and sales tax:

• to go from exclusive of tax to inclusive of tax ▶︎ multiply your price exclusive of tax by "1, the rate", i.e. 1.20 for 20%; 1.10 for 10%; 1 055 for 5.5% and 1 021 for 2.1%;
• to change from VAT to exclusive VAT ▶︎ divide the VAT by 1.20 if it is 20%, 1.10 if it is 10%, 1 055 if it is 5.5% and 1 021 if it is 2.1%.

Collected VAT and deductible VAT

Collected VAT is the VAT applied to the price before tax and invoiced to the customer by a business, which "collects" the tax for the State.

Deductible VAT is the VAT paid by a business to a supplier or service provider, which it can deduct from its VAT payments to the government.

Impact of VAT on the business

VAT is not an expense for businesses, and can only have an impact on their cash flow if they pay it to the government before it has been collected by the customer (VAT on debit). Businesses must therefore anticipate payments to avoid running into an overdraft.

VAT on collection

Collection VAT is generally applied to service providers, who pay VAT when their customers have paid them.

☝️ This system is more attractive in terms of tax optimisation, but requires more rigorous monitoring of customer payments, and therefore more administrative processing.

Debit VAT

Debit VAT is applied to goods trading, with the due date for repayment of VAT being the date of the invoice, not the date of payment. The downside is that this requires a cash advance.

☝️ A service company may decide to apply VAT on debit, but the reverse is not possible. In this case, it must state this on its invoices.

How does business VAT work?

1. A business that is subject to VAT collects the VAT applicable to the products or services it sells to its customers.
2. It also pays VAT to its suppliers, depending on the product or service supplied.
3. It then pays the State the difference between what it has collected and what it has paid itself.

It must keep all the invoices it has received from its suppliers, showing the VAT portion, and indicate the VAT on the invoices it sends to its customers, to justify the declarations made to the tax authorities and in the event of an audit.

How does VAT recovery work? Example

▶️ You are a baker who sells baguettes to your customers, on which you charge compulsory VAT, collected for the State. As each baguette has a final price of €1 and the applicable VAT is 5.5%, the VAT collected is 0.05 cents. You sold 1,000 baguettes in June and therefore collected 1,000 x 0.05 cents, or €50, for the government.

▶️ But to make these baguettes, you bought flour from a supplier, on which you paid VAT. This deductible VAT is refundable to you by the government. This is recoverable VAT. Let's assume that you spent €300 on the flour, of which €15 was VAT.

▶️ When you make your VAT return to the government, you will indicate the VAT you collected on the baguette (€50) and the deductible VAT paid to your supplier (€15).ductible, paid to your supplier (€15), you will only have to pay the government the difference between the two (€35).
Your flour supplier is also required to declare and pay back the VAT collected, in this case €15.
That's why this tax is known as split-payment.

☝️ Not all VAT is recoverable, in particular :

• VAT on petrol fuel costs,
• VAT on diesel fuel costs (80% recoverable),
• VAT on the purchase of a vehicle,
• VAT on accommodation costs.

How does the VAT credit work?

Depending on the month and the activity, you may be owed money by the State: this is known as a VAT credit. For example, if you bought a lot more flour than you sold bread.

If the total is €760 or more, you will be reimbursed the next time you file your tax return, by filling in a special form (no. 3519 or 3517DDR, depending on whether you are on the normal or simplified tax system).

Otherwise, the refund is deferred until this amount is reached. You can also keep it as a credit on your account so that you can deduct it from the VAT you owe at a later date.

Which VAT regime should your company adopt?

In principle, a business is subject to the same VAT system as its tax system.
When a business is set up, the conditions for paying VAT depend on the information provided and the options ticked at the business formalities centre (CFE) of the Chamber of Commerce and Industry.

The rules to be applied depend on the type of business:

• micro-business
• sole proprietorship
• EURL,
• SARL
• association,

and its turnover (forecast or actual).

Basic VAT exemption

In other words, a business is not liable for VAT.
The thresholds are reviewed every 3 years; the latest revision dates from 1 January 2019.

👉 New businesses, freshly declared, automatically benefit from this, but may decide to opt to pay VAT if they feel they will have to do so anyway, in anticipation of significant income.

🏢 Types of business concerned :

• sole proprietorships (EI, EIRL) subject to the microenterprise scheme,
• commercial companies (EURL, SARL, SA, etc.) regardless of their income tax regime,
• companies whose turnover (excluding tax) in the previous calendar year does not exceed :
  • 85,800 euros for the supply of goods, sales for consumption on the premises and accommodation services,
  • 34,400 euros for services.

☝️ Businesses to which the exemption applies :

• are exempt from filing a VAT return;
• cannot charge deductible VAT on their purchases;
• may not charge it to their customers;
• their invoices must state " VAT not applicable, article 293 B of the General Tax Code".

They have the advantage of having net prices (TTC is equal to HT), which is more advantageous for building up a customer base.

💡 It is still advisable for micro-businesses and self-employed entrepreneurs to anticipate the moment when they will be subject to VAT by inflating their base price a little. Otherwise, when you make the compulsory switch to VAT, customers won't understand why prices are going up 20% overnight.

Beware: if an association exceeds the threshold with an ancillary commercial activity, even if it is not-for-profit, it becomes liable for commercial taxes (VAT, corporation tax).

The simplified VAT scheme (RSI)

🏢 Types of businesses concerned :

• businesses with an annual turnover excluding tax not exceeding :
  • 789,000 euros for the sale and supply of accommodation,
  • 238,000 for the provision of services,
• and whose annual VAT liability for the previous year does not exceed €15,000;
• companies that are automatically eligible for basic exemption and that apply for it (for a minimum of two years).

This involves

• the electronic payment of six-monthly instalments in July and December, calculated on the basis of the VAT paid in the previous year or on the basis of an independent decision by the new company;
• an annual adjustment declaration,
• no instalments if VAT in N-1 was less than €1,000.

☝️ Companies subject to the RSI may apply to switch to the mini-real scheme (for a minimum of two years).

The standard VAT scheme (RRN)

🏢 Types of businesses concerned :

• new businesses with a forecast annual turnover excluding tax of :
  • more than €789,000 for the sale and supply of accommodation,
  • more than €238,000 for service provision activities.
• Companies declaring more than €15,000 in VAT per year,
• companies that are automatically covered by the basic exemption scheme or the simplified actual scheme that apply for it (for a minimum of two years).

☝️ This system requires :

• a monthly declaration (quarterly if the previous annual sum was less than €4,000) of the previous month's transactions;
• simultaneous payment of VAT.

The mini-real VAT scheme

The mini-real VAT scheme consists of opting for the normal real VAT scheme while remaining under the simplified scheme for taxing profits.

"A small business with a VAT credit should opt for the mini-real VAT scheme. It will then be able to reclaim its VAT credit each month while being subject to simplified profit formalities.

Le coin des entrepreneurs

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Why adopt VAT management software?

Anti-VAT fraud law

To combat fraud, which accounted for a shortfall of €14 billion in 2015 according to Bercy, a law was introduced in 2018, requiring the use of accounting or management software, or cash register systems that meet the requirements of the tax authorities, and guarantee:

• inalterability
• security
• storage
• archiving of data.

This obligation applies to professionals liable for VAT, at least one of whose customers is a private individual.

Advantages and examples of VAT management software

In addition to complying with anti-fraud legislation, Software as a Service (SaaS) solutions offer :

• automatic VAT management (declaration, application of VAT rates),
• online data security,
• saving you time when processing your accounts, etc.

3 examples of VAT management software:

• Evoliz is an effective invoicing and commercial management software package, particularly suited to VSEs, SMEs and self-employed entrepreneurs.
  
  ▶️ The tool helps you manage VAT in particular. For example, you can access a summary in the Report menu. Here you can enter the basis on which your VAT is calculated.
  ▶️ The report then automatically calculates your input and output VAT. Subtotals display the results by VAT rate for receipts.
  
  
• IPaidThat is a complete accounting solution (invoicing, expense reports), also suitable for small and medium-sized businesses.
  
  ▶️ You can import your accounting documents from your suppliers' websites, your mailbox or the Slack platform. VAT is sorted and categorised using artificial intelligence.
  ▶️ You can also register a supplier or customer with the intra-Community VAT function to comply with European Union tax rules.
  
  
• Kwixeo is invoicing and business management software for the self-employed, VSEs and SMEs.
  
  ▶️ The solution features a VAT declared tab that follows the same layout as the tax authorities' website. By ticking the "Fill in the return automatically" button, the software automatically does all the calculations for you.
  ▶️ The "Details" tab lets you check the figures on your return.

Software dedicated to invoicing and accounting is becoming increasingly effective in relieving you of day-to-day tasks, automating them in a stress-free way and in full compliance with the law.

All you have to do is focus on your core business and monitor your company's financial health using the dashboards they provide.
Now that's added value!