Excess VAT deduction: when it arises and how to get it

An excess VAT deduction (VAT refund) is the situation in which your deductible tax for a period is higher than the tax you have to pay to the state. Once the conditions are met, the tax office refunds the resulting difference to you. For companies with investments or seasonal sales this is an important source of cash that can significantly help cash flow. In this article we explain when an excess deduction arises, how it is claimed and how to speed up its refund.

When an excess deduction arises

Deductible tax exceeds output VAT mainly when you buy more than you sell. Typically this happens in periods of larger investments, stock purchases or a business start-up, when the company does not yet have high revenue but bears high costs. It can also arise where supplies exempt from VAT with the right of deduction predominate, for example with exports or supplies of goods to other EU countries.

• purchase of machinery, equipment or real estate
• stocking up on goods before the season
• a predominance of exports and supplies to other EU countries
• a business start-up with high initial costs

How the deduction is claimed

You report the excess deduction directly in your VAT return; no separate application is needed. The system automatically evaluates the difference between output VAT and the deduction and determines the amount to be refunded. The condition is that you hold valid documents meeting the statutory requirements and that you have met all the conditions for deducting the tax. Without your documents in order, you will not be able to defend the claim in the event of an audit.

Refund periods

The tax office refunds the deduction within the period laid down by law, which can differ depending on whether you meet the conditions for an earlier refund, for example as a reliable VAT payer with no tax arrears. Check the exact periods and conditions in the current wording of the law, as they are amended over time and cannot be treated as fixed. The period can also be extended if the tax office starts an audit.

Tax audit

Higher deductions tend to be checked more often, which is understandable given that they are an expense for the state budget. An audit is no cause for concern, however, if your documents are in order and the supplies actually took place. Prepare in advance your invoices, contracts and evidence that the supplies were actually made, such as delivery notes or transport documents. Conscientious and clear records will speed up the whole process considerably.

Impact on cash flow

An excess deduction can temporarily tie up your money until the tax office refunds it to your account. When planning larger investments, therefore, allow for the fact that some time will pass between paying the tax included in the purchase price and getting it back – sometimes several months if there is an audit. Take this time gap into account in the company’s financial plan so that you do not run into liquidity problems. With repeatedly high deductions, for example in export manufacturing, it pays to keep track of whether you meet the conditions for an earlier refund, which will shorten the time your money is tied up.

How to secure your refund

The key is a flawless return and documents that meet all the requirements. If you expect a high excess VAT deduction, discuss the period with your accountant in advance and prepare complete documentation. This way you will avoid requests from the tax office, speed up any audit and get your money back faster and without unnecessary complications.

Related articles: Transfer of tax liability (reverse charge) in practice, The EC Sales List for trade within the EU, VAT on sales of goods to the EU: OSS and distance sales.

Frequently asked questions

Do I have to apply separately for a refund of the excess deduction?

No, you report the deduction directly in your VAT return and the tax office refunds it of its own accord after verification. As a rule, no separate application is filed, but you must meet all the conditions for deducting the tax and have your documents in order.

Why does an excess deduction trigger an audit?

Higher deductions represent an expense for the state budget, so the tax office checks them more often. If your documents and records are in order, the audit is just a formality and you will receive the deduction once it is over.