Input VAT deduction: conditions and the most common mistakes

Input VAT deduction is one of the biggest practical benefits of being a VAT payer, but also the area where most mistakes and disputes with the tax office arise. An incorrectly claimed deduction can lead to an additional tax assessment and penalties that place an unnecessary burden on the company. In this article we go through the conditions for entitlement and the typical mistakes that can be avoided with a little attention and well-kept documents.

The basic condition for entitlement

You can deduct the tax on supplies you receive that you use for your taxable business. If the goods or services you buy are used for private purposes or for supplies that are exempt without the right to deduct, you are not entitled to the deduction or it must be reduced proportionally. The substantive link to the business is therefore the very foundation of the entitlement, and it is precisely what the tax office checks most often during an audit. For expenses that also have a personal dimension, such as a car or a phone, you need to be able to show to what extent they serve the business and to what extent private consumption.

Formal conditions

In addition to the substantive use, the formal side must also be satisfied. Without a correct document you will not be able to defend your entitlement in an audit, even if the supply actually took place and was used for the business.

• an invoice with all the particulars required by law
• a supply actually made by the supplier
• inclusion in the correct tax period
• keeping the document in case of an audit

Proportional deduction

If you use supplies partly for taxable and partly for exempt activities, a proportional deduction is applied by means of a coefficient. During the year this coefficient is used as a provisional one, and at the end of the year it is settled on the basis of the actual figures for the whole year. Assets used partly for private purposes are dealt with in a similar way: you claim only the part of the tax that corresponds to the business.

The most common mistakes

Typical mistakes include deducting on the basis of a document that lacks the required particulars, claiming tax on entertainment or private expenses, or including an invoice in the wrong period. Another mistake is deducting tax on a supply that never actually took place, or on a supply from a supplier who was not a VAT payer at the time of the supply. The tax office uncovers such mistakes quite easily during an audit by cross-checking the data from both parties’ VAT control statements. If the supplier did not declare the supply, the mismatch shows up almost immediately and your deduction will be challenged, even if you acted in good faith.

The timing of the deduction

It also matters when the right to deduct arises and by when you can claim it. In general, you claim the deduction when you have the document and the conditions are met, or in a later period within the rules and deadlines set by law. Check the exact deadlines in the current version of the law, as missing them can mean losing your entitlement.

How to protect your entitlement

The key is keeping your documents in order and checking incoming invoices on an ongoing basis, right when you post them. If you have doubts about whether a deduction is justified, it is better to discuss the specific case with your accountant than to risk an additional tax assessment and a penalty. A correct input VAT deduction improves your cash flow without the risk of additional assessments and unpleasant surprises during an audit. Thoroughly checking the supplier and all the particulars of a document before it is posted is the cheapest and most effective safeguard a company can have.

Related articles: VAT on imports and exports of goods outside the EU, VAT registration under Sections 7 and 7a explained, Cancelling VAT registration: the procedure.

Frequently asked questions

Can I deduct the tax on every purchase for my company?

Not on every purchase. The entitlement arises only for supplies used for your taxable business and when the formal conditions are met. Some expenses, such as entertainment or private consumption, are excluded from deduction or the deduction is reduced.

In which period should I include the deduction?

You usually claim the deduction in the period in which the entitlement arose and you have the document available, or in a later period within the rules set by law. Check the exact conditions and deadlines in the current version of the law.