There are several VAT exempt activities regulated in article 20 of the VAT law, the most important of which are the following: health care, educational activities, social assistance, cultural activities, financial and insurance operations, among others. The companies and professionals who carry out these activities have a series of expenses and, therefore, a VAT input, so several doubts may arise, such as the following: what is the difference between an exempt activity and an activity not subject to VAT, is it possible to deduct VAT, how is the deduction made?
The problem is that if you carry out a VAT-exempt activity and do not issue VAT invoices, you cannot deduct the input VAT in relation to your activity either. This derives from Article 94 of the VAT Act, which regulates the transactions whose performance gives rise to the right to deduct.
Non-subject activity and exempt activity: what is the difference?
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The first thing to differentiate is that an activity that is not subject to VAT is not the same as an activity that is exempt from VAT. For example, a product or service is not subject to VAT when VAT cannot be applied to the operation carried out (this is the case of a sale or purchase between private individuals).
However, a transaction is exempt from VAT when VAT should be applied, but the rules themselves state that it is exempt. If you carry out a VAT-exempt activity, you must state on your invoices that this exemption applies and mention the applicable section of Article 20 of the VAT Law.
Deductible VAT: practical examples
Another important point in relation to VAT is that for VAT to be deductible, certain circumstances must be met:
- It must be an expense that is directly related to the activity being carried out.
- The expense must be justified by means of an invoice.
- And the invoice must be correctly accounted for in the VAT register.
If the expense does not meet all these requirements it will not be deductible. For example:
- If a marketing professional rents an office, buys software for his activity and office equipment, he can deduct the expense if he justifies it as we have seen.
- If an electrician buys safety boots for his work, he will be able to deduct the VAT on the expense, but if they are boots for his personal use, the deduction will not be possible.
Deduction in form 130 and in the income tax return for exempt activities
For the deduction of input VAT in the case of VAT-exempt activities, there are two things to consider:
- In the event that you file form 130. This is a form that is filed quarterly and by which you advance the payment of personal income tax to the tax authorities. In other words, it is the form by which you anticipate what you will have to pay in your income tax return.
- If you do not file form 130, VAT can be included as an expense directly in the annual tax return. In the expenses section, VAT can be added so that the expenses will be increased.
If you are a professional who carries out a VAT-taxed activity and a VAT-exempt activity, you will have to apply the so-called VAT pro-rata, which consists of calculating a percentage to deduct VAT in relation to the income derived from the non-VAT-exempt activity.
Example of a case of VAT deduction for exempt activities
To better understand the situation, let’s start with the case of a person who works as a self-employed person and is registered under the 861 heading for professionals. She writes articles for magazines, so her invoices are exempt from VAT and she wants to recover the VAT on invoices for expenses related to her activity. In this case, as no VAT returns are made, the expense can be charged on the income tax return. Therefore, in the personal income tax return, the input VAT will be included in the expenses related to the professional activity. If, for example, this self-employed person makes a purchase in a stationery shop and receives an invoice for a total of 30.25 euros, of which 25 euros is the taxable amount and 5.25 euros is VAT. In his tax return he will have to include the total amount of the invoice.
If you need help with your VAT, IRPF or any other tax return, or if you carry out a VAT exempt activity and you have any doubts, do not hesitate to contact our business consultancy team. We will analyse your particular case to provide you with solutions and carry out all the formalities with the tax authorities for you so that you do not have any problems.