The VAT system permits the deduction of input VAT for the acquisition of assets and / or services that VAT taxpayers use in their entrepreneurial activity.
The deduction of input VAT can only be limited or excluded in the cases specifically foreseen in the Tax Laws. However, companies and professionals that are VAT taxpayers cannot deduct VAT in any proportion if they only carry out VAT exempt activities whilst companies engaged in exempt and subject to VAT activities have a limited right to deduct VAT due to the application of the prorate VAT system, which needs to be adjusted at the end of the calendar year.
✔ Companies performing subject – to – VAT sales that permit the input VAT deduction as well as exempt – VAT sales that do not enable the input VAT deduction can only deduct input VAT in a proportion, so – called prorate system, which includes:
- In the numerator of the fraction, the total amount of sales of products and services carried out during the calendar year which permit the input VAT deduction.
- In the denominator of the fraction, all the transactions carried out in the professional or entrepreneurial activity during the year, including those that permit the VAT deduction and those that disallow it.
✔ In the general prorate system, the deductible VAT is calculated applying the prorate percentage on the total amount of input VAT quotes (excluding those that are considered as non deductible by the VAT Law) on the acquisition of products and services used in the business activity. Consequently, if the volume of subject – to – VAT transactions increases, the deductible input VAT shall also be higher.
✔During the year, the prorate resulting from the preceding year is applied on a provisional basis. In the event of start of an activity, the percentage applied provisionally is the one proposed by the taxpayer and accepted by the Spanish tax authorities. In both cases and at the end of the year, such provisional percentage is substituted by the annual final one. This procedure obliges taxpayers regularizing the deduction carried out through the calendar year, in the final VAT return of the year.
✔ As an exception to the general prorate system, taxpayers may elect to apply the so – called special prorate system. According to it, input VAT quotes are deducted based on what the assets and services acquired are used for:
- 100%, if these are used in activities that permit the deduction of input VAT quotes.
- Are not deducted in any proportion if these are exclusively used in activities that do not permit the deduction of input VAT quotes.
- According to the prorate rule, if they are only partially used for activities that entitle to the input VAT deduction.
But, you must pay attention to the fact that the special prorate system may also result of mandatory application for taxpayers subject to the general prorate system if, as a result of this latter, the tax deductible quotes exceed in 10% those that would result from the application of the special prorate system.
✔ Consequently and for the purposes of adjusting the final prorate, it is important to determine not only which is this final percentage that will oblige taxpayers to regularize (upwards or downwards) the input VAT quotes deducted in the calendar year but also whether the special prorate system may result mandatory.
Publicado el 11-2019 por PBS