When can you deduct VAT and when can you not?

Content:

Can you always decuct VAT?

Not always. To keep accurate accounting, it's essential to know when VAT is deductible and when it's not. Many companies and self-employed workers make mistakes that can lead to problems with the Treasury.

In this article, we explain when you can deduct VAT and the requirements you need to meet to do it properly.

First, you should know that some expense receipts don't always allow VAT to be deducted.

The most common ones are:

• Expense receipts

• Restaurant receipts 

• Fuel invoices without the recipient company’s name

In addition to these receipts, in general, if your receipts don’t meet certain requirements, you won’t be able to deduct VAT.

Requirements for deducting VAT

The VAT you pay can be deducted as long as it’s related to your business activity. However, not all VAT is deductible. For an expense to be valid, it must meet certain requirements.

Let’s look at the three essential requirements to deduct VAT properly:

1. The expense must be directly related to your business activity.

If the expense is not related to generating income for your business, you won’t be able to deduct VAT.

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Expenses related to vehicle use:

For VAT on fuel, tolls, or parking to be deductible, the vehicle must be necessary for the business activity.

NOT considered related to business activity:

• Vehicles used for both business and personal purposes.

• Vehicles not recorded in the company accounts, unless proven otherwise.

Business travel expenses:

usiness trips must be necessary and properly justified. The Treasury may reject the deduction if:

• They are not directly related to the business activity.

• The expenses are excessive or disproportionate.

Important: All expenses must be properly documented to avoid problems during an inspection.

2. The expense must be properly justified.

To deduct VAT, you need the original documentation. These are the valid documents:

• Original invoice with all required tax information

• Official import settlement document

• Self-invoice (in cases of reverse charge)

• Signed receipt (for the special agricultural scheme)

Are digital invoices valid?

Also, simplified invoices (receipts) are only deductible if they include:

• Tax ID (NIF) and address of the recipient.

• Detailed VAT rate.

3.The expense must be properly recorded in the accounting books.

The expense must appear in the VAT books and be properly accounted for by the company or professional activity.

Both self-employed workers and companies must keep accounting records of all deductible expenses. To avoid mistakes, we recommend using reliable invoicing software that allows you to create invoices, add existing ones, and simplify their management.

Non-deductible VAT on certain expenses

The Treasury prohibits VAT deduction on certain goods and services.

The Treasury prohibits VAT deduction on certain goods and services.

• Among them:

• Jewelry and precious stones.

• Food, drinks, and tobacco.

• Entertainment and recreational services.

• Expenses related to client or third-party hospitality.

• Travel, trips, hospitality, and restaurant expenses ( unless deductible under Personal Income Tax or Corporate Tax )

If you have any doubts about how to prepare your invoices or don’t understand some terms, we have an article that explains everything clearly and simply.

Conclusion: How to Avoid Mistakes with VAT?

Many self-employed workers and companies make mistakes that can lead to problems with the Treasury. To avoid them... the solution is simple: hire a tax expert expert and forget about it all.

At InnoTaxes, we help you make sure you pay the right amount and not a cent more.

Contact us with your questions or send us a WhatsApp so we can assist you faster and more personally.