How does VAT work for businesses? Value-added guide!

What is value-added tax and how does it work for businesses? Appvizer has looked into the matter for you. Rates, regimes, recoverable and non-recoverable VAT, collected and deductible VAT... here's a comprehensive overview of what you need to know about this tax.

You'll also find out about the software tools available in the cloud, so you can outsource VAT management to experts and relieve your accountants.

VAT is a subtle factor in your company's invoicing. Get your calculators ready!

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VAT, a neutral tax for businesses

VAT is a value-added tax, i.e. on the difference between the price of the raw material and the final product. It is paid by individuals and businesses alike.

But it's the end consumer who really bears the burden. They pay a percentage of the product's price (excluding VAT) to the company, which then transfers it to the State on a monthly, quarterly or annual basis.

The company is merely an intermediary between the tax authorities and the customer, a collector. This is why companies are referred to as VAT neutral.

☝️ For business managers, it's important to plan ahead with prices that represent what will really be in their pockets, which is why the income statement is prepared exclusive of VAT.

Different VAT rates for different products and services

VAT rates between professionals or from professionals to private individuals are the same. They depend on the type of product or service.

☝️ Rates are different in Corsica and the French overseas departments (Martinique, Guadeloupe and Réunion), but Mayotte and French Guiana are exempt.

Tips for calculating VAT and sales tax:

• to go from exclusive of tax to inclusive of tax ▶︎ multiply your price exclusive of tax by "1, the rate", i.e. 1.20 for 20%; 1.10 for 10%; 1,055 for 5.5% and 1,021 for 2.1%;
• to change from VAT to exclusive VAT ▶︎ divide the VAT by 1.20 if it's 20%, 1.10 if it's 10%; 1,055 if it's 5.5% and 1,021 if it's 2.1%.

Collected VAT and deductible VAT

Collected VAT is the VAT applied to the price before tax and invoiced to the customer by a company, which "collects" the tax for the State.

Deductible VAT is the VAT paid by a company to a supplier or service provider, which it can deduct from its VAT payments to the State.

Impact of VAT on the company

VAT is not an expense for the company; it can only have an impact on the company's cash flow, if it pays it to the State before it has been collected by the customer (VAT on debit). It is therefore essential to anticipate payments to avoid overdraft.

VAT on collection

VAT on collection is generally applied to service providers, who pay VAT when their customers have paid them.

☝️ This system is more attractive in terms of tax optimization, but requires more rigorous monitoring of customer payments, and therefore more administrative processing.

Debit VAT

VAT on debit is applied to merchandise trading, with the due date for VAT repayment being the invoice date, not the payment date. The downside is that it requires a cash advance.

☝️ A service company may decide to apply VAT on debit, but the reverse is not possible. In this case, it must mention this on its invoices.

How does business VAT work?

1. A VAT-registered business collects the VAT applicable to the products or services it sells to its customers.
2. It also pays VAT to its suppliers, depending on the product or service supplied.
3. It then pays the State the difference between what it has collected and what it has paid itself.

It must keep all the invoices it receives from its suppliers, mentioning the VAT portion, and indicate the VAT on the invoices it sends to its customers, to justify the declarations made to the tax authorities, and in the event of an audit.

How does VAT recovery work? Example

▶️ You are a baker and sell baguettes to your customers, on which you charge compulsory VAT, collected for the State. As each baguette has a final price of €1 and the applicable VAT is 5.5%, the VAT collected is 0.05 cents. You sold 1,000 baguettes in June and therefore collected 1,000 x 0.05 centimes, or €50, for the State.

▶️ But to make these baguettes, you bought flour from a supplier, on which you paid VAT. This deductible VAT is refundable to you by the State. This is recoverable VAT. Let's assume that you spent €300 on the flour, including €15 in VAT.

▶️ When you file your VAT return with the government, you will indicate the VAT you collected on the baguette (€50) and the deductible VAT you paid to your supplier.ductible, paid to your supplier (€15), you will only have to pay the difference between the two (€35).
Your flour supplier is also required to declare and pay back the VAT collected, in this case 15 €.
That's why this tax is known as "split-payment".

☝️ Not all VAT is recoverable, in particular :

• VAT on gasoline fuel costs,
• VAT on diesel fuel (80% recoverable),
• VAT on vehicle purchases,
• VAT on accommodation costs.

How does the VAT credit work?

Depending on the month and the activity, you may be owed money by the government: this is known as a VAT credit. For example, if you bought a lot more flour than you sold bread.

If the total is equal to or greater than €760, you'll be reimbursed the next time you file your tax return, on completion of a special form (no. 3519 or 3517DDR, depending on whether you're on the normal or simplified tax system).

If not, the refund is deferred until this amount is reached. You can also keep it as a credit on your account to deduct it from the VAT you will owe later.

Which VAT regime should your company adopt?

In principle, a company is subject to the same VAT system as its tax system.
When a company is set up, the conditions for paying VAT depend on the information provided and the options ticked at the CFE (Centre de formalités des entreprises) of the Chamber of Commerce and Industry.

The rules to be applied depend on the type of business:

• microenterprise,
• sole proprietorship,
• EURL,
• SARL,
• association,

and its sales (forecast or actual).

Basic VAT exemption

In other words, a company is not subject to VAT.
Thresholds are reviewed every 3 years; the latest revision dates from January 1, 2019.

👉 New businesses, freshly declared, benefit automatically, but can decide to opt for VAT payment if they feel they will have to do so anyway, in anticipation of large revenues.

🏢 Types of business concerned :

• sole proprietorships (EI, EIRL) subject to the microenterprise regime,
• commercial companies (EURL, SARL, SA, etc.), regardless of their income tax regime,
• companies whose sales (excluding tax) in the previous calendar year do not exceed :
  • 85,800 euros for deliveries of goods, sales for consumption on the premises and accommodation services,
  • 34,400 euros for services.

☝️ Companies covered by the exemption :

• are exempt from VAT reporting;
• cannot charge deductible VAT on their purchases;
• cannot charge it to their customers;
• their invoices must state " TVA non applicable, article 293 B du CGI".

They have the advantage of having net prices (TTC equals HT), more advantageous for building up a customer base.

💡 Even so, we recommend that micro-businesses and self-employed entrepreneurs anticipate the moment when they will be subject to VAT by inflating their base price a little. Otherwise, when you make the compulsory switch to VAT, customers won't understand why prices are going up 20% overnight.

Beware: if an association exceeds the threshold with an ancillary commercial activity, even if it's not-for-profit, it becomes liable to commercial taxes (VAT, corporation tax).

The simplified real VAT regime (RSI)

🏢 Types of companies concerned :

• companies with annual sales excluding taxes not exceeding :
  • 789,000 euros for housing sales and supply activities,
  • 238,000 euros for the provision of services,
• and whose annual VAT liability for the previous year does not exceed 15,000 euros;
• companies that are automatically eligible for the basic tax exemption and apply for it (for a minimum of two years).

This involves :

• electronic payment of semi-annual instalments in July and December, calculated on the basis of VAT paid in the previous year, or on the basis of an independent decision by the new company;
• an annual adjustment declaration,
• no instalments if VAT in N-1 was less than 1,000 euros.

☝️ Companies subject to the RSI can apply to switch to the mini-real system (for a minimum of two years).

The normal actual VAT regime (RRN)

🏢 Types of company concerned :

• new businesses with forecast annual sales excluding taxes of :
  • more than 789,000 euros for housing sales and supply activities,
  • over 238,000 euros for service provision activities.
• companies declaring more than 15,000 euros in VAT per year,
• companies that are automatically covered by the basic exemption or simplified real-estate regime and request it (for a minimum of two years).

☝️ This system requires :

• a monthly declaration (quarterly if the previous annual sum was less than 4,000 euros) of the previous month's transactions;
• simultaneous payment of VAT.

The mini-real VAT system

The mini-real VAT system consists of opting for the normal real VAT system, while remaining under the simplified system for taxing profits.

"A small business with a VAT credit should opt for the mini-real VAT system. It will then be able to recover its VAT credit each month, while being subject to simplified profit formalities."

Le coin des entrepreneurs

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Why adopt VAT management software?

Anti-VAT fraud law

To combat fraud, which represented a loss of revenue of 14 billion euros in 2015 according to Bercy, a law was introduced in 2018, requiring the use of accounting or management software, or cash register systems meeting the requirements of the tax authorities, and guaranteeing:

• inalterability,
• security,
• conservation,
• archiving of data.

This obligation applies to professionals subject to VAT, at least one of whose customers is a private individual.

Advantages and examples of VAT management software

In addition to compliance with anti-fraud legislation, Software as a Service (SaaS) solutions offer :

• automatic VAT management (declaration, rate application),
• online data security,
• faster accounting processing, etc.

3 examples of VAT management software:

• Evoliz is an efficient invoicing and sales management software package, particularly well-suited to VSEs, SMEs and self-employed entrepreneurs.
  
  ▶️ The tool helps you manage VAT in particular. For example, a summary is available in the Report menu. Here, you enter the basis for calculating your VAT.
  ▶️ The report then automatically calculates your input and output VAT. Subtotals display results by VAT rate for revenues.
  
  
• IPaidThat is a complete accounting solution (invoicing, expense reports), also suitable for small and medium-sized businesses.
  
  ▶️ You import your accounting documents from your suppliers' websites, your mailbox, or the Slack platform. VAT is sorted and categorized using artificial intelligence.
  ▶️ You can also register a supplier or customer with the intracommunity VAT function to comply with European Union tax regulations.
  
  
• Kwixeo is an invoicing and business management software for the self-employed, VSEs and SMEs.
  
  ▶️ The solution features a declared VAT tab that follows the same layout as the French tax authorities' website. By checking the "Fill in declaration automatically" button, the software automatically does all the calculations for you.
  ▶️ The "Details" tab lets you check the figures on your declaration.

Invoicing and accounting software is becoming increasingly effective in relieving you of day-to-day tasks, automating them stress-free and in full compliance with the law.

All you have to do is focus on your core business, and keep track of your company's financial health thanks to the dashboards they provide.
Now that's added value!