Calculating Input Tax: Prepare for Your VAT Liability!

In principle, this calculation is straightforward. As a business owner, you pay suppliers and service providers invoice amounts inclusive of VAT: from your perspective, these tax amounts represent the deductible input tax. At the same time, you show VAT on the invoices you issue to your clients and pass it on to the tax office. The input tax you have paid reduces this amount. This process is known as input tax deduction.

When calculating and deducting input tax, however, there are several points to bear in mind. Among others, the following questions arise:

• Does the tax authority recognise the expenditure, and therefore the VAT, as deductible?
• What is the applicable tax rate?
• Do incoming invoices meet the requirements for input tax deduction?
• At what point in time must you record the input tax?
• What exceptions exist for input tax deduction?

Find valuable tips in this article! Ideally, you should transfer the administrative burden of input tax deduction and VAT returns to Guhr Steuerberatung: you reduce your workload and benefit from a correct deduction of input tax!

At the latest in your advance VAT return or annual tax return, you declare how much input tax you must pay. On the other side, you record how much VAT you have collected from your clients. As a rule, this produces an amount that you transfer to the tax office. However, an input tax surplus may also arise if the total VAT paid exceeds the VAT collected. In that case, you will receive the relevant amount as a refund.

VAT liabilities evolve dynamically. High business expenses — incurred, for example, through investments in computer equipment, office furniture, or machinery — temporarily increase the input tax. Considerable fluctuations in VAT collected can also arise, not least due to large orders. If you calculate your input tax in advance and deduct it from the VAT collected, this assists your financial planning. In particular, you avoid the unfortunate situation of being unable to meet a VAT demand from the tax office.

There are various options for calculating input tax. For example, you can add up all tax items paid and collected manually. The input tax is shown separately on incoming and outgoing invoices, so calculating it is straightforward. Alternatively, you can start from the net or gross amounts. Accounting software frequently handles these calculations automatically. Alternatively, you can use an online input tax calculator.

The tax office will only recognise the input tax deduction if the line items and invoices satisfy several criteria. In principle, the Value Added Tax Act (UStG) provides for this procedure in the following cases:

• VAT incurred in Germany
• Import VAT
• Tax on intra-Community acquisitions

In addition, input tax deduction requires that the expenditure qualifies as a business expense. If the tax authority classifies invoice amounts as private, it will also deny their deduction as input tax.

A key formal requirement is that a proper invoice exists. The precise criteria depend on the invoice amount. Aspects worthy of attention include the correct statement of VAT, a description of the services or goods, and the addresses of both the supplier and the recipient.

For business receipts and business expenses, the receipt-and-payment principle applies: you take these items into account as soon as payment is made. When calculating input tax, a different principle applies. Record the input tax when both of the following criteria are met:

• A proper invoice is present
• The service has been performed or the goods have been delivered

To give you a concrete impression of the approach, we illustrate the input tax calculation with a simple example. In the first variant, the calculation is based on the net amount for a supply subject to the standard VAT rate of 19%. The invoice amount is 1,000 euros. The VAT is 190 euros. You transfer a total of 1,190 euros and declare 190 euros of input tax in your advance VAT return.

If you start from the gross amount, the calculation is slightly more involved. Avoid the mistake of calculating 19% of this total. That would use the wrong basis, as the 19% VAT is applied to the net amount. Instead, divide the gross amount by 1.19 to calculate the net amount. The difference between the gross total and the net amount you have determined gives you the input tax.

In some industries and fields of work, there is an option to claim the input tax deduction on a flat-rate basis. When calculating input tax, the individual tax amounts are not decisive; instead, you determine the input tax based on your annual turnover. You apply the relevant industry- or profession-specific average tax rate. Your tax adviser will inform you about this method and analyse whether it is financially advantageous.

If you delegate your obligations to the tax office to a tax adviser, you relieve yourself of a considerable burden. This also applies to the advance VAT return and the calculation of input tax. Your Guhr Steuerberatung calculates input tax on an ongoing basis and informs you promptly whenever any special circumstances arise.

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