How to deduct VAT without the headache

Key Takeaways

• Eligibility: You can only deduct VAT on expenses strictly related to your business activity.
• Documentation: You must have invoices reported to the Tax Authority and correctly identified with your taxpayer number.
• Restrictions: Expenses related to passenger vehicles, fuel (partially), and representation have specific exclusion rules.
• Deadlines: VAT must be deducted in the periodic return for the period in which you received the invoice or by the end of the calendar year.

What does deducting VAT actually mean?

Deducting VAT is essentially the process of subtracting the tax you paid on purchases from the tax you charged your clients. If, at the end of the period (monthly or quarterly), the VAT on your expenses is higher than the VAT on your sales, you’ll have a credit with the Tax Authority. Otherwise, you’ll need to pay the difference to the State. This is how you ensure VAT isn’t a cost to your business, but to the final consumer.

What are the requirements to deduct VAT?

To recover this money, having a receipt isn’t enough. You need to follow three key rules:

1. Taxpayer number: The invoice must include your business or self-employed taxpayer number.
2. Direct link: The expense must be necessary to generate income or keep your business running.
3. Certified software: You should ensure your suppliers use certified systems so invoices are correctly reported in your e-Fatura portal.

Which expenses can (and can’t) be deducted?

This is where most people get confused. Not everything you buy for your business is fully deductible.

Fully deductible expenses (100%)

You can deduct VAT in full on raw materials, work tools, office rent, electricity, internet, and consultancy or accounting services. If you use Moloni ON, the software subscription falls into this category.

Expenses with limitations or exclusions

• Fuel: VAT on diesel, LPG, and hydrogen is 50% deductible. Petrol, in general, is not deductible (except in very specific cases such as public transport).
• Passenger vehicles: VAT on the purchase or lease of passenger cars is generally not deductible, unless they are electric vehicles up to a certain acquisition value defined in the State Budget.
• Travel and accommodation: Travel and hotel expenses are generally excluded from VAT deduction (Article 21 of the VAT Code).

How do you actually deduct VAT in practice?

The process takes place when you submit your VAT return. In Field 20 (and following fields), you declare the taxable base and the VAT paid.If you stay organised and record your purchase invoices in Moloni ON, you can easily generate reports that match the data on the tax portal, avoiding errors when filling in the return.

What is the deadline to recover VAT on your invoices?

You can exercise your right to deduct VAT in the return for the period in which the invoice was issued.If you forget an invoice, the VAT Code allows you to deduct it until the end of the following calendar year. Still, the best approach is to keep everything up to date monthly so your cash flow doesn’t take a hit.

Why should you use Moloni ON to manage your expenses?

Although Moloni ON is known for invoicing, managing your expenses there gives you a real view of your net profit.