VAT on Purchases

Anglo-Spanish Chartered Accountants

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VAT on Purchases

When we make a purchase that is subject to VAT, we add VAT to the price agreed with our supplier. Therefore, when we make the payment to our supplier, they receive our fees and the VAT. This VAT suffered should be refunded by the tax office; therefore we can deduct it from any VAT collected through our sales before VAT is passed on at the end of the current reporting period. An example would be as follows:


Purchase invoice - expense  
  Invoice Our money VAT - Tax office money
Expenses 200 -200  
VAT @ 16% 32   -32
  232 -200 -32


By making the purchase our profit is reduced by the amount of our cost:


Profit and loss account
Sale 3,000
Expenses -200
Profit / (Loss) 2,800


However, we can deduct the VAT paid from our VAT creditor:


Balance Sheet    
  Profit Bank VAT Creditor
Sales 3,000 3,480 480
Expenses -200 -232 -32
  2,800 3,248 448
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