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 | |