Value Added Tax (VAT) is a type of consumer tax in Europe. It is similar to sales tax in the United States; the tax is collected at the point of sale and forwarded to the government. There are certain circumstances where a business can reduce the amount of VAT owed to the government. These circumstances are collectively know as VAT credits.
If you are a VAT-registered business, you can claim VAT credit for items you exclusively use for business. For example, if you purchase a pool car for your business, you can claim back the amount of VAT paid on the vehicle. Your business can also claim a VAT credit for the cost of items you sell in your business, or tools and machinery used for business purposes. When you purchase goods from a supplier, obtain a VAT invoice showing the amount of VAT paid; you can only claim VAT credit for items that you have a VAT invoice for.
Goods Purchased Before VAT Registration
If you purchase services or goods before you register for VAT, you may be able to get a VAT credit for them. The credit generally applies for services and goods purchased up to four years prior to VAT registration. To apply for a backdated VAT credit, you must keep specific records of the items purchased and how they were used.
If you are claiming VAT credit for goods and services purchased before VAT registration, you cannot claim VAT credit for items that you have completely used, sold or otherwise disposed of. For example, if you purchased a tank of gas and have completely used it up before VAT registration, you cannot claim a VAT credit. However, if you purchased 10 books for your store and have not yet sold them, you can claim the VAT credit for those items.
VAT Credit Note
When the amount of VAT on an invoice has been discounted or otherwise adjusted, the dealer or supplier must issue a VAT credit note to the purchaser that states the amount the item has been reduced by. The credit note should also state the amount of VAT that was reduced. The dealer or supplier then uses the credit note to reduce his VAT liability when it comes to paying VAT to the government.
VAT Credit Security
If you are claiming a VAT credit on your VAT return, you may have to provide a security before your business receives the credit. This may happen if the taxation authority determines that you are making an unusually large claim for VAT credit.