Input VAT Deduction Simply Explained
For businesses VAT is economically neutral. They collect it from their customers and remit it, and they recover the tax they themselves paid on their purchases. That recovery mechanism is called the input VAT deduction and is the heart of the whole system. Understand it and you understand why, in the end, VAT burdens only the final consumer.
The principle in one example
A workshop buys spare parts for €1,000 net and pays €190 of VAT on them, so €1,190 gross. It fits the parts and invoices the customer €2,500 net plus €475 of VAT. To the tax office the workshop pays not the full €475 but the difference: €475 less €190 of input VAT, so €285. Economically it has remitted tax only on its own added value of €1,500.
That is exactly what the term value added tax means: what is taxed is the value each stage adds. The €190 has already been remitted by the parts dealer, the €285 comes from the workshop. At the end stands the customer, who bears the full €475 and can deduct nothing.
Who may deduct at all
Under section 15 UStG only a person who is a trader for VAT purposes and uses the supply received for their business is entitled to deduct. Small businesses under section 19 UStG are excluded — that is the flip side of their exemption. Anyone making exclusively exempt supplies under section 4 UStG, such as certain medical treatments or lettings, may not deduct either.
The formal conditions
In practice the deduction rarely fails on principle and almost always on form. You need a proper invoice with all the mandatory details of section 14(4) UStG. If the issuer's tax number or VAT identification number is missing, if the date of supply is absent, or if the description of the supply is so general that the supply cannot be identified, the deduction can be refused. In a tax audit these are the first points to be checked.
Typical stumbling blocks
Three mistakes cost businesses money time and again. First: deducting input VAT from an invoice on which the tax was stated wrongly — by a small business, for instance. The issuer owes the tax under section 14c UStG, yet the recipient still may not deduct it. Second: failing to strip out private shares, for example on a company car or a home office. Third: entertainment and travel costs without the required receipts and details.
Small-value invoices and receipts
For invoices up to €250 gross, relaxed requirements apply. It is enough to state the issuer's full name and address, the date of issue, the quantity and nature of the supply, the consideration and tax amount as a single sum, and the rate. Recipient details and an invoice number are dispensable. You work out the deductible input VAT from the gross amount and the rate yourself — the VAT calculator takes that route from gross to net for you.
Input VAT on investments
The deduction becomes particularly noticeable on larger acquisitions. Buy a machine for €60,000 net and you recover €11,400 of VAT — provided you are entitled to deduct. It is precisely this effect that, for many founders, is the decisive argument against the small-business rule. For land and buildings the ten-year adjustment period of section 15a UStG also applies: if the use changes, part of the input VAT is clawed back.
Returns and the net payable
You declare the difference between VAT collected and input VAT deductible in your VAT return. Depending on the previous year's liability that happens monthly, quarterly or only annually. If input VAT exceeds output VAT — typical during investment phases — the tax office refunds the excess. Anyone expecting regular refunds should choose monthly returns to protect their cash flow.
Keep your incoming invoices in order, check the mandatory details and recalculate when in doubt: the VAT calculator shows you the tax contained in any gross amount. This article explains the essentials and does not replace tax advice on the individual case.