November 1, 2024

Input VAT refers to the VAT calculated on purchases made by a taxable person. For example, a Spanish company receives a hotel bill for a staff visit to Germany, where VAT was paid. In this case, that company can't reclaim the German VAT through their Spanish VAT return. Input VAT recoverability is the process that allows businesses to deduct their input VAT from the output VAT paid on subsequent sales. Input VAT recoverability relieves the businesses from the burden of VAT payable during their course of domestic and cross-border economic activities.

AvaTax provides support for partial input VAT recoverability on purchase transactions where taxes can be recovered. For scenarios where the tax payment has already been made, VAT can’t be recovered.

While calculating VAT on sales liability for a business, the seller can deduct the input VAT amount (expenses incurred on the purchased item) from the output VAT amount paid on subsequent sales. Expenses made on purchase by a seller can sometimes lead to an inaccurate tax calculation if a portion of VAT on the purchase is nonrecoverable. The AvaTax partial VAT recoverability feature allows you to make the tax adjustments based on your business requirements. It reduces the risk of under or over payment of VAT to the tax authorities.

For example, imagine the following scenario:

A seller pays €10 as an input VAT expense on a purchased item

That seller then collects €15 as VAT on the sale of the same item from a customer.

As a result of the above, the seller underpaid €5 to the tax jurisdiction.

Note: AvaTax supports partial VAT recovery for transactions in the U.K., Northern Ireland, and the EU member states. In the remaining jurisdictions, other than the U.S. and Canada, AvaTax returns 100% recoverability.

VAT recoverability quick facts

VAT recoverability applies to purchase transactions; output tax applies to sales transactions.

VAT recoverability applies to both domestic and cross-border VAT transactions.

A tax is recoverable if you can deduct the tax that you've paid from the tax that you've collected

A tax is nonrecoverable if you have to pay the full amount you've collected regardless of what you may have paid.

The exceptions to recoverability vary by country based on what's being purchased and, sometimes, how it's used.

The percentage of recoverability can vary.

When companies buy goods and services and pay input VAT to the vendor, the VAT amount paid is generally recoverable.
- The recoverable input VAT reduces or offsets the output VAT collected from their customers.

Note: Recoverability is relevant to the input tax associated with a reverse charge, which also includes a posting of output tax.

Partial VAT recoverability percentage

Note: AvaTax provides support for partial input VAT recovery on purchase transactions where taxes can be recovered. However, if the tax payment has already been made, VAT can't be recovered.

The VAT recovery percentage can vary based on the following factors:

The type of the purchased item or service

The usage of the purchased item or service

The jurisdictional requirements of the purchased item or service

AvaTax provides support to customize the recoverability percentage based on your business requirements. The default recoverability percentage is set to 100%. If required, you can override the system-provided recoverability percentage with your customized rate. To set a customized recoverability percentage on your purchase transactions, you can set the Recoverability percentage in Find and Replace before calculation advanced rules supported by AvaTax. More information is available in the Create an advanced tax rule to find and replace transaction values article in the Knowledge Center.

VAT recoverability response codes

AvaTax returns the following response codes related to VAT recoverability.

Field	Description	Type
`recoverabilityPercentage`	The percentage of input VAT/GST that's recoverable.	`number`
`recoverableAmount`	The amount of input VAT/GST that's recoverable based on the recoverability percentage.	`number`
`nonRecoverableAmount`	The amount of input VAT/GST that's not recoverable.	`number`

Partial VAT recoverability scenarios

Scenario 1

Jane sells widgets, and the VAT tax rate in Jane's jurisdiction is 20%.

Jane's widgets cost €100, and she collects €20 as VAT (20% of €100) on a widget.

Jane buys a paper for the office printer for €20, and pays €4 as VAT (20% of €20).

The office printer paper is recoverable in Jane's jurisdiction.

The tax that Jane owes to tax authorities is €16 (€20 - €4).

The table below describes the above scenario:

Sale amount	Output tax on the sale amount	Expense on purchase	Input tax on purchase amount	VAT recoverability percentage	Input VAT recovered	Total Tax due to the tax authority
€100	€20 (or 20% of €100)	€20	€4 (or 20% of €20)	100%	€4 (or 100% of €4)	€16 (or €20 - €4)

Scenario 2

Paula sells widgets, and the VAT tax rate in Paula's jurisdiction is 20%.

Paula's widgets cost €100, and she collects €20 as VAT (20% of €100) on a widget.

Paula rents a car for business use for €50, and pays €10 as VAT (20% VAT of €50).

The VAT for car rental for business use is only half recoverable (50%) in Paula's jurisdiction.

The tax that Paula owes to the tax authorities is €15 EUR [or €20 EUR - €5 EUR (50% of €10)].

The table below describes the above scenario:

Sale amount	Output tax on the sale amount	Expense on purchase	Input tax on purchase amount	VAT recoverability percentage	Input VAT recovered	Total Tax due to the tax authority
€100	€20 (or 20% of €100)	€50	€10 (or 20% of €50)	50%	€5 (or 50% of €10)	€16 (or €20 - €5)

Scenario 3

Company A chooses to claim only 20% VAT recoverability on incurred input tax.

Company A sells widgets for €100.

Company A collects €20 as VAT (or 20% of €100)

Company A rents a car for business use for €100 and pays €20 as VAT (20% VAT of €100).

Company A agrees to apply a 25% nonrecoverable VAT rate, while paying the tax collected to the government.

Company A deducts 25% of the tax paid to the vendor.

The tax due to tax authorities is €5 EUR [or €20 - €15 (which is 75% of €20)].

The table below describes the above scenario:

Sale amount	Output tax on the sale amount	Expense on purchase	Input tax on purchase amount	VAT recoverability percentage	Input VAT recovered	Total Tax due to the tax authority
€100	€20 (or 20% of €100)	€100	€20 (or 20% of €100)	75%	€15 (or 75% of €20)	€5 (or €20 - €15)

Partial input VAT recoverability