Understand the VAT deduction in France in 2 minutes

Value added tax (VAT) plays a fundamental role in corporate taxation in France. This in-depth guide explores all aspects of VAT deduction, providing businesses with the knowledge they need to effectively manage this tax.

Intended for business managers, accountants and tax specialists, this document details the methods for calculating deductions, sectorization options and the application of the single tax coefficient, thus facilitating the understanding and optimization of VAT management.

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Definition and importance of the VAT deduction

‍The VAT deduction allows businesses to recover VAT paid on purchases related to their taxable activities. This helps to tax only added value, avoiding excessive taxation that could hamper economic activity.

The objective is therefore to allow those who charge VAT on their transactions to deduct VAT on their sales correlatively. This mechanism ensures the principle of VAT neutrality: that is to say that only the consumer bears VAT.

The principle of assignment

‍The fundamental principle of VAT deduction is the allocation of expenses to taxable activities. For example, a manufacturer who buys materials to produce goods sold with VAT can recover VAT on these materials as soon as he sells products that are subject to VAT themselves.

This case does not seem to create any difficulty. However, in some cases, VAT is only partially deductible or not deductible at all.

How does that work? Through the deduction coefficient!

Calculation of deduction coefficients

Deduction coefficients are crucial for calculating recoverable VAT. They include:

• Subjection coefficient : This coefficient reflects the proportion of use of the good or service to carry out transactions falling within the scope of VAT. It is this coefficient that the administration uses, for example, to prevent the deduction of VAT in the event of personal use of an expenditure.
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• Tax coefficient : This coefficient reflects the proportion of use of the good or service to carry out transactions eligible for deduction.
  It is 1 for expenses directly allocated to taxable activities and 0 for non-taxable activities such as exempt continuing vocational training or certain financial and banking activities.
  The calculation is based on the turnover of the current year.

• Admission coefficient : This coefficient reflects a limitation imposed by the regulations in force.
  It is 1 when the good or service is deductible and 0 when a legal or regulatory provision prohibits the deduction of the VAT relating to the good or service.
  This is for example the case for transport expenses or even the accommodation of managers in case of travel.

The Importance of Rounding in Calculating Deductible VAT

Each CThe coefficient must be rounded to the second decimal place by excess before being multiplied to obtain the overall deduction coefficient. Then, this product is also rounded to the second decimal place by excess. This precision ensures that the deduction is calculated fairly and in accordance with tax rules.

Administrative simplification through the single tax coefficient

According to article 206 V of the French Tax Code, businesses can opt for a general tax coefficient, simplifying the management of VAT by treating all expenses as general expenses. This method calculates the coefficient based on the total turnover of the previous year, allowing for more global management but which can sometimes be financially less favorable.

Sectorization of activities

When a company carries out activities with different VAT rules, it may be necessary to create separate sectors for each type of activity. This allows for a more accurate allocation of deductible VAT based on the turnover of each sector. Sectorization helps to isolate economically and fiscally distinct activities, facilitating a fairer and more compliant VAT deduction.

The case law of the Council of State requires that in order to establish distinct sectors, activities must use different means and be distinct economically and fiscally. Keeping separate accounts is not essential but accounting must clearly distinguish data specific to each sector.

Don't forget the payroll tax

VAT management is intrinsically linked to other fiscal aspects, such as payroll tax. In France, payroll tax may depend on turnover not subject to VAT, such as income from dividends. Businesses with a turnover that is significantly exempt from VAT could be subject to payroll tax. This tax can increase the weight of company employees by up to 13.6% of the wages paid.

Conclusion

‍A detailed understanding of VAT deduction is crucial for tax compliance and the optimization of business cash flows in France. By mastering these principles, businesses can not only ensure regulatory compliance but also improve their overall financial efficiency. This short guide offers a solid foundation for any company looking to deepen its knowledge of corporate taxation in France, while preparing the ground for broader tax management including other taxes such as payroll taxes.

In the event of an enquiry or an activity partially subject to VAT, you should contact your tax advisor for assistance.