VAT pro rata

What it means

Where a payer makes both taxable and exempt supplies without a right to deduct, input tax cannot be recovered in full. A pro rata ratio sets how much can.

The ratio is taxable revenue over total revenue. During the year last year’s figure applies, and in the final tax period it is recalculated to the actual one.

Not everything the company takes in goes into the ratio. Left out are supplies of capital goods the firm used in its business and incidental real estate or financial transactions, so that a one-off sale does not distort a ratio meant to reflect ordinary activity.

How it works in practice

It typically affects companies with exempt property rental, financial or insurance services and education. Inputs belonging to only one activity are attributed directly, without any ratio.

The annual adjustment lands in the December or fourth-quarter return. The difference can run to thousands of euros, so the revenue mix is watched through the year.

For received invoices the group is decided at the moment of posting: energy for the whole building is a shared input, a repair to a let flat belongs only to the exempt activity. We record the allocation in the books so that in a tax audit the reason for each restriction is clear.

What to watch out for

For assets, the ratio is joined by the input tax adjustment over twenty years for real estate. Changing how a building is used therefore claws tax back years later.

An error in the December settlement carries into the next year, because it sets the ratio for the whole of the following year. A one-off income wrongly included distorts twelve months of deductions, and fixing it means several supplementary returns and a penalty.