Everything you need to know about VAT for your business

As an entrepreneur, you’re legally required to declare and pay the Value Added Tax (VAT).

VAT rates, Collected VAT, Deductible VAT, tax regimes…It’s true this tax obligation may seem complicated at first if you’re not familiar with accounting jargon.

To help you see things more clearly, we’ve put together this in-depth article on the subject.

What is VAT? How does it work? How do you calculate and deduct it? What tax regime should you choose? Is it possible to be exempt from collecting VAT?

This article answers all of your questions.

Let’s start with the basics. What is Value Added Tax (VAT)?

It’s a tax that applies to all consumer purchases - which essentially refers to the vast majority of goods and services consumed in France.

As a consumer, you pay VAT every time you make a purchase. If you look closely at your receipt, you’ll notice a pre-tax (excluding VAT) total and a total with tax (including VAT).

Consider it an “indirect” consumption tax. “Indirect” meaning that instead of it being directly collected by the State, companies (including micro-enterprises, with some exceptions) have to withhold VAT and eventually pass it on to the State. As an entrepreneur, you play an important role in this process.

It’s important to remember that VAT doesn’t count as a cost for a company. It’s not responsible for the costs - that’s for the final consumer to handle. What a business does do, however, is set aside this money for the State to collect.

To better understand how VAT works, it’s helpful to understand two key concepts: Collected VAT and Deductible VAT.

• Collected VAT is the amount of VAT that the company will collect on behalf of the State for products or services it sells (article in French).
• Deductible VAT (article in French) is the VAT that a company pays when making necessary purchases for its day-to-day operations.

To calculate the VAT you’d need to pay the State, you need to make the following equation:

State-owed VAT = Collected VAT - Deductible VAT.

Let’s look at a concrete example.

Victor is a freelance photographer. He shoots corporate events and weddings. He needs to fold VAT into his price package in order to set it aside for the State. This is Collected VAT.

Let’s say in October 2023 he books a gig worth €2,000 to which he needs to add VAT, which brings price package to a total of €2,400 including tax.

Imagine that this month Victor also bought a new camera for €1,000. He also signed up for retouching software that he paid €100 for. Victor can get back the VAT he paid (article in French) on these purchases since they’re essential to his work. This is what we call Deductible VAT.

So for October:

• Collected VAT is €400
• Deductible VAT is €220 (€200 for the camera and €20 for the software subscription)

Victor therefore needs to hand over €180 in VAT to the State (400-220).

Now that you understand the main differences between Collected and Deductible VAT, let’s examine how they work. In other words, how does a company bill for VAT?

A. Getting your VAT number

Before you can bill for VAT, you must first get your VAT number (TVA intracommunautaire).

Your VAT number is a unique identification number that’s assigned to each and every company with a legal address in the European Union required to withhold VAT. In France, this number begins with the country code FR, followed by 11 digits.

Where to find your VAT number

Normally you get your VAT number at the same time you register your company. If you didn’t receive it then, you need to request it from your assigned Corporate Tax Service center (Service des Impôts des Entreprises or SIE) and it’ll be sent to you by post a few weeks thereafter.

B. Choose the right VAT rate for the type of products or services you offer

Once you have your VAT number on hand, you can start to bill for VAT in your invoices.

But before you do that, it’s important to make sure you’re charging the right VAT rate for the kind of business you’re doing.

There are several different VAT rates:

• the 20% normal rate;
• the 10% intermediate rate;
• the 5.5% reduced rate;
• the 2.1% special rate.

These rates vary according to the type of product or service sold. Here are a few examples:

Certain products or services are VAT-exempt, in which case you don’t need to bill VAT for them.

C. Set up your invoices correctly

In order to bill for VAT, you need to make sure your invoice template is in good shape.

Both your quotes and your invoices have to include the following legal mentions regarding VAT:

• the price excluding tax for the product or service;
• the price including tax;
• the effective VAT rate;
• the amount this VAT rate comes to;
• your VAT number.

As an entrepreneur, you know that you need to collect VAT on behalf of the State. But you’re also entitled to deduct it from your business expenses. As you recall, we call this Deductible VAT.

In order for your business purchase to qualify for a VAT deduction, however, it needs to meet three conditions:

• First condition: the expense must be essential for your business. It could be office supplies, for example, or raw materials, meal receipts, etc. On the other hand, VAT cannot be deducted from an entrepreneur’s personal expenses.

• Second condition: the expense must be justified with a receipt. This receipt must mention its price excluding tax, with tax, as well as the effective VAT rate, e.g. an invoice or a regular receipt.

Be sure to keep track of your receipts: the tax Administration could ask for them in the event of an audit.

• Third condition: your business must be subject to paying VAT. If you are exempt, you cannot deduct it from your business expenses. We’ll go into more detail about the conditions for exemption later on in this article.

The amount of VAT you deduct will have to be outlined in your VAT declaration.

Step 1: Create a professional account on impots.gouv.fr

In order to make your first VAT declaration, you need to register yourself on the tax Administration’s site for professionals. To do that, go to impots.gouv.fr and click on “Votre espace professionnel”, then “Créer mon espace professionnel”(site in French) to fill out the signup form. Once you’re done, you’ll be sent an activation code by mail to finalize your registration.

Step 2: fill out the VAT signup form and submit the direct debit mandate

Once your professional account is validated, you need to fill out the VAT signup form. It’s fairly easy to do.

• Connect to your professional space;
• Click on “J’adhère”(Sign up) in the ”Mes services ” section;
• Fill out the necessary information regarding your company (most notably your SIREN number);
• Select “Déclarer la TVA” and “Payer la TVA”;
• Confirm and sign the form.

Then you need to download and sign the direct debit mandate. Click on “Éditer le mandat inter-entreprises”(Edit the inter-company mandate) and download it. Send the signed mandate to your bank as soon as possible to set yourself up for future debits.

Step 3: fill out the VAT declaration form

Now it’s time to declare and pay your VAT from your professional account on the tax Administration’s website.

All you need to do is go to “Déclarer TVA” *in the ”Mes services*” section. Then, select the right declaration period. You’ll then be brought to an online form you’ll need to fill out, where you’ll be asked to include:

• the pre-tax amount of transactions made;
• your business’ VAT rate;
• the amount of Deductible VAT.

The tax Administration will then use this information to calculate the VAT due (link in French). All that’s left to do it click “ Payer la TVA” and select the debit mandate that corresponds to your professional account and proceed with payment.

Thankfully, this process handles all of the number crunching so you don’t have to break out your calculator. That said, it’s still vital to keep your paperwork in order and take the time to gather and file your receipts and invoices as they come along. It’ll make it that much easier (and faster) to fill out your declaration when it’s time to do so.

Are all entrepreneurs subject to VAT? In theory, yes. But there remain some exceptions.

Some companies can benefit from a VAT exemption. They don’t need to collect it on behalf of the State, but in turn they can’t deduct it from their business expenses.

There are several ways a business can be considered exempt from VAT payment:

→ your annual revenue is under the following thresholds (for 2023):

• €91,900 for commercial activity and accommodation;
• €36,800 for services rendered and liberal professions.

→ your business operates in a VAT-exempt field, such as:

• medical or paramedical activity;
• insurance;
• education or professional training activity;
• the rental of furnished or unfurnished living spaces.

As an entrepreneur subject to VAT, you must opt into a tax regime. Here’s an overview of the available options.

You can opt into the real simplified VAT regime if your annual pre-tax revenue is beneath the following thresholds:

• €876,000 for resale, dine-in food sales, and accommodation;
• €264,000 for services rendered and non-commercial activity.

With the real simplified regime, you need to make an annual VAT declaration, where you’ll be asked to make two biannual payments based on the previous year’s VAT declaration.

• The first payment is taken in July and corresponds to 55% of the VAT due from the previous year.
• The second payment is taken in December and corresponds to 44% of the VAT due the previous year.

This all gets balanced out come declaration time, where any differential in the amount debited vs. the amount owed will be taken or paid out to settle accounts.

The real simplified regime is meant to make the administrative work lighter for you, since you only need to declare VAT once a year. However there’s always the chance you might overpay what you actually owe the State. This could prove bothersome if business slows down - you’d have to wait until the end of the year to get your refund.

You’re automatically assigned to the normal VAT regime if your pre-tax annual revenue surpasses the following thresholds:

• €876,000 for resale, dine-in food sales, and accommodation;
• €264,000 for services rendered and non-commercial activity.

You can even opt into the normal regime if your revenue doesn’t hit these thresholds.

In this regime, you need to declare and pay your VAT every month (or every quarter if the total amount of collected VAT comes to less than €4,000 per year.

This helps avoid big chunks of funds leaving your account (as with biannual payments). You pay the VAT that your company actually collected the month (or quarter) prior.

You should now have everything you need to effectively manage your company’s VAT. Need and extra boost? Open a business account with Qonto and get access to thoughtful tools to help simplify your bookkeeping (digital receipts, automatic VAT detection, etc.).