Is it possible to support deductible VAT before starting the activity?

If you are going to start a business activity, it is quite normal that you will have expenses and investments long before you receive income and profits from it. Therefore, you may be wondering: can I deduct the input VAT before starting the activity? Well, in this article we will answer all your questions about deductible VAT, come and join us!

First, what is deductible VAT?

Every businessman or professional, at the time of acquiring services or goods for the development of his activity, must pay the corresponding VAT. This type of VAT is known as input VAT. 

However, for this input VAT to become deductible, the goods and services acquired must be directly related to the business activity.

For a better understanding, we will give you an example. In the case of a restaurant, the deductible VAT would be that paid by the businessman for the rent of the premises, the purchase of furniture or dishes, cutlery, glasses or other equipment that will allow him to develop his activity.

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What does the VAT Law state about deductible VAT?

Fortunately, Article 111 of the VAT Law provides for the deductibility of VAT paid or paid prior to the beginning of the fiscal year in respect of the supply of goods or services corresponding to business or professional activities.

It states in its first paragraph: “Those who have not previously been carrying out business or professional activities and acquire the status of business or professional by making acquisitions or imports of goods or services with the intention, confirmed by objective elements, to use them for the performance of activities of such nature, may deduct the taxes that, on the occasion of such transactions, they bear or pay before the time when they begin the habitual performance of the supplies of goods or services corresponding to such activities, in accordance with the provisions of this article and articles 112 and 113 below“.

Input VAT deductible before starting the activity

Now that you understand what deductible input VAT is, you need to know when you can deduct the VAT paid before the start of the activity, better known as the “preparatory phase”.

Article 93.1 of the VAT Law, in its second paragraph, states that the VAT paid or paid before the start of the activity may be deducted provided that the provisions of Articles 111, 112 and 113 of the VAT Law are complied with.

As we told you, before starting the activity, it is usual to incur expenses and investments that imply the support of VAT. Well, this VAT incurred during the preparatory phase may be deductible as long as you can prove that at the time of incurring these expenses you intended to start an activity and that you are therefore entitled to deduct VAT.

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Requirements to prove intentionality and thus be able to benefit from deductible VAT before starting the activity

If you are an entrepreneur or professional and you want to deduct the input VAT incurred before starting the activity, you will need to prove that there was the intention to start the activity at the time of incurring these expenses. This is what will entitle you to the deduction.

In that sense, in order to prove the existence of such intentionality, you may offer several pieces of evidence:

What happens if the activity does not start?

It is possible that you make payments related to your business during November and December and do not start your business until January of the following year. In that case, you may be able to claim a VAT refund.

For example, if you start the preparatory phase of your activity at the end of 2022, even if you do not make any sales until March 2023, the last VAT return for 2022, which will be filed in 2023, you will be able to claim the input VAT refund throughout 2022.

But, what happens if, even after the refund, you do not start the activity? Can the Tax Authorities demand the refund of the refunded amounts? Well, in this case, the VAT should not be refunded and the following should be taken into account:

• In order to qualify such VAT as deductible, the circumstances at the time it was borne must be taken into account.
• If it can be demonstrated that the intention was to start an activity and it is not possible due to objective or uneconomic facts. That is to say, by simple will of the entrepreneur. Then, that VAT will be deductible even though the activity can never be started.

What is decisive, in any case, is the intention to affect the assets or expenses to the activity. The latter is applicable in the case of expenses incurred or other investments that have been lost. 

However, in the case of assets that remain in your estate after the cessation of activity, the situation changes. For, unless these assets are destined to a new activity with right to deduction, you will have to satisfy the VAT that is applied to them as if you were acquiring them. This would be considered as a self-consumption of goods.

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Remember, in order to benefit from the deductible input VAT on preparatory expenses before you start selling your products and offering your services, you must prove that your intention to incur these expenses was to start an activity.

Do you need a complete advice before starting your business? Contact us through our email tasconsultoria@tas-sl.es and our professionals will provide you with the most complete help in Spanish taxation and legality, always committed to the success of your company.