Everyone starts off small – when does VAT liability kick in? – SWISS21

Something happened. Since 2018, VAT rates in Switzerland have been lower than before. The standard rate since then has been ‘just’ 7.7%. The tax rate changed from 8% due to the end of IV (pension scheme reform) additional financing (minus 0.4 percent) and rail infrastructure development financing (plus 0.1 percent). In addition to the standard rate, the reduced rate (unchanged in 2018) still applies for many food and agricultural products and the special rate for accommodation (minus 0.1 percent in 2018).

Besides the normal tax rates that apply, a number of services (mainly medical treatment, social services and education) are exempt from VAT. There are also products that are exported abroad or instances where services are provided abroad, or what are considered to be transport services and associated services in the logistics industry.

What is VAT and how does input tax work?

VAT is a general excise and consumption tax that is passed on to end consumers. It is a net all-phase tax with input tax deduction. VAT is charged on all products sold in Switzerland. This means that consumers pay VAT when they purchase goods (clothes, electronics, food, etc.) and services (insurance products, transport, food in restaurants, etc.). Only the federal government levies VAT. It is used to cover general federal expenditure and is an indirect tax. This tax is added to the price, which means it is passed on to customers when they pay. It doesn’t matter who the customer is; VAT always has to be paid. In return, companies can deduct input tax paid in the course of their business activities from this amount.

This includes:

  • Any domestic taxes invoiced (in all stages of production/distribution and in the domestic service industry);
  • Reverse charge declared by the company (services provided by companies established abroad); and
  • Import tax (when importing goods).

Calculating VAT and input tax

The basis for calculating VAT is the price paid for a product or service. The tax amount to be charged is determined by multiplying the price by the applicable rate of VAT.

As an example, the input tax deduction is calculated as follows: An importer buys material from abroad for CHF 1,000 and, after cutting it, supplies the finished goods to a clothing factory in Switzerland for CHF 2,000. The importer pays VAT amounting to CHF 77, and the clothing factory pays CHF 144 but can deduct the CHF 77 already paid by the importer.

The magical CHF 100,000 threshold

It doesn’t have much to do with magic, but this turnover threshold is key. Companies grow, entrepreneurs are happy and, although it’s often not at the forefront of their mind, they are liable for VAT once their turnover reaches CHF 100,000. For a young company headquartered in Switzerland, this means having to think about a few fundamental things. The threshold is CHF 150,000 for not-for-profit institutions and not-for-profit sporting and cultural associations.

Keep an eye on turnover

Depending on the level of planning (e.g. is there a detailed business plan?), it can be easy to estimate the point at which a company will become liable for VAT. The legal form doesn’t matter when it comes to VAT liability. The only key factor is whether the annual taxable turnover exceeds CHF 100,000. Companies with a low annual turnover can register for VAT on a voluntary basis. If a business plan shows when the turnover threshold will be exceeded, it’s advisable to plan VAT registration in good time. If turnover can’t be estimated precisely, you have to keep an eye on your sales and extrapolate for 12 months, ideally each quarter. The mandatory tax obligation applies as soon as the estimated turnover exceeds the threshold of CHF 100,000. You must register with the Swiss Federal Tax Administration (FTA) within 30 days, without being requested to do so. This period begins on the date that the turnover threshold is expected to be exceeded.

So, the period begins…

  • Three months after starting to trade
  • At the end of the financial year in which the turnover threshold is exceeded

After registering, the FTA includes the company in the register of taxable persons and issues a VAT number.

Accounting type: ‘collected’ isn’t the same as ‘reconciled’

‘Collected’ and ‘reconciled’ suggest something a bit old-fashioned, but it’s not complicated. ‘Collected’ just means that the customer’s payment has been effectively received by the company. Important: This accounting type has to be approved by the FTA. Under the type of accounting agreed with the FTA, the VAT is based on when the invoice is issued. Most companies subject to VAT settle quarterly based on an agreed amount, because this system corresponds to their accounts receivable and accounts payable bookkeeping. One disadvantage for a company’s liquidity position can be that VAT is still owed against the invoice even if the payment is received late. Returns and bad debt losses also have to be corrected later on.

Accounting method: effective or net tax rate method

Applying the net tax rate method makes the VAT accounting process much simpler for companies. Net tax rates are industry rates set by the FTA that have already taken input tax into account. VAT accounting using the net tax rate method is carried out per semester instead of per quarter and simplifies the administrative work for bookkeeping and tax settlement. Companies with a turnover of up to CHF 5.02 million and a tax liability of up to CHF 109,000 are able to account for taxes using the net tax rate method (as at: 2011).

A VAT-compliant invoice isn’t rocket science

If an invoice doesn’t meet the formal invoicing requirements (VAT), input tax cannot be deducted.

The invoice must include the following information:

  • Name and address of the supplier and company ID number (UID) with the VAT suffix
  • Name and address of the recipient of the services
  • Date of supply (unless same as the invoice date)
  • Type, subject and scope of delivery or service
  • The price (fee) of the delivery or service
  • VAT amount or valid VAT rate
  • Signature

A brief history of VAT

Switzerland introduced VAT in 1995, and it reached its highest level of 8% in 2011. VAT rates are directly anchored within the Federal Constitution, so any change in VAT rates requires a referendum and must be accepted by the people and the cantons. In 2011, the IV (pension scheme reform) additional financing was limited to the end of 2017. As the additional financing was rejected, the VAT rate was lowered from 1 January 2018. This also resulted in a change in the net tax rates. In the referendum on 9 February 2014, the people and the cantons agreed to increase all three VAT rates by 0.1 percent from 1 January 2018 to finance rail infrastructure developments.

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