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VAT in a Swiss company

Practical case: how VAT works

DALL·E 2024-07-08 18.35.57 - A business setting in Switzerland showcasing different VAT methods. Depict a flowchart with an office background illustrating the movement of VAT betw.png

Basic economic exchange and circulation of VAT

The diagram below represents a company B which operates in a basic economic environment with suppliers, consumers, customs and tax administration.

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Company A: In Switzerland, VAT on imports is collected by the Federal Customs Administration. When importing, company A pays VAT to customs. There are several possibilities. Generally, the carrier invoices it for VAT on the goods delivered and pays it to customs, which pays it to the tax administration (AFC).

Company B: It buys products from companies A and C and sells its manufactured products to the end consumer. It pays VAT to companies A and B and collects the tax from the end consumer.

Company C: It resells its products to company B on Swiss territory. VAT is collected on its sales.
End consumer: He pays the tax without being able to recover it.
Customs: notes the value of the transaction and applies VAT to the transaction.

Preamble to the practical case

Company B manufactures cosmetic products. It is subject to VAT. Its number is in the format CHE AAA-BBB-CCC.

It needs suppliers A and C to manufacture its products. Supplier A imports products from abroad and supplier C supplies raw materials. Both are subject to VAT.

The case applies to a tax year at the time of VAT calculation in the 1st quarter of the year.

VAT Method 1

The Effective Method

The effective method for deducting VAT is the most common. The system is based on recording VAT on all transactions of your company subject to value added tax.

Simply put, you buy goods or a service from another company in Switzerland and pay them VAT. Then, you record the prior VAT in your accounting.

Then, you sell your products to another company or to the end consumer and you invoice the VAT. Then, you record the VAT due in your accounting.

Here is a table that allows you to represent the accounting. Follow the VAT line at 8.1%.

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In this example, company B needs cinnamon bark for its new winter hand cream.

It buys from company A, which imports the bark and invoices it with CHF 75.- in VAT. This amount is "already paid". As a result, it is recorded as "preliminary VAT".

Conversely, the sale of the creams is invoiced with CHF 1000.- in VAT. This amount is to be paid to the AFC. As a result, it is recorded as "VAT due".

You pay the AFC the result of the difference: Preliminary VAT - VAT due = VAT to be paid. These amounts must be entered when calculating the VAT.

You will find an example of a form here.

VAT Method 2

Net tax debt rate

You are eligible for this system only if your turnover is less than CHF 5,005,000 or if the amount of VAT to be paid is less than CHF 103,000.

In this method, company B (like Beauté) buys and sells normally to its suppliers and customers. From an invoicing point of view, nothing changes. You issue your invoices as usual according to the rules in force in article 26 of the LTVA. Find more information in this article: VAT for Swiss self-employed people: understanding the rates and the application

Everything happens in the accounting of VAT backstage with the AFC.

What is the net tax debt rate? It is an average rate determined by the AFC according to your sector of activity.

You will find the link to the list of values ​​of the net tax debt rates by branch and activity here.

For the company Beauté, we find this rate in its branch.

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The rate is applied only to your taxable turnover of VAT only.

Here is a table that allows you to represent the accounting. Follow the amount excluding VAT of turnover.

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Advantages over these accounting methods

Between the effective method system (method 1) and the net tax debt method (method 2), we could easily conclude that it is advantageous to choose the net tax debt method. Indeed, in our calculations, it seems that we pay more VAT with the effective method (CHF 975.-) than with the 2nd method (CHF 440.-). Indeed, we note a difference of approximately CHF 530.

Concretely, what are the advantages of the net tax debt?

  • Simplified management of VAT based on turnover.
  • Normal invoicing to its customers
  • VAT statement based on receipts or invoices issued
  • Payment twice a year

The pleasure of investing

Now, let's consider that the company Beauté wishes to invest in a new packaging machine for its products at a price of CHF 30,000 including VAT.

This purchase is made up as follows:

  • Amount excluding VAT: CHF 27,752.-
  • VAT 8.1%: CHF 2,248.-
  • Amount including VAT: CHF 30,000.-

This investment is a charge for the company. With the effective method, you recover the VAT on the charges. This is the main advantage of this method. Depending on the format of your company, it is good to think in advance about the type of investment you are making. With the net tax debt method, you do not recover the VAT on the charges. It is a total charge.

You can change systems from one year to the next under certain conditions to optimize your management from a tax perspective.

Good luck!