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Why do I pay VAT (VAT) if my expenses exceed my income?

Sometimes, even though you have had more expenses than income, you find that you have to pay VAT. This may seem confusing at first. Why do I have to pay it if we have had losses?

You have to understand how VAT works. VAT (Value Added Tax) is a tax that applies to your sales to European customers if your company is subject to it (that is, if you have a VAT number). In these circumstances, it is added or not to the invoices taking into account some rules.

Specifically, some operations are exempt from VAT even for VAT-liable companies:

Expenses from non-EU providers (exclude VAT).
EU companies with valid VAT numbers (include 0% VAT).

VAT is not added to these purchase invoices VAT, which implies that you are not PAYING VAT on those invoices from your suppliers.

However, if you are collecting VAT on sales invoices to your customers (for example a sale to a German or French individual), s**the result may be negatives** (i.e: you need to pay VAT next month), because you collected more VAT than you paid, even if overall your expenses exceeded your sales.

A very common example: your company, with an Estonian VAT number, has many sales to individuals in the European Union (they always include VAT if you are VAT-liable), but all your purchases are made to EU companies with valid VAT (they add 0% VAT to the invoice) or to companies outside the European Union (they do not add VAT to the invoice).

In this scenario, you are charging VAT and not paying any VAT, so you will always have to pay the difference in that extra VAT that you have collected, the next month.

This happens even if your expenses are 300 times your income because even then, you are not paying VAT on expenses.

Updated on: 08/08/2022

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