VAT

Entrepreneurs have to pay the value added tax (VAT) invoiced to its customers. This is how it’s done.

Value Added Tax (VAT) is a general tax on consumption paid by the end consumer. Consumers pay VAT via the purchase of goods (clothes, cars, food, etc.) and services (hairdresser, travel, eating out, etc.). It is collected exclusively by the Confederation and is used to cover the State’s general expenditures. A company must include value added tax in the price of the services supplied and the products sold in the country, and pay it to the Confederation. In return, it can deduct from this amount the input tax paid in connection with its business.

This refers in particular to:

the domestic tax issued in the invoice (at all stages of production/distribution and on service-provider companies in Switzerland);
the purchase tax declared by the company (services supplied by businesses with their registered office abroad);
import tax (on importation of items).

The following VAT rates are applied (status as of 1.1.2024):

in normal cases – 8.1% of turnover;
for the hotel and serviced accommodation sector (special rate for accommodation services, including breakfast) – 3.8%;
food and non-alcoholic drinks, books, newspapers and magazines, medicines and access to sports and cultural events benefit from a reduced rate of 2.6% (ordinary consumer goods).

Deduction of input tax

For goods and services which go directly to the consumer, value added tax must be mentioned but must above all be included in the final price. The same does not apply for business relations: companies usually work with net prices, to which value added tax is added.

In this context, the principle of deducting input tax plays a major role: as, during their processing from raw material into finished product, goods pass through several stages where value added is taxed each time, at each stage; the creator of value can deduct the amount of value added tax already paid at the previous stage.

In practice, the following happens: once a quarter (or every month, where applicable), the Federal Tax Administration (FTA) receives an “auto-taxation” document produced by the taxpayer, which shows the total value added tax owed. All amounts of input tax paid – whether by the supplier to the FTA or, for imports, to the Federal Customs Administration (FCA) – can be deducted from this gross value added tax total. The gross margin is thus subject to the tax levied on the transactions completed on Swiss territory (Swiss VAT).

The input tax deduction is distributed as follows:

principle (where can input tax be deducted?);
exclusion of right to deduct input tax (e.g. in the case of turnover excluded from the scope of the tax, if the taxpayer has not opted for their taxation);
double allocation (goods and services are combined, that is, they are used for entrepreneurial and non-entrepreneurial activities – input tax must be adjusted);
services to self or subsequent relief of input tax (input tax must be adjusted);
deduction of input tax (in particular in the case of receipt of subsidies).

The UID as VAT number

The old six-digit VAT number was replaced on 01.01.2014. Now only the Unique Enterprise Identification Number (UID) can be validly used as a VAT number.

In accordance with Article 26 (2)(a) of the Law on VAT (LTVA), companies subject to VAT are required to mention on their invoices the number under which they are registered in the register of parties liable to VAT. With the UID, the addition of “VAT” must appear after the number.

The format of the VAT number to be mentioned on invoices therefore appears as follows:

CHE-123.456.789 VAT

Defining companies’ specific needs

Business owners and their family sometimes use the products and services (cheaper for them) of their own company (only possible for private companies). They thus become the “end consumers” of their own clothing, computers, jewelry, health products, food, etc. and cannot therefore deduct input tax for this part of their product offer.

Here, allocation is not always easy. The same applies then to benefits in kind for the owner of a grocery store or personal use of a company car. For this reason, value added tax (on the federal direct tax form) provides for fixed deductions for business owners, their family and their employees.

In some cases, such benefits in kind are exempt from VAT and deducted from input tax as personal consumption (input tax adjustment) or service (declaration as turnover and to be taxed at a reduced and/or normal rate).

Anyone benefiting from public assistance in the form of subsidies, incentives, etc., must also proceed with a reduction of the input tax deduction proportionately, given that, otherwise, unjustified double tax relief would be seen.

Criteria relating to VAT liability

In principle, all companies are subject to VAT, whatever their legal structure. If however, turnover for services liable to VAT (delivery and/or services) is less than CHF 100,000 per year (or CHF 150,000 for not-for-profit sports and cultural associations and charitable institutions), the company is exempt from VAT.

Anyone not paying value added tax cannot claim input tax either. Special limits on turnover for liability to VAT are also granted to groups governed by public law and in the case of tax on acquisitions.

It is also possible for companies exempt from liability to VAT to opt for voluntary liability for this tax. This option makes sense, for example, when competitiveness itself suffers compared to the competition subject to tax, given that a company which is not liable may not deduct input tax, and must therefore be included in the sale price.

Optional liability is particularly advantageous for companies which:

post annual turnover of less than CHF 100,000 and operate as subcontractor or service-provider for companies subject to VAT;
supply most of its services abroad;
do not, for the time being, make any turnover, but are liable to significant input tax deductions.

Example of a start-up:

A newly founded start-up operates in the research sector. During the activity start-up phase and the first few years of operation, no taxable turnover is made, but major investments in building premises and buying operating resources are made. This company has the option of being freely subject to VAT during the start-up phase, waiving exemption from liability, and can then deduct input tax in full from its investments and other expenses.

Declaration depending on consideration agreed or received (declaration methods)

The taxable company can deduct VAT from the Federal Tax Administration based on:

incoming payments (consideration received);

or

invoices drawn up for customers (consideration agreed).

Most taxable companies produce their declaration quarterly, according to considerations agreed, because this system is based on their debtor-creditor accounting. The disadvantage being that value added tax is due based on invoices, even if payment is late (e.g. more than 120 days after issue of invoice). Moreover, losses on debtors and returns must be adjusted after the event.

The declaration according to consideration received is suitable in particular for all small companies which do not have accounts for their debtors or who only produce open-entry accounts. Note: this method for declaring consideration requires authorization from the FTA/VAT.

Net tax debt rates and fixed rates method: simplified calculation

To simplify the tax declaration, taxable companies with turnover of no more than CHF 5.02 million and a tax debt (or tax owed) of a maximum of CHF 108,000 per year, may use the net tax debt rate method (2024 status).

Net tax debt rates (NTDRs) are rates by sector which considerably simplify the method of declaration with the FTA, since input tax amounts no longer need to be determined and administrative work in connection with accounting and VAT declaration is made easier.

Instead of sending declarations every three months, the net tax rate method makes it possible to produce accounts only twice a year. With customers, the taxpayer continues however to invoice the usual rates of value added tax (and not the NTDRs).

NTDRs are used as multipliers, that is, the total of all taxable turnovers, including VAT, is declared and multiplied by the NTDR to get the total VAT owed.

Fixed rates vary markedly between 0.1% for farriers for example (the value added on raw materials they purchase is clearly very low) and 6.8% for temporary employment agencies or translation agencies. There are currently 10 rates of this type.

Nearly one third of all Swiss SMEs use the simplified NTDR method. Businesses having opted for the NTDR method must use this method for at least one year. They can then change to the effective declaration method, this then having to be applied for at least three years before changing back to the NTDR method.

In addition to the NTDR method, there is also the fixed rate (FR) method, for VAT declarations. This method is intended for public groups and affiliated sectors such as private schools and hospitals, public transport companies, etc., as well as associations and foundations. Unlike the NTDR method, there is no limit on turnover or tax debt, without taking into account the fact that income must be declared every quarter. The values of NTDR and FR tax are equal.