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A Simple Guide to Small Business VAT in Portugal

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Published at 23 October 2023

Understanding the Value Added Tax (VAT) system in Portugal is vital for entrepreneurs looking to start a new business in this beautiful European country.

But what is VAT? How does it work for small businesses? Let's start at the beginning.

VAT, known as "Imposto sobre o Valor Acrescentado" (IVA) in Portuguese, is a consumption tax added to the price of the goods or services that you sell. Businesses collect it from their [customers](undefined and pay it to the government, however at the same time, you can reduce your liability by 'claiming back' the VAT that you've spent on purchases, essentially resulting in either a bill, or a rebate, of the difference between the two.

This guide will demystify VAT for small business owners, explain how to pay it, and provide a real-world case study illustrating how a small business can reduce its VAT liability.

Understanding VAT in Portugal

VAT Registration

Firstly, not everyone needs to register for, or pay, VAT.

Only small businesses and freelancers with an annual turnover exceeding a certain threshold (usually €12,000) are required to register for VAT, however voluntary registration is also possible, even if your turnover is below the threshold, which can be beneficial for reclaiming VAT on business expenses.

VAT Rates

Portugal has different VAT rates, including the standard rate, reduced rate, and zero rate. As of 2023, the standard VAT rate in Portugal was 23%. The reduced rate applied to certain goods and services, like restaurant meals (13%), and the zero rate covered specific transactions, such as exports and medical services.

How and When to Pay VAT

Reporting Period

VAT returns in Portugal are typically filed on a monthly or quarterly basis, depending on your business's turnover. Smaller businesses often report quarterly.

Filing and Payment

You (or more usually, your accountant) will need to submit VAT returns electronically through the Portuguese Tax and Customs Authority's website. VAT owed to the tax authority should be paid by the deadline specified in your return, usually within 10 days after the end of the reporting period.

Invoicing

Proper invoicing is crucial in VAT compliance. Invoices must contain specific information, including your business's VAT number, NIF, the customer's details, and a breakdown of the VAT applied.
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Calculating VAT

Calculating VAT involves determining the VAT on your sales and subtracting the VAT on your purchases. The difference is what you owe or can reclaim.

For example:

  • Your business sells products worth €10,000 with a 23% VAT rate. You collect €2,300 in VAT from your customers.
  • During the same period, you purchase goods and services for €6,000 with €1,380 in VAT.
  • Your VAT liability is €2,300 (collected) - €1,380 (paid) = €920.

Reducing Your VAT Liability: A Case Study

Let's look at a real-world case study of a small business owner in Portugal effectively reducing their VAT liability:

Case Study: Maria's Café

Maria owns a small café in Lisbon, Portugal. She decided to explore ways to reduce her VAT liability and boost her profit. Here's what she did:

1. Opting for Reduced VAT Rate: Maria discovered that her café qualified for the reduced VAT rate of 13% on restaurant meals. This reduced her VAT liability on food and beverage sales.

2. Streamlining VAT Recovery: Maria diligently kept track of her business expenses, including coffee beans, milk, and furniture. By reclaiming VAT on these purchases, she lowered her overall VAT liability.

3. Timing of Payments: Maria made sure to time her payments and collections strategically to optimize cash flow. This helped her manage her VAT obligations more efficiently.

4. Engaging a Tax Advisor: To ensure she was fully compliant and taking advantage of all VAT reduction opportunities, Maria sought the advice of a local tax advisor. This expert guidance proved invaluable.

By implementing these strategies, Maria successfully reduced her café's VAT liability while maintaining her commitment to providing excellent service to her customers.

Conclusion

In addition to corporation tax, understanding VAT is crucial for small businesses in Portugal and, while complex, doesn't always need to be complicated.
By comprehending the basics of VAT rates, registration, and reporting, you can navigate the system effectively. Additionally, learning from real-world case studies can inspire you to explore strategies for reducing your VAT liability and optimizing your business's financial health.

Always remember that VAT regulations can change, so staying updated and seeking professional advice when needed is essential for long-term success.

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