Understanding VAT: collected, deductible, and what you actually owe

Méline sells handmade lamps online. This month: €12,000 collected including tax — that is €10,000 net plus €2,000 of VAT charged to her customers. She also paid €3,600 for supplies, including €600 of VAT. How much does she owe the State? €2,000? No: €1,400. This module explains why — and why VAT must never be counted as revenue.

The mechanism: you are a collector, not a payer

VAT is a consumption tax paid by the final customer. The business charges it, cashes it in, then hands it over to the State: it acts as a collector. That money never belongs to the business.

In the other direction, the VAT the business pays on its own professional purchases comes back: it is deducted from what gets handed over. That is the right to deduct — the heart of the system.

Accounting consequence: Méline's revenue is €10,000, not €12,000. Reasoning in gross amounts inflates sales artificially and distorts the margin — the classic beginner's mistake.

The four French rates

The rate follows the product or service sold, never the seller's status. One invoice can mix several rates — each is then declared separately (module 2).

Conversions go through the net amount: gross = net × 1.20 at the standard rate, and net = gross ÷ 1.20. The VAT calculator linked to this course does the round trip at all four rates, VAT amount detailed.

Every invoice must show the three figures separately: net amount, VAT rate and amount, gross total. A customer who is a business deducts that VAT on their own return — your invoice is their evidence, which is why it has to be right.

Three regimes, three rhythms

• Standard real regime: a CA3 return every month (or quarterly if annual VAT stays under €4,000) — this course's regime.
• Simplified real regime: half-yearly instalments and an annual CA12 return (form 3517-S).
• Franchise: no VAT charged or deducted while revenue stays under the thresholds — invoices carry the wording "TVA non applicable, art. 293 B du CGI".

The franchise waives everything that follows — but removes the right to deduct. A business that invests heavily may prefer opting into the real regime: price the trade-off before choosing.

Regimes are not forever: crossing the thresholds moves you up, and options let you move deliberately. Re-check your situation once a year, at closing time — a regime chosen at creation rarely stays optimal as the business grows.

Méline chose the standard regime from day one: her materials and machines carry VAT she recovers monthly, and her professional customers deduct the VAT she charges. The rest of this course walks through her routine as a VAT payer.

One more consequence of neutrality: for a business selling to other businesses, charging VAT costs the customer nothing — they deduct it. The franchise's "no VAT" advantage really only matters when selling to consumers, who cannot.

VAT and your cash position

Between collection and payment, the VAT sits on your bank account and creates an illusion of cash. Businesses that spend it discover the deadline with an empty account — setting it aside is hygiene, not an option.

For Méline, who sells goods, the VAT on a lamp delivered in January belongs on January's return — even if the customer pays in February. A service provider declares when the cash comes in.

That distinction explains many gaps between the bank statement and the return: the CA3 follows chargeability, not account movements. Your bookkeeping must date every operation by its own rule.

A simple discipline settles the cash question: each week, move the VAT collected to a separate account and never touch it. Méline's €1,400 payment on the 18th then becomes a non-event — the money was never considered hers.