The right to deduct, and the conditions that open it

An architecture practice bears €12,000 of VAT on its purchases for the year. It deducts all of it, and its accountant warns of a likely reassessment. The invoices are in order, the spending is professional, and yet the deduction is excessive. Before reading on: which condition is missing, and why does it not show on the invoice?

A tax that deducts against itself

Article 271 of the French Tax Code states the central mechanism: « Value added tax borne by the elements of the price of a taxable transaction is deductible from the value added tax applicable to that transaction ».

That is what makes value added tax a charge on final consumption rather than on activity. The business collects tax on its sales, deducts what it bore on its purchases, and remits only the difference between the two.

The right arises with chargeability

The same article fixes the moment: « The right to deduct arises when the deductible tax becomes chargeable on the taxable person ». It is therefore neither the invoice date nor the payment date, but the date on which the supplier becomes liable for the tax.

That rule explains a common lag. On a supply of services, chargeability arises in principle when the supplier is paid: the customer cannot deduct before paying, even though the invoice is already in hand.

The invoice, a condition of form and of substance

The business must hold an invoice drawn up in accordance with article 289, and the tax must lawfully have been capable of appearing on it. The second half of that condition is the forgotten one: tax wrongly invoiced does not become deductible because it appears on a document.

• The goods and services must be used for the purposes of taxable transactions.
• Those transactions must themselves open a right to deduct.
• The invoice must comply with the requirements of article 289.
• The tax must lawfully have been capable of appearing on that invoice.

All four conditions stack, and the third is the only one that can be checked at a glance on the document. The other three turn on the actual use of the goods or service acquired, which the invoice never states and which the business alone knows.

That imbalance is what makes the subject treacherous. A file may be impeccable on the documentary side and wrong on the substance, and that is exactly the position of the architecture practice in our example.

The deduction operates by set-off

The deduction is not applied for, it is carried out. Deductible tax is set off against the tax the business owes for the month in which the right arose: the return itself carries the operation, not a separate claim.

Where deductible tax exceeds tax collected, the excess is not lost. It may be refunded, under the conditions and within the limits a decree lays down, or carried to later returns depending on the position of the business.

That mechanism explains the tax credit of businesses in an investment phase. A year in which equipment purchases exceed sales produces a structural excess, which is not an anomaly at all but a faithful reflection of the timing gap between the two flows of the business.

A proportion, not all or nothing

This is the point that changes everything. The right to deduct is not binary: it is exercised up to a proportion, which the regulations call the deduction coefficient. A wholly taxed business deducts everything; a mixed business deducts a fraction.

The first coefficient entering that computation measures use. The subjection coefficient equals, for each good or service, the proportion in which that good or service is used for taxable transactions — independently of everything that follows.