Input tax in Switzerland: What can be claimed?

The ability to claim input tax deduction is a key feature of the VAT system. It allows businesses to recover the VAT they have paid on purchases and pass on their VAT liability to the end consumer. In this article, we explore the concept of input tax deduction in Switzerland. We explain which businesses are eligible to claim back the input tax they have incurred, and the specific requirements they must fulfil to be able to do so.

How does VAT work?

Value Added Tax (VAT) is a consumption tax that is applied to the value added to goods and services at each stage of their production and distribution. It is collected at each step of the supply chain but is ultimately borne by the final consumer. This is because VAT registered companies are able to reclaim the VAT which they themselves pay on the goods and services they purchase in their production process, in the form of input tax deductions. In turn they charge VAT on the goods they sell and are required to hand over the amount collected to the tax authorities.

In other words, businesses simply act as intermediaries which collect VAT on behalf of the government. They charge VAT on their sales and deduct the VAT paid on their purchases, thereby paying only the net amount to the tax authorities. This mechanism ensures that the VAT burden is ultimately passed on to the end consumer.

This system is called the net all-phase system with input tax deduction. The object of taxation (taxable object) is all supplies made within the country for consideration and for which the law does not provide for an exemption.

VAT rates in Switzerland

Switzerland applies three different VAT rates depending on the nature of the product or service in question:

• The standard rate of 7.7% which applies to majority of goods and services.
• A reduced rate of 2.5%, which is applicable to certain essential items like food, water, pharmaceuticals, and books.
• A special rate of 3.7% for hotel accommodation services.
• In addition, certain exports and international services are exempt from VAT in Switzerland.

The aforementioned VAT rates are scheduled to be increased to 8.1%, 2.6% and 3.8% respectively from 1st January 2024.

Who is obligated to register for VAT?

In Switzerland, all businesses with a total annual turnover of at least CHF 100,000 in Switzerland and abroad, for goods and/or services which are not exempt from VAT, are obligated to register for VAT. Once registered, they are required to charge and collect VAT on their taxable supplies. In turn, they can claim input tax deductions on the VAT they pay while purchasing goods and services as part of their production process. Take note that the threshold is increased to CHF 250,000 for non-profit, voluntary sports and cultural clubs, and charitable institutions.

Voluntary VAT registration

Businesses with an annual turnover below the threshold can also choose to voluntarily register for VAT. This can be beneficial, especially for those that mainly deal with other VAT-registered entities. By registering voluntarily, businesses can claim input tax deductions and therefore recover VAT paid on their purchases. This could have a net positive effect for businesses depending on their specific situation.

Input tax deduction

Input tax deduction allows businesses to deduct the VAT they have paid on purchases from the VAT they have collected on sales when calculating their final VAT liability to the tax authorities. By doing so, they effectively recover the VAT they have paid to their suppliers, and therefore only need to hand over the net VAT they have collected. In some cases, the net amount could be negative which means the business would be able to claim a rebate from the tax authorities.

Who can claim input tax deductions?

All businesses that are registered for VAT in Switzerland can claim input tax deductions. To claim these deductions, they must have valid VAT invoices or other supporting documents for their purchases.

What can be claimed?

Only VAT paid on goods and services used for business purposes is eligible for deduction. VAT incurred on personal or non-business expenses is not deductible. For these expenses to qualify as deductible for input VAT purposes, they must not be zero-rated (i.e., they should have a positive VAT rate applied to them), and both the company providing the goods and services, as well as the one purchasing, should be registered for VAT in Switzerland.

What about small businesses?

It is not mandatory for small businesses with an annual turnover of less than CHF 100,000 to register for VAT. Small businesses which do not register are not required to charge and report VAT on their sales; but it also means they are not able to claim input tax deductions. This exemption simplifies the administrative burden for small businesses.

Small businesses who feel it would be in their best interest to register for VAT can do so voluntarily. Once registered, they will have the same VAT obligations as larger companies who are obligated to register.

How to claim input tax deductions in Switzerland

Businesses need to meet certain requirements and follow specific procedures to claim input tax deductions in Switzerland. Here are some of the key considerations:

Invoicing requirements

For a business to be able to claim input tax deductions, they must ensure that their suppliers issue valid VAT invoices for the goods or services purchased. These invoices should include the following mandatory information:

• Supplier’s name and address
• Purchaser’s name and address
• Supplier’s VAT number (same as UID number)
• Date of delivery of the goods or services, as well as the date of the invoice
• Description of the goods or service
• Total fee amount
• The VAT rate applied and the VAT amount
• Signature (or digital signature)

Quarterly submission of sales tax returns

Registered businesses are required to submit quarterly sales tax returns to the tax authorities. These returns show the VAT collected on sales and the VAT paid on purchases. Input tax deductions can be claimed by offsetting the VAT paid against the VAT collected.

Balance tax rates & flat-rate VAT rates

Balance tax rates and flat-rate tax rates are industry rates that considerably simplify the settlement of VAT with the FTA because input taxes do not have to be determined.

However, in the invoices to the customers, the taxable person must show the tax at the statutory tax rate.

With these billing methods, the tax due is calculated by multiplying the gross turnover, i.e. the turnover including tax, by the corresponding balance tax rate or flat tax rate approved by the FTA. The VAT statements for the balance tax rate method only have to be submitted semi-annually

Example of input and output tax calculations

Let us now explain the input tax system using a simple example:

1. Suppose a wool spinning mill procures merino wool and processes it into yarn. They sell the yarn to a textile factory which specialises in the weaving of high-quality merino wool shawls, among other products. The mill invoices the textile factory an amount of CHF 40 per pound of yarn (approx. 450 grams) plus CHF 3.08 in VAT (standard rate of 7.7%). The textile factory therefore pays a total of CHF 43.08 per pound of wool. The spinning mill keeps CHF 40 and pays the VAT of CHF 3.08 to the tax office.
2. The textile factory uses each pound of wool to make one shawl, which they sell to a shawl emporium for CHF 80 each, plus CHF 6.16 in VAT (at 7.7%). The shawl emporium is therefore invoiced a total of CHF 86.16 per shawl. The textile factory can deduct the input tax of CHF 3.08 they paid to the spinning mill from the VAT of CHF 6.16 they received from the shawl emporium and must therefore pay a total of CHF 3.08 to the tax office.
3. The shawl emporium sells the shawls for CHF 100 each, plus VAT of CHF 7.70 (at 7.7%) to their customers, who must therefore pay a total of CHF 107.70 for each shawl. When calculating the amount of VAT they have to pay to the tax office, the shawl emporium can deduct the input tax of CHF 6.16 from the VAT amount of CHF 7.70 they received at the time of sale. They therefore owe an amount of CHF 1.54 to the tax office for every shawl they sell.

Upon adding up the incremental VAT amounts that are paid to the tax office at each stage of the production process, we come to a total amount of CHF 7.70 (3.08 + 3.08 + 1.54), which is equal to the final VAT amount paid by the end consumer. This system of VAT collection, where input tax deductions play a crucial role, ultimately means that the final consumer pays the entire VAT liability.

In essence, VAT is not truly an additional expense for the companies involved, due to their ability to deduct their input tax expense.

Take note that this example assumes all the companies are VAT registered.

VAT liability of companies based abroad

Companies based abroad are now subject to the same VAT requirements as domestic companies if they provide taxable services in Switzerland and generate at least CHF 100,000 in turnover per year from taxable and tax-exempt services in Switzerland and abroad.

A more in-depth discussion of the VAT liability which applies to companies based abroad who deliver mail-order to Switzerland can be found here.