Value added tax and VAT reporting – an explanation

Value Added Tax (VAT) in Switzerland

Swiss Value Added Tax is an indirect tax levied by the federal government. Why does Switzerland need a value added tax? The basic concept is simple: It ensures that each consumer supports the government financially. To simplify matters by not having each consumer report taxes owed on his/her consumption individually, companies have to pay this tax. They pass it on to consumers in the form of value added tax that is included in the purchase price. What exactly is the tax base? According to the Swiss Federal Tax Administration (ESTV, Swiss Internal Revenue Service) «The tax targets all goods and services provided in Switzerland for compensation and that are not subject to a statutory exbillinemption.»

How high are the applicable VAT rates?

The regular VAT rate is 8% of the sales amount. It applies to most goods and services. A reduced tax rate of 2.5% applies to goods needed daily, such as food, newspapers or medications. A special rate of 3.8% is charged for hotel accommodations.

The Value Added Tax Mandate: Who has to bill and pay VAT?

The VAT Mandate hinges on the annual revenues of a company: All businesses that turn over more than CHF 100,000 a year are principally subject to the Value Added Tax Mandate and have to bill/pay it effectively or with the assistance of “Saldosteuersätzen” (SSS, balance tax rates). Companies with sales below the threshold are exempt from the Mandate. The incorporation status of a business (e.g. LLC, stock corporation or sole proprietorship) is irrelevant as far as this obligation is concerned.

VAT billing with advance tax? An explanation of advance tax and how to calculate it

The best way to explain what the advance tax is and how to compute it, is by using an example: A carpenter purchases CHF 100 worth of timber and pays the owner of the forest CHF 108 (VAT: CHF8). He later uses the timber to complete a customer order, for which he bills the customer CHF 216 (VAT: CHF 16). To compensate for the accumulated tax, i.e. the excessive tax paid, he is authorized to deduct advance tax from the amount owed to the Swiss Internal Revenue Service (ESTV), which is equivalent to the VAT he paid when purchasing the wood (CHF 8). Hence, the carpenter pays «only» CHF 8 or 4% value added tax for the order in this example.

VAT number and UID (company ID)

According to the Swiss Value Added Tax Act (MWSTG), all companies that are required to pay VAT have to disclose their value added tax numbers on their invoices. Hence, the tag «MWST» (VAT) must be placed behind the abbreviation UID (for company identification) and the number. Hence, on invoices, the value added tax number appears in the following format:

CHE-322.646.985 MWST

What is an UID? The «Unternehmens-Identifikationsnummer» (company identification number) is a unique and all-encompassing number allocated to each company active in Switzerland. It is issued by the Bundesamt für Statistik (BFS, Federal Statistics Office). The UID has completely superseded both, the 6-digit MWST (VAT) number (example: MWST 123 456) and the 11-digit trade register number (Example: CH-320.3.074.699-6).

VAT reporting: effective or balance tax rate?

All companies that are required to pay value added tax, have to report their VAT. However, they also have to choose the method they will use – based on agreed upon or collected compensation.

Agreed-upon compensation: Reporting based on agreed-upon compensation is the standard procedure of the Swiss Internal Revenue Service (ESTV). If this reporting method is used, the value added tax is due for payment upon issuance of the invoice. This implies that companies have to pre-finance the VAT if their customers do, for instance, not pay the invoice until the next billing period.
Collected compensation: If a company reports the VAT based on collected compensation, the value added tax does not become due for payment until payment from the customer is received.

Moreover, companies have to choose one of two VAT reporting methods: The effective method or balance tax rate based reporting. The bookkeeping requirements change depending on the method they choose. What are the differences?

VAT reporting: effective or balance tax rate — The figure on the left shows the VAT form for reporting based on balance tax rates; the figure on the right a form for the effective value added tax reporting. What are the differences?

Value added tax reporting using the balance tax rate

Many small businesses opt for the balance tax rate method for their value added tax reports because it minimizes the administrative complexity: On the one hand, they have to submit value added tax rates only every semester – instead of quarterly, which is the frequency the effective method mandates. On the other hand, the use of the balance tax rate also makes the determination of the advance tax redundant.

Value added tax reporting using the effective method

Effective value added tax reporting requires companies to declare the generated revenues along with the accrued advance tax. The above explained tax rates apply. Companies that choose the effective reporting method have to submit their tax reports to the Swiss Internal Revenue Service (ESTV) on a quarterly basis and they have 60 days to do so after the end of each quarter. The same deadline applies to the payment due dates.

Detailed information on the balance tax rate method

For companies filing their VAT reports on the basis of balance tax rates (SSS) the tax owed is determined as follows: The total sales (which include the value added tax billed to customers) are multiplied by the balance tax rate (ref. Art. 37 MWSTG). This reduced VAT rate has to be approved by the Swiss Internal Revenue Service (ESTV) and depends on the company’s sector. The advantage of this VAT reporting method is obvious: A lump sum advance tax amount is included and does not have to be reported separately.

Ob ein Unternehmen mit Hilfe von Saldosteuersätzen abrechnen kann, hängt vom steuerbaren Jahresumsatz ab und ist zudem an eine maximale jährliche Steuerschuld gebunden. Darüber hinaus muss die offizielle Abrechnung mit Saldosteuersätzen der Eidgenössischen Steuerverwaltung (ESTV) mitgeteilt werden.

Accounting software based VAT reporting

If you want an easy option for your VAT reporting needs, work with an accounting software solution. bexio offers exactly what you are looking for: in the software, the form is automatically compiled in such a manner that it is identical with the reporting form of the Swiss Internal Revenue Service (ESTV). Regardless of whether you are using the effective or the balance tax rate based reporting methodyou're your VAT, or whether you report based on agreed upon or collected compensation – bexio comes with the tools you need. Any time you post a sale, the VAT form in bexio is updated automatically. All of the information and numbers required, such as the sales totals under the different rates are included in the bexio form. Hence, all you have to do is simply transfer the numbers and you are in complete control of your value added tax reports.

Swiss Value Added Tax and VAT billing