Firm Guides · VAT in practice

VAT in practice: rates, settlements and input VAT recovery

Value Added Tax (IVA) is the indirect tax that accompanies almost every economic transaction carried out by businesses and professionals. Understanding how it works means avoiding invoicing mistakes, paying the correct amount and not losing the right to input VAT recovery. This guide, updated to the legislation in force in 2026, explains in practical terms the fundamental mechanisms of the tax, the applicable rates, the input VAT recovery rules, the deadlines for VAT settlements and the reporting and return-filing obligations.

What is VAT and how does it work

VAT is governed by D.P.R. 633/1972 (Italian VAT decree) and, for cross-border transactions, by D.L. 331/1993. It is a tax multi-stage and non-cumulative: it applies at each step of the production chain, but only on the value added generated at that stage. The actual burden falls on the final consumer, while for economic operators it is generally neutral.

The mechanism is based on two complementary legal institutes:

• Rivalsa (art. 18): whoever carries out the transaction charges VAT on the invoice to the customer, collects it and pays it to the State.
• Input tax deduction (art. 19): the taxable person recovers the VAT paid on purchases related to their business activity.

The difference between Output VAT and Input VAT determines the tax to be paid or the credit to be carried forward.

VAT requirements

A transaction falls within the scope of VAT only if simultaneously three requirements are met; if one is missing it is outside the scope of VAT.

• Objective: supply of goods (art. 2) or supply of services (art. 3) for consideration.
• Subjective: transaction carried out in the course of a business (art. 4) or of arts and professions (art. 5).
• Territorial: transaction carried out within the territory of the State (artt. 7 et seq.; for generic B2B services, the relevant place is that of the customer, art. 7-ter).

Transactions outside the scope must be distinguished from those that are non-taxable (exports, art. 8), exempt (healthcare, financial and insurance services, art. 10) or taxable: the distinction affects the right to deduct and the pro-rata.

Italian VAT rates

To be confirmed for 2026: the classification of individual goods changes with the annual budget laws. Before applying a reduced rate, check the latest version of Table A.

Deduction and non-deductibility

The right to deduct applies if the purchase is directly related (inerente) to the activity and if the downstream transaction gives entitlement to deduction. It must be exercised, under the conditions existing when it arose, no later than with the return relating to the second year following the one in which it arose: art. 12 of D.Lgs. 148/2026, in force since 12 August 2026, amended the second sentence of art. 19, comma 1, of D.P.R. 633/1972 accordingly.

The same art. 12 correspondingly extended the deadline for recording purchase invoices under art. 25, comma 1: the invoice must be recorded in the purchase register before the periodic settlement in which the right of deduction is exercised and, in any case, by the deadline for filing the annual return relating to the second year following the one in which the invoice was received. This is not, however, an unconditional extension: the deduction remains subject to the conditions existing when the right arose, and the ordinary filing obligations are unchanged. What has been extended is the period within which the right may be exercised, not the conditions on which it depends.

The pro-rata

Anyone who carries out both activities giving rise to transactions with entitlement to deduction and activities giving rise to transactions exempt under art. 10 deducts in proportion to the first category, by applying the deduction percentage of art. 19-bis (art. 19, comma 5). Mind the denominator: it is not the total of the output transactions. The numerator is the amount of the transactions giving entitlement to deduction carried out during the year; the denominator is that same amount increased only by the exempt transactions carried out in the same year. The percentage is rounded up or down to the nearest whole number depending on whether the decimal part exceeds five tenths.

It follows that non-taxable transactions (exports, intra-Community supplies) appear both in the numerator and in the denominator, because they retain the right to deduct, and therefore do not reduce the percentage; transactions outside the scope of VAT remain, as a rule, outside the ratio.

The following are not taken into account in the calculation (art. 19-bis, comma 2, D.P.R. 633/1972):

• supplies of depreciable assets;
• internal transfers (passaggi interni) between separately accounted activities under art. 36, last comma;
• the excluded transactions of art. 2, comma 3, letters a), b), d) and f): transfers of money or of monetary claims, transfers and contributions of a business or of a business division, free samples of small value which are marked as such, transfers of assets on merger, division or transformation;
• the exempt transactions of art. 10, comma 1, n. 27-quinquies), that is the resale of goods purchased or imported with fully non-deductible VAT;
• the other exempt transactions of nos. 1) to 9) of art. 10 where they do not form part of the taxable person’s own business or are ancillary to taxable transactions; the VAT on goods and services used exclusively to carry them out remains non-deductible.

The pro-rata does not apply to the transactions of art. 10, nos. 6) and 7), nor to the related agency, brokerage and intermediation services. During the year the deduction is provisional and is made at the final percentage of the previous year, subject to adjustment in the annual return; a taxable person commencing business applies a percentage determined on an estimated basis. The pro-rata is general: the percentage reduces the VAT on all purchases, not only on those attributable to the exempt transactions.

Example. Output transactions for the year: taxable 800,000 euros; non-taxable exports 200,000 euros; exempt transactions forming part of the taxable person’s own business 253,000 euros; exempt sale of a business-use building (fabbricato strumentale), a depreciable asset, for 50,000 euros, excluded from the calculation. Numerator: 800,000 + 200,000 = 1,000,000. Denominator: 1,000,000 + 253,000 = 1,253,000. Percentage: 79.808%, rounded to 80%. With 44,000 euros of input VAT incurred on purchases, the deduction is 35,200 euros and the non-deductible tax 8,800 euros. Applying instead the incorrect formula based on the total of the output transactions, the denominator would rise to 1,303,000 euros, the percentage would fall to 77% and the deduction to 33,880 euros: 1,320 euros lost.

Objective non-deductibility (art. 19-bis1)

• Motor vehicles: deduction of 40% for mixed use; 100% if the vehicle is used exclusively in the activity (sales agents, car rental, taxi). The same rule applies to fuels, maintenance and leasing.
• Entertainment expenses (spese di rappresentanza): non-deductible VAT, except for goods with a unit cost not exceeding 50 euro.
• Hotels and restaurants: deductible if related to the business and documented by an invoice; non-deductible with a simple receipt.

Periodic VAT settlements and payments

• Monthly settlement (ordinary scheme): payment by 16 of the following month.
• Quarterly by option: for prior-year turnover not exceeding 500,000 euro (services) or 800,000 euro (other activities). Payment by the 16th of the second month following the quarter, with a 1% surcharge. The fourth quarter is included in the annual balance.

VAT prepayment (Acconto IVA): by 27 December, calculable using the historical method (88% of the relevant reference payment: for monthly taxpayers, the one for December of the previous year; for quarterly taxpayers, the one due with the annual return), the forecast method or the analytical method. Annual balance: by 16 March, payable by instalments or deferrable with an increase of 0.40% per month.

Settlement examples

Example 1 – VAT payable. Issued invoices for 20,000 euros + 22% VAT (VAT payable 4,400) and purchases for 12,000 euros + 22% VAT (input VAT 2,640). VAT settlement: 4,400 – 2,640 = 1,760 euros to be paid.

Example 2 – VAT credit. Fees for 10,000 euros + VAT (VAT payable 2,200) and purchase of equipment for 15,000 euros + VAT (input VAT 3,300). A VAT credit of 1,100 euros, carried forward to the following period or claimed as a refund.

LIPE and annual VAT return

The Periodic VAT settlement communication (LIPE) transmits the summary data for each quarter:

• 1st quarter: 31 May
• 2nd quarter: 30 September
• 3rd quarter: 30 November
• 4th quarter: by the last day of February (may be omitted if the data flow into the annual return filed by the end of February)

The Annual VAT return (Dichiarazione IVA annuale) is filed electronically between 1 February and 30 April.

Reverse charge and split payment

Reverse charge

The supplier issues an invoice without charging VAT; the customer integrates it, recording it both among purchases and among sales. It applies to construction subcontracts; cleaning, demolition, installation of systems; scrap and recovered materials; gold and silver; terminal equipment for the terrestrial public mobile radio service, games consoles, tablet PCs and laptops, integrated circuit devices supplied before their installation in products intended for the final consumer; transfers of greenhouse gas emission allowances and of certificates relating to gas and electricity; supplies of gas and electricity to taxable dealers.

An expiry date to keep an eye on. The cases of art. 17, comma 6, letters b), c), d-bis), d-ter) and d-quater) are not permanent: they rest on the optional and temporary mechanism of Article 199a of Directive 2006/112/EC, which Member States are allowed to apply until 31 December 2026 by virtue of Council Directive (EU) 2022/890. Consistently, art. 17, comma 8, of D.P.R. 633/1972 provides that those letters apply to transactions carried out until 31 December 2026.

As at the date on which this guide was updated, no extension beyond that date has been adopted. Before issuing or integrating reverse charge invoices for transactions carried out from 1 January 2027, two steps must therefore be checked: the adoption and publication in the Official Journal of the European Union of a directive postponing the expiry of Article 199a, and the ensuing action of the Italian legislature on art. 17, comma 8. Failing that, from 1 January 2027 those supplies revert to VAT charged by the supplier by way of rivalsa, with immediate effects on electronic invoicing (the nature code, codice natura) and on the customer’s integration procedures. The construction, scrap and gold cases remain permanent, because they rest on different legal bases.

Split payment

Provided for by art. 17-ter for transactions with the Public Administration (Pubblica Amministrazione) and with the bodies and companies listed in comma 1-bis: the supplier charges VAT but does not collect it, because the customer pays it directly to the Italian Treasury.

The scheme is a derogating measure authorised by the European Union, and therefore depends on time-limited authorisations. Council Implementing Decision (EU) 2017/784, already extended to 30 June 2026 by Council Implementing Decision (EU) 2023/1552, has most recently been extended by Council Implementing Decision (EU) 2026/1728 of 10 July 2026, published in the Official Journal of the European Union of 15 July 2026: the decision replaces, in art. 5 of Decision 2017/784, the date of 30 June 2026 with that of 30 June 2029 and postpones to 30 September 2027 the deadline for the report that Italy must send to the Commission on the effectiveness of the measure. The decision takes effect from the day of its notification: the text contains no express clause running from 1 July 2026, and the continuity of the scheme follows from the replacement of the date in the authorising act.

From 1 July 2025 the listed companies included in the FTSE MIB index have left the scope: letter d) of comma 1-bis of art. 17-ter was repealed by art. 10 of D.L. 84/2025, converted with amendments by L. 108/2025, giving effect to the constraint set by Decision (EU) 2023/1552. The exclusion has effect from 1 July 2025 and applies to the transactions for which the invoice is issued from that date: on supplies to those companies the tax is again charged and collected under the ordinary rules. The criterion is the date on which the invoice is issued, not the date on which the transaction is carried out: invoices issued up to 30 June 2025 for transactions already carried out remain subject to split payment.

Transactions with foreign countries

Intra-Community transactions

• B2B supplies to EU taxable persons: non-taxable (art. 41 D.L. 331/1993), subject to registration with the VIES.
• B2B purchases from EU suppliers: subject to VAT in Italy under the reverse charge.
• Requirement to file INTRASTAT forms according to the thresholds.
• Distance B2C sales: above the annual threshold of 10,000 euro VAT is due in the consumer’s country, which can be accounted for under the OSS.

Non-EU countries

• Exports: non-taxable (art. 8).
• Imports: VAT assessed and paid at customs.
• Generic B2B services: relevant in the customer’s country, with reverse charge for the Italian customer.

The habitual exporters purchase without VAT within the limits of the plafond, by transmitting the letter of intent. The communication of cross-border transactions takes place via the SdI.

VAT credits and refunds

• Carryforward to the subsequent period (ordinary solution).
• Offsetting in F24: for the use of the annual credit over 5,000 euro, the tax compliance attestation (visto di conformità).
• Refund if the conditions under art. 30 are met (average rate on purchases higher than that on sales, non-taxable transactions exceeding 25% of the total, purchase of depreciable assets, cessation of the business). The quarterly credit is claimed using the IVA TR form.

Refunds up to 30,000 euro do not require a guarantee; above that threshold, the visto is required with a substitute declaration (dichiarazione sostitutiva) or a surety bond (fideiussione).

Common mistakes to avoid

• Deducting VAT on expenses that are not business-related or are subject to limited deductibility (cars, representation expenses, restaurant meals without an invoice).
• Applying a reduced rate without checking Table A (Tabella A).
• Failing to self-invoice/integrate invoices under the reverse charge or for intra-EU purchases.
• Forgetting the VAT advance payment (acconto IVA) due on 27 December.
• Not submitting the LIPE or submitting them with data inconsistent with the payments.
• Exceeding the ceiling of habitual exporters.
• Claiming the input VAT deduction beyond the allowed deadline.
• Confusing transactions that are exempt, non-taxable or outside the scope, with effects on the pro-rata.

In the event of omitted or late payment, it is possible to regularize through ravvedimento operoso (voluntary disclosure and payment adjustment). This guide is for informational purposes: for the analysis of the specific case, Studio Ponchio is available.

Download in Word (.doc)