Input VAT, who can deduct and what gets lost
Input VAT is the VAT you paid on purchases for the business, and it is the side that reduces what you hand to the Tax Authority. The idea is simple: the business collects VAT from customers, pays VAT to suppliers, and remits only the difference. What complicates it is when you may deduct, how much, and until when.
- VAT you collected from customers
- Comes from every tax invoice you issued
- Increases the amount payable
- VAT you paid to suppliers
- Comes from tax invoices you received
- Reduces the amount payable
Who may deduct input VAT
Only an osek murshe or a company. An osek patur does not collect VAT from customers, and correspondingly may not deduct the VAT they pay to suppliers. For them VAT is part of the cost, full stop.
This is the point people miss when comparing the two statuses. An osek patur does not "save" VAT, they simply do not deal with it. A business with substantial expenses can come out ahead as an osek murshe, precisely because the VAT on purchases comes back.
The four conditions for deducting
Section 38 of the VAT Law says a business may deduct the tax included in a tax invoice lawfully issued to it. In practice four things have to hold together.
An original tax invoice. Not a transaction invoice, not a quote, and not a receipt on its own. A transaction invoice gives no deduction, even if a VAT amount is printed on it.
Issued to the business. The invoice has to carry the business's name and number. An invoice made out to a private individual does not qualify, apart from one narrow exception covered below.
For business purposes. The expense has to serve the production of VAT-liable income. A personal purchase booked to the business does not become an input.
Inside the time window. The deduction is taken within six months of the date the invoice was issued.
The six-month window
This is the most common failure. An invoice forgotten in a drawer, or a supplier who sent the document late, can push the deduction out of the window.
The rule: a tax invoice belongs in the report for the period in which it was issued, and if it was not deducted then, it can be deducted in a later report as long as six months have not passed from the issue date. Beyond that the deduction is no longer automatic and requires an application to the VAT manager with an explanation.
The practical conclusion is simple: collect supplier invoices continuously, not quarterly. A business that scans receipts as they arrive never reaches this situation.
Mixed inputs
An expense that serves both the business and the household does not go in whole. Regulation 18 of the VAT Regulations governs this.
The basic rule is a deduction in proportion to business use out of total use. Where that proportion has not been established, the regulation sets two defaults: where the main use is for the business, two thirds of the input VAT may be deducted; where the main use is not for the business, a quarter.
These are rates fixed in the regulation, not a matter of self-assessment. A business that wants a different ratio has to substantiate it.
Input VAT on vehicles
This section generates the most questions, and the answer splits in two.
Buying a private car. Input VAT on the purchase of a private car cannot be deducted. Not two thirds, not a quarter. It is a blanket rule, designed to stop a family car being bought through the business. A vehicle classified as commercial under the regulations is a different story, and the classification is what decides, not actual use.
Running costs. Fuel, insurance, servicing and repairs fall under the mixed-input rules of regulation 18, meaning in proportion to business use.
The distinction between VAT and income tax matters here. For income tax, vehicle expenses are recognized at a fixed percentage for most self-employed people, and the exact rates are in the deductible expenses guide. That is an entirely different calculation on a different basis, and both live side by side on the same fuel invoice.
What "other inputs" means in the report
The VAT report splits inputs into two lines. Equipment inputs are purchases of fixed assets: a computer, office furniture, machinery. Other inputs are everything else: raw materials, services, rent, software, marketing.
The split does not change the amount deducted, but the Tax Authority uses it for analysis. Consistently misclassifying, for instance reporting everything as equipment, draws attention you do not need.
An invoice not in the business's name
There is a defined exception. Regulation 12c allows a deduction even when the invoice was not issued in the business's name, for inputs such as telephone, electricity, water and gas, provided it is shown that the input served the business.
That covers the self-employed person working from home whose utility account is in a partner's name. It does not open a general door to invoices made out to somebody else.
Pre-business expenses
VAT paid before the tax file was opened does not go in automatically. It is deductible only where it is shown that the inputs were acquired during the establishment of the business and served that purpose, and with the manager's approval.
Anyone planning to open a business and buying equipment in advance should keep the invoices and raise it with their accountant when the file is opened, not a year later.
The allocation number as a condition for deducting
Since the Israel Invoices model, a tax invoice above the threshold gives no input VAT deduction without a valid allocation number. The threshold has stood at 5,000 shekels before VAT since June 2026.
That turned checking incoming invoices into part of the process. A business that receives a large invoice with no allocation number and deducts anyway will find out in an audit rather than at the moment of payment. The threshold and the document types are covered in the allocation number guide.
A worked example
A licensed dealer reporting bi-monthly ends a period with 60,000 shekels of income before VAT, meaning 10,800 shekels of output VAT.
On the expense side: 8,000 shekels before VAT on subcontractors (1,440 shekels of input VAT, deducted in full), a new computer at 6,000 before VAT (1,080 shekels, entered as equipment inputs), and fuel of 1,500 before VAT (270 shekels of input VAT, of which two thirds go in, so 180).
Total inputs: 2,700 shekels. Payment to the Tax Authority: 10,800 minus 2,700, so 8,100. The VAT calculator handles the split between pre-VAT and total amounts, and the periodic report guide explains the structure of the report itself.
What kills a deduction
The first is deducting on a receipt alone. A receipt evidences payment, not a transaction, and it is not a document that supports a deduction.
The second is deducting full VAT on a mixed expense. A mobile phone that also serves the household is not a full input.
The third is mixing VAT rules with income tax rules. An expense can be 100% recognized for income tax and entirely non-deductible for VAT, and the reverse.
The fourth is collecting invoices once a year. That is the reliable way to lose deductions to the six-month window, and to keep records in a state that will not survive an audit.
How Slate separates the two calculations
In Slate every expense is recorded against a category, and the VAT and income tax deduction percentages are derived from that category rather than estimated. Scanning a receipt produces a draft expense ready for approval, so supplier invoices land in real time instead of at year end, and the VAT report presents the equipment and other inputs split ready to file.
This is general information, not tax advice. For a specific situation, talk to an accountant or tax adviser.
Common questions
Who can deduct input VAT?
A licensed dealer and a company only. An exempt dealer charges no VAT and deducts no input VAT, even on a purely business expense.
How long do I have to claim input VAT on an invoice?
A six-month window from the invoice date. An invoice forgotten in a drawer past that window is not deductible without a special application to the Tax Authority.
Can VAT be reclaimed on an invoice not in the business's name?
No. The invoice has to carry the business name and number. An invoice in a personal name gives no deduction, even where the expense clearly served the business.
What is mixed input VAT?
An expense that served both business and private use. Only the business share is deducted, by actual use, and in certain categories at a fixed rate.
Does a missing allocation number cancel the deduction?
Yes, on a tax invoice above the threshold. Without a valid allocation number the customer may not deduct the input VAT, which is why it is checked before payment is approved.
Can input VAT be claimed on pre-registration expenses?
Sometimes, where the expense was incurred to set the business up and close to its opening. It depends on the type of expense and the documentation, so check with your accountant before claiming.