VAT: effective method or net tax rate?

The basic difference: not just effort, but system logic

The effective method pays off with high input tax from purchases of goods and investments; the net tax rate method suits a simple cost structure and a low input tax ratio. The net tax rate method is permitted up to a taxable annual turnover of CHF 5,024,000 including tax and a tax liability of no more than CHF 108,000 per year (Art. 37 para. 1 MWSTG).

In Switzerland, companies are generally liable for VAT once their turnover from taxable supplies reaches at least CHF 100,000 per year. If you are liable for VAT, you not only have to register but also decide which VAT method to use for your returns.^1,3

For most SMEs, two models come into question:

The effective method and the net tax rate method.

The effective method is the standard logic of VAT: you declare the tax owed on your turnover and deduct the input tax actually incurred separately.

The net tax rate method simplifies the return by multiplying the taxable gross turnover by an industry rate approved by the Swiss Federal Tax Administration (ESTV); there is no need to determine input tax separately.^3,4

This is where the real decision lies: do you want to claim input tax precisely and in full on the basis of your actual expenses and investments, or is the flat-rate simplification economically and administratively more sensible for your company?^3,4

When the effective method is stronger

The effective method is particularly suitable if your company regularly has significant input tax. This applies, for example, to trading companies with high purchases of goods, businesses with larger investments, companies with a lot of third-party services, IT or consulting firms with high external project costs, or SMEs with ongoing infrastructure costs.^3,4

The advantage is clear: input tax is not settled on a flat-rate basis but actually deducted. This can make a noticeable economic difference if your company bears an above-average amount of costs subject to input tax.

The downside is the higher accounting and control effort, because output tax, input tax, corrections and accruals must be recorded properly.^3,4

The effective method also often goes well with accounting that has a clean accounts receivable and accounts payable logic. The SME Portal states that most companies liable for VAT file quarterly returns on the basis of agreed consideration, because this system is based on their accounts receivable and accounts payable accounting.³

The effective method is therefore usually the more robust choice if your company provides differentiated services, invests regularly or already has properly kept financial accounts. In that case, greater precision is often more important than simplification.^3,4

When the net tax rate can make sense

The net tax rate method is intended for small and medium-sized companies that want to simplify their VAT returns. Currently, the taxable annual turnover including tax may not exceed CHF 5.024 million for this; in addition, the tax owed per year may not exceed CHF 108,000.⁴

The practical advantage lies in the lower administrative effort: instead of recording and deducting input tax item by item, you settle your entire taxable turnover at the approved net tax rate.

The ESTV expressly emphasizes that input tax does not have to be determined, which simplifies the return considerably.^3,4

This can make sense especially for SMEs with a simple cost structure, few investments and manageable input tax. Economically, the method often fits better where the simplified mechanism comes closer to the actual input tax burden and accounting is not supposed to become unnecessarily complex.^3,4

However, it is important not to confuse the simplification with a flat-rate saving. The net tax rate is not a discount on VAT but a simplified settlement technique. Whether it is cheaper or more expensive than the effective method depends on the specific relationship between turnover, cost structure, investments and input tax.^3,4

Since 1 January 2025, stricter rules have also applied to multiple activities: for every activity whose share of total taxable turnover exceeds 10%, the relevant net tax rate must be applied.

This means that more than two net tax rates are now possible. For mixed business models, this sometimes makes the method less simple than before.⁵

The net tax rate method must not be confused with the flat tax rate method. The latter is intended for public authorities and certain related areas and is generally not the relevant model for typical private SMEs.⁴

Keeping settlement method and settlement frequency clearly apart

A typical error in reasoning in practice is to mix up method, settlement method and settlement period. These are three different levels of VAT logic.^3,6

First, the method: effective or net tax rate.^3,4

Second, the settlement method: on the basis of agreed consideration or consideration received. With agreed consideration, you settle on the basis of the invoices issued. With consideration received, you settle on the basis of the payments received. According to the SME Portal, settlement on the basis of consideration received is suitable above all for micro-enterprises without proper accounts receivable accounting; it requires approval from the ESTV.^3,7

Third, the settlement period: By default, returns are filed quarterly under the effective method and, as a rule, semi-annually under the net tax rate method. Since 1 January 2025, companies with annual turnover of up to CHF 5,005,000 can also file annually on request. This is a separate simplification and not automatically an argument for or against a particular method.^4,6

If you choose annual settlement, you must also observe the rules for installment payments: under the effective method, three installments are due; under the net tax rate method, one installment.

Annual settlement therefore reduces the number of returns, but it does not change the fact that the choice of method must be assessed economically on its own.⁶

Since 1 January 2025, companies liable for VAT must submit their returns via the ESTV Portal. Applications for settlement on the basis of consideration received or changes to the modalities also go through the official ESTV channels.⁷