How does the difference between VAT and income tax work?
VAT passes through you. Your customer pays €121 for something worth €100, and that €21 was never yours. You collect it for the State and pay it per period, minus the VAT you paid on your own purchases. That is why the amount in your bank account says nothing about how you are doing. What is there is your money plus money you still have to pay on.
Income tax looks at something quite different: your profit. That is your revenue excluding VAT, minus your business costs, minus the deductions you are entitled to. That profit is added to your other income, and you pay tax on the total according to that year’s brackets. If you have wages from a job alongside your business, those wages help determine which bracket your profit falls in. That is exactly why an estimate without your full picture is not right.
The two rhythms clash in practice. VAT asks every quarter for money you have already received, and income tax asks once a year for money you earned over the course of that year. If you only steer by the quarter, you get a surprise in the spring. Reserving for both is therefore not accounting tidiness but the core of making ends meet as a sole proprietorship (eenmanszaak).
Where is the difference between VAT and income tax in the law?
For this term there is no statutory basis to refer to, and that is not an omission but the state of affairs. It is a term from bookkeeping practice, not a legal obligation with its own article.
What does apply sits one level higher: under Article 52 of the Dutch General State Taxes Act (Algemene wet inzake rijksbelastingen, AWR), your bookkeeping must be verifiable within a reasonable time. How you set that up is not prescribed by law.
What does basestep do with the difference between VAT and income tax?
The platform calculates both sides separately and keeps them apart. VAT per box per period, with the trace included, and an estimate of income tax on your profit. Next to that is the reserve meter, which shows how much of your balance is actually already spoken for. You file yourself, and the estimate is an estimate: the Belastingdienst sets the assessment.
All calculations, explanations and signals in basestep are calculation support and instruction, not tax or legal advice. Amounts are estimates based on your own input; the Dutch tax authority (Belastingdienst) sets the assessment.
Where does it go wrong with the difference between VAT and income tax?
The two mistakes you run into most often in practice with this term, and what they cost you.
Seeing VAT as revenue
The amount including VAT in your account feels like what you earned. Part of it already belongs to the Belastingdienst, and that part grows with every invoice you send.
Reserving only for VAT
VAT comes round every quarter and enforces itself. Income tax comes in one go, over a whole year, and is therefore the amount people do not see coming.
Deducting costs that are not deductible for VAT
An expense can be deductible for your profit while the VAT on it is not deductible, or the other way round. The two systems do not run in step, and that costs you deductions if you handle them in one go.
Further reading
Three places this term is tied to, inside this glossary and beyond.