VAT Return 18 % (PCN874)

How the periodic VAT report works

Every registered dealer with a VAT file submits a periodic report to the Israel Tax Authority, monthly or every two months depending on the reporting period the authority assigned. The report adds up the VAT charged to customers during the period, subtracts the VAT paid on business purchases, and shows either an amount to pay or an amount to be refunded.

The standard rate is 18 % since 2025, and the report has to separate sales at the standard rate from zero-rated sales such as qualifying exports and from exempt sales. Mixing the categories is the quickest way to receive a clarification letter, because the authority cross-checks them against what your customers report.

The report is due even in a period without activity. A nil report takes five minutes online, whereas a missing one can lead to an estimated assessment and a penalty that the dealer then has to dispute.

What PCN874 is and when it matters

PCN874 is the file format the Tax Authority specifies for a transaction-level listing of sales and purchases that supports the VAT report. Accounting software and accountants generate it from the ledger, and the content is checked against the totals reported in the form itself.

Whether you must submit it depends on your category and the authority's instructions for your file, so ask the accountant instead of assuming. Dealers who are required to file it need every invoice in the period to be present with the correct counterparty identifier, date, amount and VAT.

Treat the file as a mirror of your books. If the file shows a purchase that your ledger does not, or the other way round, the difference will appear when the authority matches your report to your supplier's.

Input VAT: what you can deduct

Input VAT is deductible when the purchase is for business purposes and you hold a proper tax invoice issued by a registered supplier. A receipt from an exempt dealer carries no VAT, so there is nothing to deduct, and an invoice addressed to another entity or to a private person does not support your claim.

Some expenses are restricted by rule, for instance parts of vehicle costs and entertainment. Instead of memorising the list, give the accountant a short note about each unusual purchase, so that the decision is taken once and consistently.

Where the buyer must obtain an allocation number for an invoice above the current threshold, the deduction can depend on it. Ask suppliers for the number when they send the invoice, and store it with the document.

A monthly routine that keeps the report accurate

A reliable routine has four steps. First, close the sales ledger: confirm that every invoice issued in the period appears once and in sequence, and that credit notes are linked to their originals. Second, collect purchase invoices and mark which are deductible.

Third, reconcile the VAT account in the ledger with the sum of output and input VAT. A difference of a few shekels is usually a rounding issue; a difference of hundreds points to a missing document or an invoice recorded twice.

Fourth, submit the report and pay on time, then archive the submission confirmation with the working papers. When the authority asks a question eighteen months later, the confirmation and the papers are the fastest answer.

If a mistake is found after submission, correct it in the next report or through the amendment procedure the authority provides, rather than leaving it. Voluntary correction is treated more kindly than a discovery in audit.

A worked example for one month

Consider a design studio with a monthly report. In March it issues invoices of 50,000 ILS before VAT, which carry 9,000 ILS of output VAT at 18 %. It receives supplier invoices of 20,000 ILS before VAT, with 3,600 ILS of input VAT, all supported by valid tax invoices in the company name.

The VAT payable for the period is 9,000 minus 3,600, that is 5,400 ILS. The accountant checks that the sales ledger totals 50,000 and the VAT account shows the same output VAT. If the studio also issued a credit invoice of 2,000 ILS before VAT, the output VAT falls by 360 ILS and the payable amount by the same figure.

Now assume the studio also exported a project to a client abroad for 10,000 ILS equivalent. That sale appears in the report as a zero-rated sale. It adds nothing to output VAT, but it must be reported in the right line, and the export evidence is filed with the documents for the period.

The same logic works in a refund position. If purchases of a large equipment batch produce more input VAT than output VAT, the report shows a refund claim, and the authority may ask for supporting invoices before paying. Keep the documents indexed by invoice number so you can produce them within a day.

Mistakes that trigger authority queries

The most frequent cause of a query is a mismatch between your report and a supplier's or customer's report. If you deduct input VAT on an invoice that the supplier never reported, the authority notices it when it matches the two files.

A second cause is the wrong period. An invoice dated in March but booked in April can look like a late deduction or an unreported sale. Choose a clear cut-off rule, for instance by invoice date, and apply it every period.

A third cause is the wrong category: a sale reported at the standard rate when the accountant treated it as an export, or the opposite. Record the category on each invoice at the time of issue rather than reconstructing it at month end.

Finally, watch for rounding. Calculating VAT per line item and per invoice can produce differences of a few agorot, which add up over hundreds of invoices. Pick one method and keep it.

4invoices.net issues PDF invoices and keeps an archive, so the sales side of the report can be assembled from a numbered series. 4softerp.net keeps the accounting records for one or several companies. Neither product prepares the PCN874 file, submits the VAT report or connects to the Tax Authority; the accountant or the dealer files it directly.

The standard VAT rate in Israel is 18 %, in force since 2025. Exports of goods and qualifying services may be zero-rated, and some activities are exempt. Check the category of each sale with your accountant before invoicing, because the rate on the invoice must match the rate you report to the Tax Authority.

PCN874 is the file format specified by the Israel Tax Authority for a detailed listing of transactions that supports the periodic VAT report. Accounting software and accountants produce it from the ledger. Whether you must submit it depends on your category, so confirm it for your VAT file before the first period closes.

The Tax Authority assigns your reporting period, monthly or every two months, according to your turnover and profile. The period and due date are visible in your online account. A report is required even when there was no activity, so a nil report must still be submitted on time. Calendar the due date a few days earlier.

No. You can deduct input VAT when the purchase serves the business and you hold a valid tax invoice in the company name. Certain categories, such as parts of vehicle and entertainment costs, are restricted by rule. Give your accountant the invoice and a short note on the purpose of any unusual item.

Late submission can lead to penalties and interest, and the authority may issue an estimated assessment based on available data. Paying late is a separate matter from submitting late. Calendar the due date, collect documents a few days earlier and submit even if some payment details remain open. Late reports can also delay any refund you are expecting.

Information page

This page is informational. Confirm requirements with the competent authority; 4b2b tools cover general invoicing and records only.