Non-contractual use of the premises and VAT settlement

Service-Tax

When running a business involving the rental of premises, we never know how our cooperation with a new tenant will go. It happens that the landlord from us is not able to pay the rent for some reasons. This may be due to financial difficulties or dishonesty in the landlord. The activity consisting in renting commercial premises is therefore associated with a high risk. What taxation applies to the non-contractual use of the premises?

Taxation of lease with VAT

Pursuant to Art. 5 sec. 1 point 1 of the Act of March 11, 2004 on tax on goods and services (i.e. Journal of Laws of 2017, item 1221, as amended), hereinafter referred to as the "VAT Act", taxation with tax on goods and services are subject to the paid delivery of goods and the paid provision of services within the territory of the country.

Under Art. 5 sec. 2 of the VAT Act, these activities are subject to taxation regardless of whether they were performed in accordance with the conditions and forms specified by law.

The above means that what matters is the actual course of a given activity and the result achieved in accordance with the intention of the contracting parties.

Pursuant to Art. 7 sec. 1 of the VAT Act by the delivery of goods referred to in Art. 5 sec. 1 point 1 shall be understood as the transfer of the right to dispose of the goods as the owner.

The provision of art. 2 point 6 of this Act states that goods are understood as things and their parts, as well as all forms of energy.

By providing the services referred to in Art. 5 sec. 1 point 1, pursuant to art. 8 sec. 1 of the VAT Act, is understood as any service for a natural person, legal person or organizational unit without legal personality, which does not constitute a supply of goods within the meaning of Art. 7, including:

  • the transfer of rights to intangible assets, regardless of the form in which the legal transaction was performed;

  • an obligation to refrain from performing an action or to tolerate an action or situation;

  • provision of services in accordance with an order of a public authority or entity acting on its behalf or an order arising from the law.

Thus, the rental of premises is a taxable service subject to VAT.

Termination of the lease agreement

We will use an example to illustrate the situation.

Example 1.

On July 1, 2015, Zakład Komunalny concluded a contract for the lease of a shop with company X. The lease fee in the contract was set at PLN 3,000 plus VAT per month. The notice period is three months. In the absence of payment for two months, the premises can be "terminated" without observing the above-mentioned period of notice. In December 2015, company X ran into financial problems and stopped paying the rent for the premises. Therefore, on February 1, 2016, the premises was terminated. The enterprise, despite receiving and confirming the letter of termination, did not leave the premises and continued to use it.

Such a broadly formulated definition shows that the provision of services should primarily be understood as a specific behavior of a taxpayer for a separate entity, which basically results from a bilateral obligation relationship, assuming the existence of an entity that is the buyer of the service, as well as the entity providing the service.

Provision of a service should be understood as any behavior which may consist of both an action (doing something) and a failure to act.

Do we consider any failure to act or tolerance to act as a service?

At this point, however, it should be noted that not every refraining from acting or tolerating actions or situations may be considered a service within the meaning of the provisions of the Act.

The wide nature of the service is confirmed by the provisions of the Act of 23 April 1964 Civil Code (i.e. Journal of Laws of 2017, item 459, as amended), hereinafter referred to as the Civil Code.

In the light of Art. 353 § 2 of the Civil Code, the benefit may consist in an action (performance of an action for another entity) or in omission (an obligation to refrain from performing an action or to tolerate an action or situation). The benefit may also consist of acting and omitting behavior at the same time.

Pursuant to Article 25 of the Council Directive 2006/112 / EC of 28 November 2006 on the common system of value added tax (Journal of Laws UE L 347, p. 1, as amended), the provision of services is any behavior of the entity in the performance of an obligation, which does not necessarily involve the physical performance of any action or taking an action. The definition of service provision also includes an obligation to refrain from acting or to tolerate an act or situation.

However, in order to be taxable, the supply of services must, in principle, be for remuneration. Thus, there must be a legal relationship between the service provider and the recipient, and remuneration should be paid in return for the service (the provisions of the Act do not specify the form of remuneration).

In view of the above considerations, the provision of services is subject to tax on goods and services when it is performed for a consideration and when there is an explicit or implicit legal relationship (contract) between the supplier of the goods or the service and their recipient (contract) under which the services are provided.

When is the compensation involved?

Pursuant to Art. 222 § 1 of the Civil Code, the Municipal Institution, as the owner of the thing (in our case, the premises), may demand that the person of the enterprise X, who actually controls his thing, be released to him, unless the person is entitled to the owner of the property.

The activity subject to VAT is the rental service and, consequently, the payment of the rent and the underlying rental agreement. On the other hand, an activity that is not subject to VAT is the payment of compensation for non-contractual rental and the resulting damage. Compensation is the payment for the damage caused and the losses suffered by someone. Pursuant to Art. 361 of the Civil Code, as a rule, compensation for the damage covers the losses suffered by the aggrieved party and the benefits that could have been achieved if the damage had not been done to him.

Non-contractual use of the premises - compensation

In the analyzed case, Zakład Komunalny did not agree to use the property. It should be emphasized that company X did not pay for the rent during non-contractual use of the premises. Zakład Komunalny, wanting to recover the amount for non-contractual use of the premises, applied to the court. In such a situation, when a third party, company X uses the property without the consent of its owner, it is reasonable to assume that there is no explicit or implied legal relationship (contract) between the owner of the property and the non-contractual legal relationship (contract) under which the services are fulfilled. mutual. The provision of Zakład Komunalny is not based on a legal title indicating the existence of an obligation to provide a service and the amount of remuneration (rent) is not subject to tax on goods and services. If the court decides, the compensation will not be taxable. In summary, the compensation paid in these circumstances is not a payment for the provision of a service, but a compensation for depriving the Municipal Office of the right to freely dispose of the property and the resulting damage. Thus, as stated above, it is not subject to VAT.

The above is confirmed by the interpretation of the Director of the Tax Chamber in Katowice of June 23, 2016, ref. No. IBPP1 / 4512-205 / 16 / AW:

a service not based on a legal title indicating the existence of an obligation to provide a service and the amount of remuneration is not subject to tax on goods and services. In the case of non-contractual use of someone else's property, the owner is entitled to a claim for remuneration for the unlawful use of his property. Payment of a certain amount of money is associated with the right to demand compensation for the resulting damage due to unlawful use of the item. Demand for remuneration (monetary claim) in its essence does not constitute a payment for the performance of services, but is a compensation for the owner's inability to obtain benefits and use things during the period of non-contractual use.

What document should be issued for non-contractual use of the property?

At the outset, it should be remembered that the invoice is a formal document and should be issued in accordance with the applicable provisions of national law. It should correctly reflect the economic event. The invoice confirms the economic events that have occurred, and its formal elements required by Art. 106e paragraph. 1 of the VAT Act are of evidentiary nature.

In the analyzed case, because it has been stated above that the fee due to the Municipal Office for non-contractual use of the premises is not subject to tax on goods and services, there are no grounds for issuing a VAT invoice documenting this fee.

As a consequence, the fee for non-contractual use of the premises in the analyzed case should not be documented with a VAT invoice.