Building a house with a business activity in mind and VAT deduction

Service-Tax

Taxpayers who own real estate often use their property to conduct business. Such action allows for a deduction of the input tax on the property. However, the question arises whether it is possible to make a tax deduction for expenses generated by building a house intended for running a business? In addition, what if the property will be used for both residential and business purposes?

General rules for making VAT deductions

First of all, it is necessary to point out the general principle of deduction of input VAT. Well, as Art. 86 sec. 1 of the VAT Act, to the extent that goods and services are used to perform taxable activities, the taxpayer has the right to reduce the amount of tax due by the amount of input tax. This provision implies a direct conclusion that the right to deduct input tax is available only to the taxpayer of the tax on goods and services, on purchases of goods and services used to carry out taxable activities. This means that input tax related to taxable transactions of the taxpayer can be fully deducted. The indicated rule excludes the possibility of deducting input tax related to goods and services that are not used at all to perform taxable activities.

As a result, if a building to be erected is entirely intended for business purposes, the taxpayer has the right to deduct the entire input tax resulting from purchase invoices related to the construction of that building. Moreover, it is worth noting that in order to acquire the right to deduct VAT, it is not necessary to register a business activity, as the status of a taxpayer under VAT results from the very fact of undertaking taxable activities.

Example 1.

The owner of the land plans to build a house that will be used in its entirety for the conduct of taxable economic activity. As a result, all invoices related to purchases will be deducted from input tax.

However, taxpayers deducting VAT from expenses for building a house must bear several important issues in mind. First of all, only the invoice gives the right to deduct VAT. As a result, the taxpayer must ensure that each expense is documented by an invoice, not a receipt. Second, the house, after its construction, must be used only for the purposes of taxable economic activity. If the taxpayer changes the purpose of the property and starts to use it for private purposes (or activities exempt from VAT), it will be necessary to adjust the amount of tax deducted. It should be remembered that in the case of real estate, the correction period is as much as 10 years.

Building a house that is used both for private purposes and for business purposes

It is not uncommon for a building to be used for mixed purposes, i.e. it serves as a living quarters for the owner and his family, and at the same time serves the business activity.

This type of situation is referred to in Art. 86 sec. 7b of the VAT Act, from which it follows that in the case of expenditure on the production of real estate constituting the property of a given taxpayer, used both for the purposes of the taxpayer's business and for other purposes, in particular for personal purposes, which cannot be entirely attributable to economic activities, input tax is calculated according to the percentage in which the property is used for business purposes.

The above provision therefore applies to cases where a given real estate is not used exclusively for business purposes. Namely, it concerns situations in which the property has mixed use, that is, it is used for both related and non-business purposes. Therefore, if the taxpayer is able to assign the expenditure to the part of the house that will be used for business activity, he is entitled to reduce the output tax by the amount of input tax included in the invoices documenting these expenses in the part that will be used for taxable activities, i.e. from the part that will be used for business activities and will be related to activities subject to VAT.

As a result, for expenses that can be allocated to the part of the house used exclusively for business purposes, the taxpayer will have the right to reduce the amount of input tax by the amount of input tax. On the other hand, with regard to expenses that the taxpayer is not able to assign to specific parts of the building, he will have the right to reduce the amount of tax due by the amount of input tax according to the percentage in which the property is used for business activities related to taxable activities. VAT.

Example 2.

The taxpayer builds a house that will serve both as a dwelling and will be used for business purposes. The taxpayer assumes that the economic activity will occupy 25% of the house area. As a result, it can deduct 25% of the input tax amount from each purchase invoice. For example, if the sum of the input tax from invoices is PLN 25,000, only the amount of PLN 6,250 is deductible.

Example 3.

The taxpayer builds a house that will be used entirely for business purposes. The sum of the tax charged on purchase invoices related to the construction of the house is PLN 25,000. The entire amount is deductible (assuming that the purpose of the built house does not change for a period of 10 years, there will be no obligation to correct the deducted VAT).