Free benefits for an employee and VAT taxation

Service-Tax

Employers often provide employees with various types of benefits in addition to remuneration, but they are not always aware that such benefits for an employee are subject to VAT.

As a rule, VAT is subject to chargeable transactions, i.e. the paid delivery of goods and the paid provision of services. In certain situations, however, also activities that are free of charge are also subject to taxation, including the free transfer of goods by the taxpayer.

Employee benefits - definition

The Act additionally specifies certain activities that should be treated on a par with the paid delivery of goods. Certain unpaid activities of the taxpayer are also such factors. A taxable supply of goods is also considered to be the delivery by a taxpayer of goods belonging to his enterprise, in particular:

  1. the transfer or consumption of goods for the personal purposes of the taxpayer or its employees, including former employees, partners, shareholders, shareholders, members of cooperatives and their household members, members of the governing bodies of legal persons, members of the association,

  2. any other donation

- if the taxpayer was entitled, in whole or in part, to reduce the amount of tax due by the amount of input tax on the acquisition, import or manufacture of these goods or their component parts.

The transfer of the employee benefit will be taxable if all of the following conditions are met:

  1. the transfer was made for the employee's personal needs,

  2. the taxpayer was entitled to deduct input VAT on the purchased goods.

There are exceptions to this rule. Two categories of free supplies of goods enumerated in the Act are excluded from the scope of taxation:

  • gifts of low value and

  • samples.

Both these terms have been defined in detail by the legislator. Pursuant to Art. 7 sec. 4 of the VAT Act, gifts of small value are understood as goods transferred by the taxpayer to one person:

  • with a total value not exceeding PLN 100 in the tax year, if the taxpayer keeps records that allow the identification of these persons,

  • the transfer of which has not been included in the records referred to in point 1, if the unit purchase price of the goods (without tax), and if there is no purchase price - the unit production cost, determined at the time of handing over the goods, do not exceed PLN 10.

Below, we present the most frequently appearing benefits, the necessity of taxation of which raises interpretation doubts.

Handing over of groceries

Food products such as: water, coffee, tea and other beverages provided by the company to employees for the purpose of their consumption during work should be considered as a transfer related to the company's activity, because it serves to improve working conditions and its the goal is to increase its efficiency.

In addition, the donated products are used only at the workplace. This excludes the possibility of the transfer being considered a personal donation of employees or a donation. Thus, the transfer will not be subject to VAT.

The position presented is also confirmed by the tax authorities, an example is the letter of the Director of the Tax Chamber in Bydgoszcz of 30 July 2010, no. ITPP1 / 443-423a / 10 / BK, in which we read:

(...) As it appears from the application, the goods transferred to employees are related to the conducted activity, and are not transferred for personal purposes of employees. Considering the above, it should be considered that the distribution of drinks to employees by the employer as part of the obligations imposed by the above-mentioned provisions, and not for their personal purposes, is not subject to tax on goods and services. In any other situation, the employer issuing the above-mentioned articles for employees - due to the content of art. 7 sec.2 point 1 of the Act - is obliged to tax the value of those goods with the tax on goods and services, the purchase of which was entitled to deduct input tax in whole or in part. The conditions for recognizing this delivery as a paid delivery of goods for personal purposes of employees will be met. Moreover, due to the fact that this activity is not subject to taxation, the Applicant will not be obliged to document the above activities with an internal invoice. (...)

Preventive meals

Due to the provision of obligatory preventive meals to employees, there is no VAT taxation of this transfer. In this case, Art. 7 sec. 2 of the VAT Act. It cannot be considered that it is a transfer of goods for the taxpayer's personal purposes. VAT is not taxed also when the provision of preventive meals constitutes free services. In such a situation, it is not transferred for the personal purposes of employees, nor is it a free provision of services for purposes other than the taxpayer's business activity (Article 8 (2) (2) of the VAT Act).

This position is confirmed by the tax authorities, an example of which is the letter of the Director of the Tax Chamber in Katowice of February 2, 2012, no.IBPP1 / 443-1565 / 11 / MS, where we read:

(...) Therefore, taking into account the nature of the business activity conducted by the Applicant and the specific circumstances of providing meals to specific employees, indicated in the application, there are no grounds to believe that in this particular case there is a transfer of goods or services for personal purposes of employees. In this particular case, the needs of the enterprise are of paramount importance and exceed the personal needs of the employees (…).

Inventory shortages

The delivery of goods means, for VAT purposes, the transfer of the right to dispose of the goods as the owner and other activities listed in art. 7 of the VAT Act. Culpable shortages are not mentioned in this provision, which means that they are not subject to VAT. Therefore, there will be no obligation to charge the tax due on the value of the deficiencies found. The occurrence of culpable shortages will also not affect the deducted input tax charged on the purchase of these goods.

On the other hand, the term "provision of services" is defined in Art. 8 of the VAT Act, according to which the provision of services 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.

In connection with the above, it should be assumed that the losses as not constituting the supply of goods or the provision of services within the meaning of Art. 7 and art. 8 of the VAT Act are not subject to this tax. Therefore, there is no obligation to calculate the output tax on the value of the identified losses and this fact cannot be documented with a VAT invoice.

Such a position was expressed by the Head of the Tax Office in Malbork in a letter of May 25, 2005, No. PV-BP / 443-50 / O / 05, in which we can read:

(...) faultless deficiencies do not constitute a supply of goods or provision of services within the meaning of Art. 7 and 8 of the Act of March 11, 2004 on tax on goods and services / Journal Of Laws No. 54, item 535 as amended /

In view of the above, the Act on Value Added Tax and the secondary legislation to the Act do not impose the obligation to record natural losses and to create special documents and records for the purposes of value added tax (...).

Importantly, even if the taxpayer was entitled to deduct VAT on purchases related to taxable activities, the identified shortage of goods does not require input tax correction.