Free services for own needs - the issue of taxation

Service-Tax

It is well known that tax on goods and services is subject to paid activities for other entities. In the economic reality, however, there is a situation where a taxpayer conducting business activity provides free services for his own needs. In such a situation, the question arises whether such an activity also causes an obligation to pay VAT.

Definition of free provision of services

As a rule, tax is imposed on the supply of goods against payment and the provision of services against payment. Art. 8 sec. 2 of the VAT Act, however, provides that the following are also considered as providing services for consideration:

  • the use of goods forming part of the taxpayer's enterprise for purposes other than the taxpayer's business activity, including, in particular, for the personal purposes of the taxpayer or its employees, including former employees, partners, shareholders, members of cooperatives and their household members, members of legal entities, members an association, 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,

  • free provision of services for personal purposes of the taxpayer or its employees, including former employees, partners, shareholders, shareholders, members of cooperatives and their household members, members of governing bodies of legal persons, members of the association and any other provision of services free of charge for purposes other than the taxpayer's business activity.

The above regulation leads to the conclusion that the taxation of a free service will take place when two conditions are met. First, it concerns only those free services which serve purposes other than the taxpayer's business activity, and secondly, only those situations in which the taxpayer was entitled to reduce the output tax by the amount of input tax paid on the purchase of goods and services related to those services.

The provision of services free of charge is subject to VAT if it is performed for purposes other than the taxpayer's business activity. Thus, such a benefit for the purposes of the taxpayer's business activity is not subject to VAT.

Free provision of services for business purposes takes place if it takes place as part of business activities carried out by the taxpayer and is related, even indirectly, to taxable activities performed as part of this activity. Any other provision of services free of charge is for purposes other than the taxpayer's business activity.

Example 1.

A taxpayer running a business in Radom, in order to travel to a customer located in Wrocław, used the company's fuel by refueling his private car. Such unpaid consumption of goods does not constitute a taxable activity as it was made for purposes related to the taxpayer's business activity.

Example 2.

A taxpayer running a business in the field of repairs of household appliances, using the company's tools and company parts, repaired his own washing machine. Due to the fact that the taxpayer was entitled to deduct input tax due to the purchase of the part and the repair was not related to the business activity, such activity will be subject to VAT.

Tax base for free services

Pursuant to Art. 29a paragraph. 5 of the VAT Act, the tax base for free services is the cost of providing these services incurred by the taxpayer. This cost is all expenses incurred by the taxpayer in order to provide the service. More specifically, it will be any actual costs incurred by the taxpayer for the provision of these services, which will be the total amount of the expenses incurred by him.

As a side note, it should be noted that the provisions of the Value Added Tax Act do not regulate the principles of documenting the provision of services free of charge. There is currently no obligation to document such activities with an invoice. The taxpayer can document them in any way, e.g. through internal evidence. It should be noted that, in the light of the currently applicable regulations, taxpayers do not issue internal invoices.

As a result, the taxable free provision of services can be documented with any documents, and even included in the VAT register without issuing any documents.

Free services for own needs - tax obligation

The Act on Value Added Tax does not provide for any specific regulations as to the moment when the tax obligation arises in the case of free provision of services for one's own needs. This means that general rules should be applied in this respect. As a consequence, taxable free services for own use should be reported in the relevant declaration for the accounting periods in which the service was performed.

Example 3.

The taxpayer running the car workshop replaced summer tires with winter tires on October 27. The tax obligation for the free benefit arose on October 27, which means that the tax due on this activity should be shown in the tax return for October.