The right to deduct input VAT and no registration

Service-Tax

Taxpayers of value added tax have the right to deduct input VAT on purchases of goods and services made for the purposes of business activity, related to taxable activities. Entrepreneurs who are not registered as active VAT payers in some cases also have this right.

Taxpayer of value added tax and the right to deduct VAT

The VAT taxpayer has the right to reduce the amount of tax due by the amount of input tax to the extent that goods and services are used to perform taxable activities, as stated in Art. 86 sec. 1 of the VAT Act. It should be emphasized that pursuant to Art. 15 sec. 1 of this Act, VAT taxpayers are legal persons, organizational units without legal personality and natural persons who independently carry out economic activity referred to in paragraph 2, regardless of the purpose or result of such activity. The regulations do not stipulate that registration for VAT purposes is a condition for recognizing a person running a business as a taxpayer of value added tax.

Unregistered taxpayer and the right to deduct VAT

Pursuant to Art. 88 sec. 4 of the VAT Act, the reduction of the amount or the refund of the difference in output tax does not apply to taxpayers who are not registered as active VAT taxpayers. Accordingly, unregistered taxpayers are entitled to deduct input VAT, but this is not tantamount to the possibility of exercising this right. To use it, you must register.

The entities referred to in Art. 15, are required before the date of the first taxable activity to submit a registration application to the head of the tax office, as indicated in art. 96 sec. 1 of the VAT Act. The provisions of this Act do not provide for any negative effects if this obligation is not fulfilled or it is met at a later date.

If the taxpayer registers for VAT purposes (submits the VAT-R form and receives the VAT-5 confirmation), he obtains the status of an active VAT taxpayer, therefore he can deduct VAT from invoices received before registration in connection with his business activity, because the right to deduct VAT the taxpayer purchased the input at the time of receipt of the invoice.

Change of status to an active VAT payer and the right to deduct VAT

A taxpayer benefiting from a subjective VAT exemption has the right to deduct VAT in the case of purchases made before registration. Pursuant to Art. 91 section 7-7d of the VAT Act, a taxpayer resigning from the exemption and switching to a VAT payer may partially deduct VAT for:

  • commercial goods,

  • services,

  • fixed assets,

  • intangible assets,

  • other assets.

Until January 2014, in order to be entitled to deduct VAT on commercial goods, the taxpayer was required to prepare a physical inventory as of the date of change from VAT exemption to an active VAT payer. And report this inventory to the tax office within 14 days. After changing the regulations, the taxpayer should correct the amount of tax deducted in accordance with art. 90 sec. 2-10, taking into account the proportion.

Attention!

Deduction of the tax on commercial goods is possible only on the basis of a correction accounted for in accordance with art. 91 paragraph. 7d of the VAT Act, which says that in the event of a change in the right to reduce output tax by input tax on goods and services other than those listed in paragraph 7a and 7b, in particular commercial goods or raw materials and materials, acquired with the intention of using them for activities for which there is a full right to reduce the output tax or for activities for which the right to reduce the output tax is not applicable, and unused in accordance with this intention, until the date of this change, the input tax adjustment is made in the tax return submitted for the accounting periods in which this change occurred.

The adjustment should be made to all commercial goods and materials that the trader has in stock at the time of transition and which will serve a taxable sale. The correction should be shown in the VAT return submitted for the period in which the form of taxation has changed.

The adjustment is also made to the assets:

  • if their initial value does not exceed PLN 15,000, and until the end of the period, 12 months have not passed since they were put into use

  • if it exceeds PLN 15,000, the correction should be made within 5 years, and in the case of real estate - up to 10 years.

Example 1.

In 2012, the company purchased a fixed asset (car) worth PLN 16,000 and VAT 3,680 PLN. From 01/01/2015 she registered as an active VAT taxpayer.

The taxpayer has the right to correct the input VAT, but only in ⅖ of the value, as in the period 2012-2014 the measure was used as an activity exempt from VAT. This adjustment cannot be made once, as the value exceeded PLN 15,000.

In this case, the company will be able to deduct ⅕ of VAT, i.e. PLN 736 in the VAT-7 / 7K declaration submitted for the first accounting period of the year following the year in which the purpose of fixed assets has changed - January 2016. The next adjustment will be made in 2017 if the intended use of the fixed asset will not change.

To sum up, a taxpayer not registered for value added tax purposes also has the right to deduct input VAT on purchases made before registration, but to exercise this right, he must first register. Thus, a taxpayer who made purchases entitling to deduct input VAT, without being an active VAT taxpayer, may register after the occurrence of these events and exercise the right to deduct. And in the event of resignation from the subjective exemption from VAT for an active VAT payer, the taxpayer may also deduct VAT on purchased commercial goods and assets. Then, the VAT should be corrected and the proportion in which the tax can be deducted should be calculated.