Loss of personal exemption from VAT and the valuation of goods

Service-Tax

Some of the entrepreneurs who benefit from the subjective exemption from VAT sooner or later exceed the limit entitling them to it. It is then necessary to analyze how the loss of the subjective exemption from VAT will affect the tax deduction in the period of exceeding the limit and what will happen to the value of the goods.

VAT deduction

In the case of taxpayers running a business, and in addition:

  • benefiting from the subject exemption from VAT, or

  • who are active VAT taxpayers, using the VAT proportion and making purchases for activities exempt from VAT, or

  • providing only services exempt from VAT

- there is no right to deduct VAT, the taxpayer is entitled to deduct input VAT when:

  • he is an active VAT taxpayer,

  • the goods or services it purchases are intended for sales subject to VAT.

Please note that VAT refund will not be given to taxpayers who are not registered as active VAT taxpayers.

Subjective VAT exemption

Pursuant to Art. 113 paragraph. 1 of the VAT Act, sales made by taxpayers whose sales value did not exceed the total of PLN 200,000 in the previous tax year, and the sales value does not include the tax amount.

The sales limit of PLN 200,000 does not include:

  • sale of fixed assets and intangible assets subject to depreciation against payment,

  • intra-community delivery of goods,

  • mail order sale from the territory of the country and mail order sale within the territory of the country,

  • for sale of goods or services exempt from VAT, except for:

  • real estate transactions,

  • insurance services,

  • services including brokerage, relating to currencies, banknotes and coins used as legal tender, excluding banknotes and coins that are collectors' items, which are considered gold, silver or other metal coins, and banknotes that are not normally used as legal tender or which have a numismatic value,

  • management services of funds and investment portfolios, insurance capital funds, open-ended pension funds, employee pension programs, settlement funds,

  • credit or cash loan granting services and intermediation services in the provision of credit or cash loan services, as well as credit or cash loan management by a lender or lender,

  • services in the field of granting sureties, guarantees and any other security for financial and insurance transactions as well as intermediation services in the provision of these services, as well as the management of credit guarantees by a lender or a lender,

  • services in the field of deposits of funds, maintenance of cash accounts, all kinds of payment transactions, money orders and transfers, debts, checks and bills of exchange and brokerage services in the provision of these services,

  • services, including brokerage services (except for the storage and management of these shares), the subject of which are shares in:

- companies,

- entities other than companies, if they have legal personality,

  • services related to financial instruments, with the exception of the storage and management of these instruments, and intermediation services in this regard.

- if these activities are not ancillary transactions.

It should be remembered that in the case of taxpayers starting business activity during the year, the personal exemption limit of PLN 200,000 is determined proportionally to the number of days remaining until the end of the current year.

In addition, the taxpayer, starting from the date of the loss of the subjective exemption from VAT (the limit amount is the net sales value), should immediately submit the VAT-R form informing about the loss of the status of a taxpayer exempt from VAT and start keeping VAT registers and submit the first VAT declaration for a month or a quarter, in which the above limit was exceeded.

Loss of the subjective exemption from VAT by the taxpayer who purchased the goods for sale exempt

Example 1.

Mr. Krzysztof runs a sole proprietorship, which he started in May 2016. His company sells only commercial goods and does not provide any services. This activity benefits from a subjective exemption from VAT, therefore the purchased goods or services are intended for the exempt sale of goods. It soon turned out that on December 5, 2016, the sales value of Mr. Krzysztof's company exceeded the amount of PLN 200,000, which resulted in the loss of the right to the current status of the entity as exempt from VAT. On December 5, 2016, the company became an active VAT taxpayer.

At this point, there is a change of destination as to the previously acquired goods intended for exempt sale. Starting from December 5, 2016, the previously purchased goods are intended for taxable activities (the exception would be the situation in which the goods would benefit from the VAT exemption in question, i.e. not the VAT-exempt status of the taxpayer, but the VAT-exempt status of the goods sold, as well as the previously mentioned types of sale not included in the limit value of PLN 200,000).

Also from that date, there was a change in the right to deduct input VAT. Therefore, the taxpayer will be required to register VAT and submit the first VAT return for the December period.

However, pursuant to Art. 91 paragraph. 7 of the VAT Act, he also has the right to a one-off correction of VAT for December 2016 on the previously purchased goods used for VAT-exempt activities, and used for taxable activities due to the loss of the subjective VAT exemption.

The same position was adopted by the Director of the Tax Chamber in Bydgoszcz in the individual ruling of 25 September 2012 no. ITPP1 / 443-756 / 12 / MN and the Director of the Tax Chamber in Katowice in the individual ruling of 8 July 2013, ref. No. IBPP1 / 443-299 / 13 / ES.

Value of the nature inventory in case of loss of VAT exemption

Example 2.

Mr. Karol sells commercial goods and benefits from the subjective VAT exemption. In June 2017, his company lost the status of a taxpayer subject to VAT exemption due to the fact that the sales value of PLN 200,000 was exceeded, which resulted in the loss of the right to the current status of the entity as exempt from VAT. Mr. Karol made an adjustment in the settlement for June 2017 pursuant to Art. 91 paragraph. 7 of the VAT Act in connection with the change in the intended use of previously purchased goods for the performance of only taxable activities. However, Mr. Karol wonders what value to value the goods at at the end of the year.

It is worth quoting § 29 para. 1 of the Regulation of the Minister of Finance of August 26, 2003 on keeping a tax book of revenues and expenditures, which says that the taxpayer is obliged to evaluate materials and commercial goods covered by the physical inventory at purchase or acquisition prices or at market prices from the date of the inventory, if they are lower than the purchase or acquisition prices; the inventory of semi-finished products (semi-finished products), finished products and shortages of own production is valued at manufacturing costs, and utility waste, which lost its original value in use in the course of activity, is valued at the value resulting from the estimation taking into account their suitability for further use.

If Mr. Karol deducted VAT on goods acquired before becoming an active VAT payer, he should make a valuation of the goods:

  • as at the date of loss of the personal VAT exemption (in the VAT declaration for June 2017 or Q2 2017) in the net amount,

  • at the end of 2017 also in the net amount.

Moreover, in a situation where VAT is deducted in the correction procedure in connection with Art. 91 paragraph. 7 of the VAT Act, and previously it was included in the tax deductible costs (due to the recognition of goods in the gross value at the time of using the VAT exemption), at the time of the loss of the subjective VAT exemption (previously recognized VAT in costs) it will no longer constitute a tax deductible cost, and will be a deductible VAT, but only under the correction procedure under Art. 91 paragraph. 7 of the VAT Act. Therefore, taking into account Art. 14 sec. 2 point 7f of the Personal Income Tax Act, in the settlement for June 2017, Mr. Karol should increase the revenue by the amount of the deducted VAT on the purchased goods (during the period of VAT exemption) as at the date on which the personal exemption from VAT was lost , the income from economic activity is also the amount of VAT in the part in which the adjustment resulting in the increase of the tax deducted VAT was made.