VAT in company costs - formal issues

When running a business, entrepreneurs incur various types of expenses which, under certain conditions, may be classified as tax deductible costs, thus lowering the tax base. In special situations, you can also include VAT in the company's costs. The conditions that must be met to make it possible are discussed below!

Tax-deductible costs and VAT

Pursuant to Art. 22 sec. 1 of the PIT Acttax deductible costs are costs incurred in order to achieve income or to maintain or secure the source of income, with the exception of the costs referred to in article 1. 23, i.e. apart from land purchase expenses, loan repayment amounts, income tax, penalties and fines adjudicated in criminal or fiscal penal proceedings.

The act does not mention the exact expenses that can be classified as tax deductible costs. It is only advisable that in order for a given expense to be considered a cost:

• must be related to the conducted business activity,
• cannot be listed in the catalog of expenses not recognized as tax deductible costs,
• must be properly documented.

The catalog of expenses not classified as tax deductible also includes the tax on goods and services. There are, however, some exceptions when VAT may be included in tax deductible costs. Pursuant to Art. 23 sec. 1 point 43 of the Personal Income Tax Act, tax deductible costs in some situations include input and output VAT.

Charged VAT on company costs

Input tax is a tax deductible cost if the taxpayer is exempt from value added tax or purchased goods and services in order to produce or resell goods or provide services which are exempt from value added tax. This means that if a taxpayer is not an active VAT payer, when receiving a purchase invoice, he may include VAT in tax deductible costs, as it cannot be deducted. The condition is that the expenditure to which the VAT relates should be a cost incurred in order to generate income or to maintain or secure the source of income. If the taxpayer purchases goods or services that are used for activities that are statutorily exempt from tax on goods and services (e.g. medical services), the total gross amount from the purchase invoice is included in the tax deductible costs, and thus the input VAT is shown. in company costs.

Example 1.

Anna Kowalska, who runs a grocery store, benefits from a subjective exemption from VAT. Additionally, it keeps records in the form of a Tax Book of Income and Expenditure. In May 2019, commercial goods were purchased from an active VAT taxpayer, therefore, Ms Anna received an invoice containing the input VAT. How should my purchase be accounted for?

The received invoice should be fully included in column 10 of the KPiR - Purchase of Commercial Goods and Materials. Due to the exemption from VAT on the purchase of commercial goods, Ms Annie has the right to include the amount of input VAT in the tax deductible costs (apart from the net value of goods).

Input tax is also a tax deductible cost in the part in which, in accordance with the provisions on tax on goods and services, the taxpayer is not entitled to a reduction in the amount or refund of the difference in tax on goods and services - if the input tax on goods and services does not increase the value of a fixed asset or intangible asset and legal. This is the case in cases where, in accordance with the VAT Act, there is no right to deduct input tax. This is the case, inter alia, when purchasing hotel and catering services. In such situations, the entire amount of the incurred expenditure is recognized as tax deductible costs.

Due tax and tax deductible costs

The tax due is a tax deductible cost in the case of importing services and intra-Community acquisition of goods, if it is not an input tax within the meaning of the provisions on tax on goods and services. However, it is not possible to show the VAT due in costs in the part exceeding the amount of tax on the purchase of these goods and services, which could constitute input tax within the meaning of the provisions on tax on goods and services. This means that tax-deductible costs include output tax, which is also input tax, which, however, is not deductible. Such a situation takes place in the case of the import of services related to sales exempt from tax or the purchase of a passenger car for which a partial right to deduct VAT is available.

The tax is also a cost when the taxpayer transfers or consumes goods or provides services for the purposes of representation and advertising, and this tax is calculated in accordance with separate regulations.

Example 2.

Jan Kowalski, who runs the XYZ company, purchased the goods from a contractor from the European Union. Mr. Jan benefits from a subject exemption from VAT. In such a situation, how should the WNT transaction be settled for tax purposes?

As a rule, when making an intra-Community acquisition of goods (intra-Community acquisition of goods), the entrepreneur is obliged to report both input and output VAT. Due to the use of the VAT exemption, Mr. Jan cannot deduct VAT from this transaction, despite the obligation to pay it. Therefore, this tax will be tax-deductible for him on the date of payment.

To sum up, in practice, in most situations where VAT cannot be deducted from output tax, it may constitute a tax deductible cost. It should be remembered, however, that this applies only to entities that are active VAT taxpayers and only to the extent to which the purchased goods or services are used to perform activities subject to VAT. In the case of entities that are not VAT payers, VAT automatically becomes a tax deductible cost.