Being a VAT taxpayer often pays off
Beginning entrepreneurs who are just getting to know the principles of the company's operation, often wonder whether to decide to be an active VAT payer or to choose an exemption. This is a very important decision, because it may turn out that sometimes it will be more profitable to use the exemption, sometimes - not.
Sales to other taxpayers
The most common cases are domestic sales. If it takes place for the benefit of people who do not run a business, it usually does not matter whether the amount they pay is VAT added or not. Because consumers bear the burden of the gross price, without the possibility of deducting VAT. If, on the other hand, our recipients are companies - active VAT payers, then you can come across information that they only want to cooperate with entities that are themselves active VAT payers. Then they will receive an invoice with the tax charged.
If an active VAT payer purchases goods or services from an entity that is a VAT payer, he usually has the option of deducting the tax shown on the invoice. There are a number of exceptions to this rule, such as accommodation services or goods purchased for sale, which obligatorily benefits from VAT exemption (e.g. learning foreign languages).
However, if the purchase is not an exception, the trader actually bears the net amount of the transaction. A vendor benefiting from a VAT exemption should in such a situation issue an invoice for the equivalent of the net amount. In such a case, it would not matter for the buyer whether he cooperates with an active or exempt VAT taxpayer. However, the point is that sellers, despite being exempt from VAT, issue invoices at gross market prices. Thus, the buyer on the transaction is losing the amount of VAT.
For low-cost or low-cost services, the seller can afford to invoice at the net market value of the services in question. In this situation, it is not necessarily profitable to be an active VAT taxpayer. It is enough to inform the buyer that the price is similar (or lower) to the competition.
Worse when selling goods. Then the seller issuing the invoice in the net value would gain less than by registering for VAT.
Jan Nowak and Marek Kowalski purchased the goods for PLN 100 net (+ PLN 23 VAT). Mr. Jan is an active VAT payer, and Mr. Marek benefits from tax exemption. In order to maintain competitive prices, they both sell the goods for the benefit of companies for PLN 200, however for Mr. Jan it is a net amount, and for Mr. Brand the final value on the invoice. So what is the income in both cases?
1. Jan Nowak:
cost: PLN 100 (VAT is deductible)
revenue: PLN 200 (VAT is paid by the buyer)
income: PLN 100
2. Marek Kowalski:
cost: PLN 123
income: PLN 200
income: PLN 77
In this case, Marek achieves a lower profit so that his prices are competitive with the competition.
If we were buyers in the transaction, the profitability of the purchase should be considered based on an example.
Companies X and Y sell household appliances, X is an active VAT payer, while Y is exempt. Both companies purchased refrigerators from one supplier, paying for them the amount of PLN 1000 net + PLN 230 VAT.
The cost of the refrigerator at entrepreneur X will therefore be PLN 1000, while at Y - PLN 1230.
Assuming that both companies want to get PLN 500 for the sale of equipment, it can be calculated that the refrigerator at entrepreneur X will amount to PLN 1000 + PLN 500 profit + PLN 345 tax - that is PLN 1845. On the other hand, the cost of the refrigerator at entrepreneur Y will be PLN 1230 + PLN 500 profit - PLN 1730.
So it seems that a potential customer will choose company Y, which benefits from the VAT exemption. However, it is not always obvious. For if the buyer is a natural person who does not conduct business, company Y should actually be the one to whom he will turn. However, if it is a company - an active VAT payer, it will be more likely to buy a refrigerator from seller X. It is worth remembering that with such a purchase, the customer has the right to deduct the input VAT - therefore the actual cost of the refrigerator will not be PLN 1,845, but PLN 1,500. .
As you can see, if the entrepreneur has the option to choose to be an active or exempt VAT payer, it is worth considering whether his company is aimed at retail sales, for private persons, or whether other companies settling VAT will be the majority of recipients.
Investments and being a VAT taxpayer
When starting a business or creating a new branch of a company, entrepreneurs sometimes spend large amounts on investments. They can be related to the purchase of fixed assets, e.g. production machinery, a car or real estate. An entrepreneur who is an active VAT taxpayer will deduct the tax on purchases and may apply for its refund ex officio if the expenses exceed the amount of revenues obtained. The recovered VAT money can be used for further investments in the company or for current operations.
When it comes to investment expenditures, it is worth remembering that they may be depreciated over time (if the entrepreneur does not use or is not entitled to a one-off depreciation under the de minimis aid), however, the VAT itself can be deducted once.
Taking into account the scale of investment expenditure, it is worth considering whether being an active VAT taxpayer in such a case will be more profitable than taking advantage of the exemption.
Purchases at 23% and sales at 8%
In some industries, the VAT Act specifies the application of reduced VAT rates. Most often, this case concerns construction and renovation services performed on real estate included in the social housing program. Then it is possible to apply a reduced VAT rate of 8%.
The housing construction covered by the social housing program includes:
residential buildings (or parts thereof), excluding business premises and residential premises in non-residential buildings classified in PKOB in section 12,
buildings of health care institutions providing accommodation services with medical care and a nurse, especially for elderly and disabled people.
However, it does not include:
single-family residential buildings with an area exceeding 300 m2,
residential premises with a usable area of more than 150 m2.
In the above cases, the sale will be taxed at the rate of 8%. Most often, services are provided in single-family buildings and residential premises, the size of which is within the above-mentioned limits. On the other hand, purchased construction materials or materials for renovation are taxed at the rate of 23%. Therefore, with a large number of purchases, it may turn out that the VAT on purchases will exceed the amount of the sales tax, and in this case, being an active VAT taxpayer will become beneficial.
Services provided for a foreign contractor
This case is not an isolated case, as many freelancers cooperate with foreign companies, providing services such as IT, programming or online marketing. An entrepreneur who intends to provide services only to foreign taxpayers should consider registering for VAT. The VAT Act indicates that in such a case, the obligation to tax the service is transferred to the buyer. A Polish entrepreneur issues an invoice without VAT, with a note on the reverse charge (the term "reverse charge" is commonly known, which can be additionally included in the invoice).
The advantage in this case is that you do not have to pay VAT on the sale, but you can deduct it from your purchases. The provisions allow for the deduction of VAT in the case of purchases related to taxable activities, and the provision of services in which the buyer is the taxpayer are such.
Art. 86 sec. 1 of the VAT Act
To the extent that the goods and services are used to perform the activities, taxable, the taxpayer referred to in article 2. 15, has the right to reduce the amount of tax due by the amount of input tax (...).
If the trader does not provide any other domestically taxed services, then the VAT return will accumulate an excess of input VAT on purchases, which can be recovered.
Being an active VAT taxpayer should always be assessed in terms of profitability. As you can see, it all depends on the type of industry in which the entrepreneur operates, as well as the type of buyers. When large expenses are planned for which VAT will be deducted or in the case of providing services to taxpayers from other EU countries, it is worth considering VAT registration. In the case of sales to consumers for whom the issue of payment with or without input VAT does not matter - it is worth considering the use of the tax exemption.