How not to pay VAT on the inventory when liquidating the company?

The liquidation of the company involves the need to prepare a physical inventory, including both materials and goods, as well as components of the company's assets, on the purchase of which the taxpayer had the right to deduct VAT. When decommissioning a business, the entrepreneur is obliged to pay VAT to the tax office on the items shown in the inventory. Is it possible to avoid the obligation to pay tax? How to lead to a situation in which the final physical inventory does not include any goods, i.e. the final inventory would have a value of "zero"? Read our article and find out how not to pay VAT on the inventory!

Sale of the entire enterprise

If, prior to the liquidation of the business, the entrepreneur decides to contribute the entire enterprise to the company against payment (sale) or free of charge (contribution in kind), this operation will not be subject to tax on goods and services (Article 6 (1) of the VAT Act). The condition is that the sale should take place before the liquidation of the sole proprietorship, and more precisely before the cessation of taxable activities. Thanks to this, after the transaction is completed, the value of the physical inventory prepared in a sole proprietorship will amount to PLN 0. The entrepreneur will then not be obliged to pay VAT on the final inventory upon liquidation of the business.

Company liquidation and compliance with the regulations, i.e. how not to pay VAT on the inventory

Tax regulations allow the use of such solutions, which is confirmed by numerous tax interpretations issued on this subject at the request of entrepreneurs.

The Director of the Tax Chamber in Warsaw in the individual ruling (IPPP2-443-444 / 10-2 / AK) of September 1, 2010, decided:

“(...) if, as indicated by the Applicant, the subject of the in-kind contribution will be an enterprise within the meaning of Art. 55 of the Civil Code, this activity will be exempt from the VAT Act, and therefore will not be subject to this tax. (...) The applicant indicated that the Company, to which he contributed his entire sole proprietorship, continues to operate in an identical scope with the use of fixed assets, goods, computer programs, customer base and contacts previously used in a sole proprietorship. After this event, the Applicant submitted a notification of the cessation of taxable activities on the VAT-Z form along with information about the liquidation inventory status (zero inventory)”.

Also, the Director of the Tax Chamber in Poznań, in an individual ruling (ILPP2 / 443-91 / 13-4 / SJ) of 30 April 2013, confirms the legitimacy of taxpayers' conduct with regard to the valuation of the final inventory of sole proprietorship (including civil law partnership of natural persons) contributed to another company before liquidation:

“(...) in the present case we are dealing with the contribution of the entire enterprise of a civil partnership within the meaning of Art. 551 of the Civil Code an in-kind contribution to a limited liability company in the course of conducting business activities by the civil partnership. As a consequence, in the analyzed case, at the moment of liquidation (resulting from an in-kind contribution to a limited liability company), the civil law partnership will no longer have any goods for which it was entitled to reduce the amount of output tax by the amount of input tax. (...) To sum up, in connection with the planned contribution of the entire enterprise of the civil law partnership (within the meaning of Article 551 of the Civil Code), in the form of an in-kind contribution to a limited liability company, there will be no obligation to make a physical inventory on the date of dissolution of the civil partnership and tax settlement VAT, in accordance with Art. 14 sec. 1 point 1 of the Act”.

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Selected disadvantages of the sale of the company

The main and significant disadvantage of such a solution is the inability to exclude certain goods (usually those that are not included in the inventory) belonging to the business from the sale. The entire enterprise is usually sold, although the regulations also allow for the so-called sale of an organized part of it. Here, however, first of all, one should bear in mind the issue of determining until when a group of tangible and intangible assets can be considered an enterprise. In the judgment of the Supreme Administrative Court (II FSK 1489/11) of March 27, 2013, the court indicated:

“(...) the criterion for assessing whether the subject of a legal transaction is an enterprise will be a certain level of organization and functional separation, and above all, the ability to carry out the current economic activity with the use of assets covered by the contract”.

Therefore, it is possible to separate some assets before the sale of the enterprise, but it will be subject to special assessment by the tax authorities.

Sale of individual assets before the liquidation of the company

The solution leading to the recognition of a "zero" liquidation inventory when closing a business may also be the sale of individual assets - especially those that would be included in the final physical inventory prepared for the purpose of VAT settlement. Of course, such a solution involves showing the tax due on sales. Here, however, the advantage is the fact that it is the taxpayer who decides which of the assets he sells, which was not possible in the first presented solution. It should also be borne in mind that when selling goods or company property, the entrepreneur himself decides about their selling price. The limitation of his competences in this respect would take place only if the sale was made to related entities (Art. An example would be the sale of business assets to family members of the entrepreneur.

An entrepreneur planning to cease running a business may protect himself from paying VAT on the liquidation inventory. Such a possibility is offered by the decision to make an in-kind contribution of the entire enterprise to the company, provided that the sale takes place before the liquidation of the business. Another solution is to sell individual goods or assets remaining on the date of liquidation. Each of the solutions has advantages and disadvantages, and the choice of the optimal course of action depends on the individual needs of a given entrepreneur.