Correction of input VAT on property renovation expenses

Changing the purpose of the property generates the need to apply a VAT correction system. In this article, however, we will not deal with the case of adjusting the VAT deducted in connection with the purchase or construction of real estate, but in connection with the renovation. Let's check if it is necessary to correct the input VAT on property renovation expenses.

Rules for correcting VAT in connection with the change of destination

The basic rule indicates that when a taxpayer incurs expenses related to business activity (purchase of goods and services), he is entitled to deduct input tax.

However, it must be remembered that the purpose of the property may change. We are talking here about a change consisting both in the commencement of use for the purposes of tax-free activity (which results in the necessity of a negative correction) and a reverse correction (in plus), when the purpose is changed from tax-free to taxed activity.

The basis of the above formulation is Art. 91 paragraph. 7 of the VAT Act stating that the adjustment is made when the taxpayer had the right to reduce the amount of tax due by the entire amount of input tax on the goods or services he used and made such a reduction or did not have such a right, and then the right to reduce the amount has changed output tax by the amount of input tax on this good or service.

Changing the purpose of the real estate implies the need to correct the input tax deducted previously by the taxpayer. Such an adjustment applies not only to expenditure on the acquisition of real estate, but also to expenditure on the real estate.

What period does the input tax adjustment apply to in relation to property expenses

The obligation to make adjustments in connection with a change of purpose is not unlimited in time. The need to correct previously deducted VAT only arises when the change of destination occurs during the correction period.

At the same time, it should be emphasized that the VAT Act specifies different correction periods.

First, according to Art. 91 paragraph. 7a of the VAT Act, it is 10 years in the case of the purchase of those goods and services which, pursuant to the provisions on income tax, are classified by the taxpayer as fixed assets and intangible assets subject to depreciation, excluding those whose initial value does not exceed PLN 15,000.

As a result, the above rule will apply, for example, to expenditure on improving real estate, as the improvement is depreciated under income taxes.

This issue is completely different in the case of renovation. This is where Art. 91 paragraph. 7b in connection with from paragraph 7c of the VAT Act. This regulation applies to these goods and services other than those mentioned in sec. 7a. This provision applies to all goods and services, including fixed assets and intangible assets subject to depreciation, the initial value of which does not exceed PLN 15,000. This adjustment is not made if 12 months have elapsed since the end of the settlement period in which the goods or services were released for use.

Therefore, if in a given factual state we are dealing with renovation of real estate, then in the event of a change in the purpose of the real estate, Art. 91 paragraph. 7a of the VAT Act, relating to fixed assets and their improvements, where the correction period is 10 years. In such circumstances, it is 12 months from the month when the renovation works are completed.

Similar conclusions were drawn by the Director of IS in Katowice in the interpretation of January 3, 2017 (No. 2461-IBPP1.4512.741.2016.2.ES), where we can read that in relation to goods and services purchased in connection with the renovation of the roof of the building carried out in 2016, due to the fact that these were not expenses for improvement, the provisions of Art. 91 paragraph.7b and 7c of the Act, according to which the adjustments are made once in the tax return submitted for the accounting period in which the change of destination occurs, but not later than 12 months from the end of the accounting period in which the goods were released for use.

As a result, we can indicate that only in a situation where 12 months have not elapsed from the date of completion of renovation works to the change of use of the property, pursuant to Art. 91 paragraph. 7b and paragraph 7c of the Act, the taxpayer is obliged to correct the input tax on account of expenditure incurred for the renovation in the declaration submitted for the accounting period in which the change of destination took place.

Example 1.

The VAT taxpayer purchased the property for the company property and started using it in 2010. Consequently, he deducted input tax. In addition, in July 2019, he incurred expenses for the renovation of the property, in connection with which he also deducted VAT. In January 2021, he handed over the property for private purposes. Due to the fact that more than 12 months have elapsed since the completion of the renovation works, there is no need to correct the previously deducted VAT on this account. The obligation to correct does not arise with regard to the deducted VAT on acquisitions, as also in this case the 10-year correction period has elapsed.

Corrections of the tax deducted in connection with renovation expenses for real estate are not made if a period longer than 12 months has elapsed since the end of the settlement period in which the renovation works were completed.

Correction of input VAT on expenses for renovation or improvement of real estate?

From the regulations we have presented, it is clear that a different correction period occurs in the case of expenditure for improvement, and another in a situation where we are dealing with renovation of real estate.

Therefore, from the taxpayer's perspective, it is very important to distinguish when there is renovation and when an improvement occurs.

Renovation in accordance with Art. 3 point 8 of the Act - Construction Law is the performance of construction works in an existing building object consisting in restoring the original technical and functional condition of a fixed asset, and not constituting current maintenance, while it is allowed to use construction products other than those used in the original state.

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Products used to replace worn-out elements of a fixed asset with new ones, made of more modern materials, do not change the nature of the work performed, because the changing economic reality and technical progress should be taken into account. It cannot be considered that each replacement of worn-out elements of a fixed asset with new ones with the use of more modern materials is an improvement.

On the other hand, an improvement occurs when investments are made on real estate which increase the value in use of the asset. In this sense, the concept of improvement includes:

• reconstruction, i.e. enlargement (extension) of property components, in particular buildings and structures, technological lines, etc., a significant change in the internal structure of an already existing facility without increasing the area;

• adaptation, i.e. adaptation (modification) of an asset to be used for a purpose other than that for which it was originally intended or to give it new functional features;

• reconstruction, i.e. restoration (rebuilding) of fully or partially used assets;

• modernization, i.e. modernization of the fixed asset.

In the context of determining the correction period, it is crucial to determine whether the given outlays on the property took the form of an improvement or renovation. Renovation is essentially when the taxpayer restores the original condition and functionality of the property.

The presented regulations lead to the conclusion that the change in the purpose of the real estate implies the need to correct the input VAT on the real estate renovation expenses. It should be emphasized that the 12-month correction period is important.