Step by step VAT deduction
Entrepreneurs who are active taxpayers of value added tax have the right to deduct input VAT in connection with the purchase of goods or services, and thus reduce the output VAT. In order for the taxpayer to be able to deduct VAT on these purchases, the conditions specified in the VAT Act must be met.
Documents authorizing the deduction of VAT
An entrepreneur who wants to exercise the right to deduct input VAT must have an invoice in connection with the purchase that includes the VAT amount. It can also deduct VAT from an advance invoice in connection with its receipt and payment.
You should pay attention to the invoices we receive, because according to art. 88 sec. 3a of the Value Added Tax Act do not entitle the taxpayer to deduct input VAT, customs documents, invoices and corrective invoices in the event that:
are issued by a non-existent entity,
the transaction is not subject to tax or is tax-exempt,
state activities that have not been performed - in the part concerning these activities,
provide amounts that are not in accordance with reality - in the part concerning those items for which amounts are not consistent with reality,
confirm the activities to which the provisions of art. 58 and 83 of the Civil Code - in the part concerning these activities,
are issued by the buyer in accordance with separate regulations (self-invoicing), if they have not been accepted by the seller,
the amount of tax has been shown in relation to taxable activities for which the amount of tax is not shown on the invoice - in the part relating to these activities.
The provision of Art. 88 (3a) of the VAT Act also applies to duplicate invoices.
VAT deduction in connection with the type of activities performed
As a rule, a VAT payer is entitled to reduce the amount of tax due by the amount of input tax to the extent that goods and services are used to perform taxable activities, as stated in Art. 86 sec. 1 of the VAT Act.
In the case of purchases related to exempt activities, the entrepreneur cannot deduct VAT. However, if the acquisition of goods and services relates to both taxable and exempt activities (the so-called mixed sale), then the VAT deduction is only available in the part to which the taxable activities relate.
A taxpayer conducting a mixed activity, who cannot separate costs from purchases made for a given type of activity subject to VAT or exempt, must then deduct VAT proportionally.
Article 90 (3) states that the proportion is determined as the share of the annual turnover for activities in relation to which the taxpayer is entitled to reduce the amount of tax due, in the total turnover obtained for activities in relation to which the taxpayer is entitled to reduce the amount output tax and activities in relation to which the taxpayer is not entitled to such a right.
The right to deduct VAT
The taxpayer, in order to be able to deduct input VAT on the purchase of goods and services, in accordance with Art. 88 (4) of the VAT Act must be registered as an active VAT taxpayer. You should then register for VAT purposes - submit the VAT-R form, then the entrepreneur obtains the status of an active VAT taxpayer and is entitled to deduct input VAT.
Persons not registered for VAT are entitled to deduct input VAT from invoices received prior to registration in connection with their business activity. However, in order to be able to use it, you must register (the right to deduct VAT is due in the original period - month / quarter - or in one of the two following).
Pursuant to Art. 88 sec. 1 of the VAT Act, the reduction of the amount or the reimbursement of the difference in due tax does not apply to accommodation and catering services purchased by the taxpayer, except for the purchase of ready meals intended for passengers by taxpayers providing passenger transport services.
Due to the change in the regulations on the purchase and operation of motor vehicles, it should be remembered that there is a limitation in the right to deduct VAT on invoices related to them. These limitations are shown in Art. 86a of the VAT Act and in accordance with the general rule in para. 1 has a 50% right to deduct VAT on the expenses related to these vehicles.
However, according to Art. 86a paragraph 3 of the VAT Act, 100% VAT deduction is available when motor vehicles:
are used only for the taxpayer's business activity,
they are designed for the transport of at least 10 people, including the driver, if the documents issued on the basis of road traffic regulations indicate such purpose.
A full VAT deduction is also payable in respect of goods installed in motor vehicles and related assembly, repair and maintenance services, if the intended use of these goods objectively indicates that they can be used only for the taxpayer's business activity.
Tax obligation with the seller and the possibility of deducting VAT
The right to reduce the amount of tax due by the amount of input tax arises in the settlement for the period in which the tax obligation arose in relation to the goods and services purchased or imported by the taxpayer, as stated in art. 86 sec. 10 of the VAT Act. However, not earlier than in the settlement for the period in which the taxpayer received an invoice or a customs document (Article 86 (10b) (1) of the VAT Act). This also applies to paid advances, down payments and installments.
It is worth noting here that the legislator, in relation to some of the activities performed, specified the moment when the tax obligation arose in a special way. According to the regulations, both the seller and the buyer should know when a tax obligation arises for each transaction in order to deduct VAT in a timely manner.
VAT deduction - deadline
As for the date of VAT deduction, as a rule, it arises in the settlement for the period in which the taxpayer received an invoice or a customs document. If the taxpayer did not deduct the VAT in the period in which the tax obligation arose on the seller's side and received the purchase invoice, he may deduct the input VAT in one of the two consecutive accounting periods.
However, if the taxpayer does not exercise the right to deduct VAT in the tax period or two subsequent periods, it may do so at a later date. You can deduct input VAT in such a situation by correcting the tax return for the period in which you were entitled to reduce the output tax, but not later than within 5 years.
Having an invoice documenting the purchase of goods or services and the emergence of a tax obligation with the seller is a condition for deducting input VAT.
In the case of some activities or taxpayers, the date of VAT deduction may be different, special attention should be paid:
whether the invoice is a correcting invoice - the obligation to reduce the amount of input tax arises in the settlement for the period in which the taxpayer received confirmation of its receipt by the buyer;
whether the tax obligation on the part of the seller was created in a special way in relation to the purchased goods or services (e.g. utilities, lease, construction services);
whether the buyer of goods or services has the status of a small tax payer accounting for VAT using the cash method - the right to deduct VAT arises when the payment for goods or services is made (Article 86 (10e) of the VAT Act).
Summing up, in order to use the right to deduct input VAT, you must be registered as an active VAT payer and conduct taxable activity. In the case of mixed activity, you can only take advantage of a partial VAT deduction if the purchase is related to taxable and exempt activities. In addition, the taxpayer must know when a tax liability arises with the seller and have a purchase invoice in order to benefit from the VAT deduction in due time.